The headlines read “No new evidence SRI funds create financial value”

So in the last couple of days the some global headlines have read:

  • “SRI funds not outperforming” – Financial Times
  • “No new evidence SRI funds create financial value” – Investment & Pensions
  • “SRI Funds did not outperform” – Pension and Benefits Monitor

Of course, this has caught my attention and if you are someone who pays attention to this area of Socially Responsible/Responsible or Sustainable investing, I’m sure its caught your attention as well.

I’m a natural sceptic, I’ve learned never just to read the headline but to read the article/go to the source. So, what’s all this noise really about?  Well, earlier this week there was a position paper published by the EDHEC-Risk Institute in France called “The Performance of Socially Responsible Investment and Sustainable Development in France:  An Update after the Financial Crisis” and it appears that the report has some interesting observations about their study of “SRI and Green” funds in Europe.

So regarding SRI investments globally, the three main comments are the following:

  1. The study confirms EDHEC-Risk Institute’s previous results on SRI as presented in the 2008 position paper.  At this stage it has not been shown that the pure SRI approach on its own creates value in the financial sense of the term.
  2. This does not mean that extra-financial criteria (ie. ESG factors) should not be taken into account, but they cannot be the only foundation for sound portfolio management.
  3. EDHEC recommends that SRI be integrated in a more global process whereby the results of fifty years of quantitative research in finance not be abandoned in favour of a solely qualitative appraoch.  As such, an approach that comines stock picking with SRI critieria and a well-diversified portfolio construction methodology can be an alternative to pure SRI.

Well I guess it depends on what your view is on SRI funds, but I’m not shocked by this report.  As a someone who sees the benefit for the integration of Environmental, Social and Governance (ESG) factors into mainstream investing, I’ve never argued that one should throw away quanitative research and portfolio construction.  In fact, the point is that the integration of these ESG factors (often referred to as SRI) with the traditional style of quantitative research should give us better performance and better risk management.  The idea here is to integrate quantitative and qualitative research, not to separate.

Given how performance is the key issue to the investment industry, I feel it’s important to put this report in perspective.  In November 2009,  the consulting firm Mercer published a review of Responsible Investing studies called  “Shedding light on responsible investment:  approaches, returns and impacts”.  In this report they reviewed 16 academic studies, 10 showed evidence of a positive relationship between ESG factors and financial performance; two found evidence of a negative-neutral relationship; and four reported a neutral association. Pooling these results together with the 2007 report, there are 36 studies in total: 20 studies showing evidence of a positive relationship between ESG factors and financial performance, two showing evidence of a neutral-positive relationship, three showing evidence of a negative-neutral relationship, eight showing evidence of a neutral relationship, and three showing evidence of a negative relationship.

It’s great that we’re seeing research and reviews continuing to push forward this discussion.  However, let’s remember it’s one report.  Similar to those who professional manage money, researchers use different styles and methodologies to try to achieve their results.  It’s important that we keep the big-picture in mind.

The links to both reports are below:

http://docs.edhec-risk.com/mrk/000000/Press/EDHEC-Risk_Position_Paper_SRI.pdf

http://www.mercer.com/ri

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