June 26, 2002
SRI Simulations Beat Benchmarks
by William Baue
The Triple Bottom Line Simulation demonstrates to institutional investors how socially responsible
investing generates positive financial, social, and environmental returns.
Investors, like car shoppers, appreciate the opportunity to “test drive” investment strategies
before committing to them financially. Simulations allow investors to do just that--track
performance before investing. In mid-June, Wisconsin-based Capital Missions Company hosted more than 40
institutional treasurers in New York City for the second Triple Bottom Line Simulation Conference.
Since its launch in May 2001, the Triple Bottom Line Simulation has tracked five
portfolios that apply different socially responsible investing (SRI) strategies. Investors began
the test drive last year with $100 million in simulated assets in each portfolio. The simulation
is different from back testing because it starts with assets and goes forward, allowing investors
to compare the simulated portfolio’s performance to their existing portfolios.
of the simulated portfolios outperformed their benchmarks over the past year, dispelling the myth
that investors must sacrifice financial performance in order to achieve positive social and
environmental performance. The benchmarks in the simulation are a composite of the relevant
indexes for each SRI product in each portfolio.
“Institutional investors, if they do
social investing at all, tend to think of it as something to be done with a tiny percentage of
their portfolio,” said Capital Missions CEO and Founder Susan Davis. “The simulation demonstrated
that sophisticated institutional treasurers can socially invest 100 percent of a $100 million
portfolio across all asset classes and realize returns that closely match or exceed financial
The best financial performer of the five portfolios was the Shareholder
Advocacy Simulation, which increased its assets to $101.8 million while outperforming its benchmark
by 0.68 percent for the year. This portfolio includes investments that promote shareowner action
such as dialogue with management, to improve social and environmental practices and policies.
The value of shareowner action has been demonstrated in the Brightline Simulation, which is unrelated to
the Triple Bottom Line Simulation. Corporate governance advocate Robert Monks commissioned the
development of the Brightline Simulation to model the effects of corporation externalization.
Externalization refers to the diversion of costs from within the company to without. For example,
companies that reduce costs by disregarding environmental laws “externalize” these costs onto the
environment. Mr. Monks ran the Brightline Simulation for the top five companies in the oil
industry to demonstrate how government regulation, shareowner action, and externalization affect
“[G]iven a sufficient level of government regulation, and when
competition in the oil industry is measured over a sufficient length of time: (1) the most
aggressive externalizers lose to the less aggressive externalizers, [and] (2) shareholder action
weakens this effect,” said Mr. Monks at the Coalition for Environmentally Responsible Economies (CERES) Annual
Conference held this April in Washington, DC.
In addition to the Shareholder Advocacy
Simulation, other Triple Bottom Line Simulation portfolios beat their benchmarks for one-year
performance. The Social Venture Capital Simulation, which invests in socially and environmentally
responsible startup companies, outperformed its benchmark by 1.29 percent. This made it the best
performing Triple Bottom Line portfolio in comparison to its benchmark, though its assets fell to
The Community Development Simulation, which invests in community
development financial institutions (CDFIs), outperformed its benchmark by 0.11 percent while also
increasing its assets to $100.33 million. The Social Screening Simulation, which employs both
negative and positive screens, increased its assets to $100.90 million, though it underperformed
its benchmark by 0.69 percent. The General SRI Simulation, which blended the SRI strategies used
in the other four portfolios, decreased in assets to $98.96 million, and underperformed its
benchmark by 1.78 percent.
“After reviewing the year’s performance, the institutional
treasurers were very surprised at the above market returns,” said Ms. Davis.
At the recent
conference, the institutional treasurers created a “Simulation Network” to steer the ongoing
simulation. The group decided to shift the structure of the portfolios from reflecting different
SRI strategies to reflecting different types of institutional investors.
felt the simulations needed to be customized for foundations, wealthy families, and pensions, etc.,
because they invest according to different laws and constraints and tax considerations,” said Ms.
This coming year, instead of test driving different SRI strategies, the Triple
Bottom Line Simulation will test drive how different types of institutional investors fare with