Conventional wisdom about SRI, which can mean either socially responsible investing or sustainably responsible investing, is that adding an overlay of social screens to investment decisions will have an adverse effect on investment returns. Like much conventional wisdom, that convention may contain a kernel of truth, but it is by no means always the case.
As more advisors consider SRI because of personal interest or prodded by clients’ personal interests (see sidebars below for profiles of four such advisors), there is a need for serious research on SRI.
Luckily, questions like “Is there a causal relationship between corporate social performance and corporate financial performance?” and “Do investors have to give up returns in order to invest according to their personal values?” have been taken up in the academic world, and we are beginning to get some answers.
One of the primary vehicles for fostering such research is the annual Moskowitz Prize, which is awarded by the Haas School of Business at the University of California at Berkeley. The award is given in cooperation with the Social Investment Forum, promoting the concept, practice, and growth of responsible investing, and is named for Milton Moskowitz, one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios.
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Presented on October 26 at the annual SRI in the Rockies Conference, this year’s recipient was David Baron, professor of political economy and strategy at Stanford University’s Graduate School of Business, for his paper, The Economics and Politics of Corporate Social Performance.
“This year’s winning paper takes a more nuanced view of a firm and its interactions with society than most academic studies,” wrote Lloyd Kurtz, Moskowitz Prize administrator and senior portfolio manager at Nelson Capital Management. “Baron and his colleagues hypothesize that firms attempt to meet demands not only for financial performance, but also for social performance in general, and for social action specifically.”
Managing Editor Bob Keane discussed with Baron his research and its implications for investing by telephone in late October.
Is there a connection between a company’s level of corporate social responsibility and its overall profit picture? There’s a lot of controversy about that. Scholars don’t agree. One question is whether it’s beneficial for firms to pay attention to social issues, and by beneficial I mean in terms of increasing their market value. There could be several answers to that.
Associated with social issues is social pressure, and social pressure on firms could be harmful in a lot of ways. And notice that this all “could be” harmful.
Social pressure could affect the demand for your products because consumers might be pro the social issue and concerned about your performance on that dimension because of the social pressure itself. The extreme case of that is a boycott. We don’t play up boycotts, because it’s not clear that boycotts make much of a difference. The evidence isn’t there.
Social pressure on you could affect how much investors are willing to pay for your shares. It could be that some investors will shun your stock and buy shares of other firms, but it could be that those investors anticipate that the social pressure you’re under could lead to other activities, such as regulatory activities.
What’s even harder to measure is [whether social pressure] affects your employees and their morale and productivity.
You’re saying social pressure could be harmful to a firm? It’s hard to see how it could be beneficial, but it could be harmful. These days I think that most enlightened firms understand that social pressure and try to mitigate it to the extent they can.
Are there things that a firm can do, proactively, that will improve its performance? How might the firm be rewarded for its own social activities or performance?
They could be rewarded by consumers. A second way they could be rewarded is by investors. Some investors like the social performance and want to hold shares in those firms. The third is that the employees may like these things and like working for the firm and be more productive.
So by acting responsibly a company might win over consumers and succeed in the marketplace? It could be that a company does all these things right and is rewarded by consumers, but it could be that there’s enough competition in that industry that it drives prices way down. If prices get driven way down, the company may not perform well, even though it may have these beneficial social dimensions. It depends on the competitiveness of the industry. It could be that there are these effects, but they just get competed away in the marketplace.
We can’t determine if there’s a causal effect of corporate social responsibility on corporate financial performance.