Ethical Performance
inside intelligence for responsible business


socially responsible investors are barking up the wrong tree

December 2003

Do good companies do well? A lot hangs on this beguilingly simple question. If it could be shown that socially responsible companies perform better over time than those unconcerned, sceptical boards and finance directors would be quickly persuaded of CSR’s benefits. And socially responsible investors would break out of the niche they currently inhabit (although in a perfect market, the comparative advantage they may now enjoy would soon vanish).

There clearly is a relationship between social and environmental performance on the one hand and financial performance on the other. A woodcutter who chops down all the trees will have to find a new job. But pinning down the relationship in a complex modern economy is another matter entirely – there are simply too many factors in play to identify any causal link. A significant correlation is the most one can hope for, which is why organizations such as the Ethical Investment Research Service, which would gain from finding a link, are careful never to claim one.

The latest investor to go in search of this holy grail is the Swiss asset manager Pictet, which came away disappointed. Its analysis of 288 European listed companies found that a portfolio of companies with good environmental policies would have underperformed the benchmark by 15 per cent over the four-and-a-half years to July 2003. Yet other surveys have produced broadly opposite conclusions and Pictet itself found that companies with good stakeholder relations outperformed.

Perhaps researchers are looking in the wrong place. Practically everybody agrees that social, environmental and ethical policies help companies to manage risk. If companies are good at managing risk and treat their employees properly, their business is more likely to prosper. This is what investors should mainly be looking for. Of course, that still leaves the problems of inadequate data and how to benchmark performance between companies. But no one said investment research was easy.


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