September 29, 2011

Vice vs. Nice: Sustainability Debate Pits ‘Tea Party’ Against ‘European Social’ Teams

‘Sustainability is not just a fluffy conversation anymore,’ says NYSE Euronext’s Michelle Greene

Commit!Forum debate moderator John Harwood (right), CNBC’s chief Washington correspondent, questions 'Nice' team members Vinay Nair (center) and R. Paul Herman. Commit!Forum debate moderator John Harwood (right), CNBC’s chief Washington correspondent, questions 'Nice' team members Vinay Nair (center) and R. Paul Herman.

Doing good versus making money—that was the topic on Monday at the Javits Center in New York. In a sometimes feisty Oxford-style debate, portfolio managers and professors sparred over whether socially responsible investment has any business contributing to—or subtracting from—a company’s bottom line.

Co-sponsored by the New York Stock Exchange (NYSE) and Corporate Responsibility (CR) magazine’s COMMIT!Forum , the debate pitted two teams against each other to argue the merits of shareholder advocacy, environmental sustainability and ethical governance.

(Who won the Tea Party versus European socialdebate? See audience poll results on page 3.)

Debate moderator John Harwood, CNBC’s chief Washington correspondent, presented the topic—Resolved: When companies expend resources on corporate responsibility and sustainability, they destroy economic value—and summed up the two sides as “the Tea Party argument versus the European social argument.”

The Javits audience of about 150 included financial analysts and executives from what CR calls “the world’s best corporate citizens,” such as event sponsors Hewlett-Packard, SAP AG, State Street Corp. and Zurich Financial Services.

“To use a Dr. Seuss term that I’ve made up, we’re seeing the ‘businessfication’ of sustainability. It’s not just a fluffy conversation anymore,” said Michelle Greene, head of corporate responsibility for NYSE Euronext, in remarks just before the debate started.

Greene asserted that there is more focus on corporate responsibility than ever before. “Companies are placing greater value on it because customers care, employees care and shareholders care,” she said.

Indeed, a survey released Tuesday supports Greene’s claims. According to human resources consulting firm Mercer and the Social Investment Forum Foundation, four out of five retirement plan sponsors expect demand for sustainable and responsible investing (SRI) options to grow over the next five years. The survey said 14% of defined contribution sponsors already offer one or more SRI options, while an additional 13% either are discussing adding an SRI option or intend to do so in the next two to three years.

But that sort of evidence hasn’t yet convinced the “vice” side of Monday’s debate. Arguing the case that shareholder value is eroded by sustainability and corporate responsibility were VICE Fund (VICEX) portfolio manager Gerry Sullivan and University of Michigan Prof. Aneel Kamani, and the two had plenty to say about how the capital markets reward companies that exceed expectations, regardless of holding to SRI standards. Business has no business engaging voluntarily in such oppressive standards, they insisted.

Kamani mocked corporate responsibility as “an intensely confused concept,” saying the jumble of initials used to define it—CR, SRI, GRI and ESG, to name a few—show how hopelessly vague the notion is.

‘There Is No God’

Good company management takes care of itself, Kamani said, asserting that corporate responsibility reporting is itself a “dangerous fallacy” that assumes companies are bad. When companies don’t work as they should, he said, government regulators should force them to take mandatory actions to resolve their problems. Expecting companies to voluntarily join along on sustainability efforts, he added, is a scattershot solution and doomed to fail.

“There is no God,” he said. “I think we should convert to being pagans and go back to a secular belief system of shareholder value and market regulation. The means to get there is not corporate responsibility initiatives.”

Before the “nice” team argued its side, Sullivan also got in his digs, pointing to GE Chief Executive Jeffrey Immelt’s “Ecomagination” campaign that followed CEO Jack Welch’s departure from the corporate giant. The green energy campaign might have looked good to the company’s marketing department, Sullivan said, but GE stock plummeted to about $20 per share versus Welch’s glory days when it was trading around $160.

“In the kumbaya moment when everybody joins in a group hug, the first thing you should do is check for your wallet,” Sullivan said.

Sustainability Is the 21st Century’s Mainstream

Nice guys R. Paul Herman, CEO and chief investment officer of RIA firm HIP Investor Inc. and Vinay Nair, CIO of Ada Investments  and professor at the Columbia Business School, countered that sustainability is a market reality in the 21st century, and that GE’s stock plummeted not because of the Ecomagination campaign but because the company was overleveraged.

 “Investors care about long-term shareholder value, not short-term profits,” said Nair, whose Ada Investments firm believes that consistent and superior risk-adjusted returns can be achieved “by focusing on ideas that are less crowded and by employing a holistic view of firm valuation.”

“The drivers of sustainability are creating the fastest growing category of everything in all consumer sectors,” Nair said, adding that companies often lead government to regulatory reform rather than the reverse. “Sustainability is moving to the center mainstream from both the left and the right. Government has limitations due to lobbying and competition with other governments.”

The problem, said Herman, is that professional money managers haven’t yet bought into the corporate responsibility mindset, as evidenced by Sullivan’s VICEX strategy of investing in guns, booze, cigarettes and gambling.

“Two-thirds of consumers want to do good with their purchases, and two-thirds of investors see doing good as a positive indicator of a company’s performance. Unfortunately, two-thirds of institutional investors do not,” he said.

In an unexpected act of niceness, Herman went on to favorably compare VICEX’s performance against that of Portfolio 21’s sustainable PORTX global fund. Both funds have both outperformed the SPY S&P 500 this year, Herman noted.

“Theoretically, you could buy ‘vice’ and ‘nice’ and not the S&P 500, and you’ll outperform the market,” he said.

Who Won the Commit!Forum Debate on Corporate Responsibility?

According to audience polls conducted via text message before and after the debate, “nice” won out over “vice”—and even more so the second time around.

On the issue “Resolved: When companies expend resources on corporate responsibility and sustainability, they destroy economic value,” the results were as follows:

Disagree Before 82.3% After 90.2% Plus +8 for NICE team

Agree Before 14.7% After 2.4% Negative -12 for VICE team

Don't Know Before 2.9% After 7.3% Plus +4 for NICE team

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