We now have the proof: SRI is at least as good any other strategyJuly 2011
Barely a week now goes by without the unveiling of a new piece of research showing that investment in socially responsible companies is likely to bring greater returns. Last month, Pictet Asset Management in Switzerland added to the pile with a study concluding that portfolios based on sustainability factors ‘tend to outperform in most environments’.
Pictet’s findings may well be based on sound research, but some of the studies in this field – often driven by a desire to confirm the hypothesis – have been flimsy, to say the least. Too many have used a small sample, been limited to a short timeframe, or have too liberally interpreted what a socially responsible company might be.
Nonetheless, over the past ten years or so, study after study has appeared to support the argument of socially responsible investment enthusiasts that there is much to be gained from investing in companies that adopt an ethical, longer-term view. What we can now safely conclude is that there is no substantial evidence to suggest that an SRI approach is more risky than any other. That may sound rather a weak conclusion to draw from such a body of research – especially to those who have been chasing the holy grail of proof that SRI will increase returns. But in fact it is a meaningful and positive outcome.
In the final analysis, the success or otherwise of various investment strategies usually comes down to the skills and knowledge of investment managers – and to a large slice of luck. Many in the industry like to pretend otherwise, but investing is essentially a form of gambling – and in the betting world no ‘system’ is foolproof. It would probably be possible to run a fund that invests only in companies that begin with the letter ‘B’, and still outperform certain benchmarks over a period of time. So it’s not surprising that adopting an SRI approach can also be a successful strategy. Many SRI funds are doing better than their mainstream benchmarks, while others are doing less well. As with mainstream funds, much comes down to the fund manager’s ability and timing.
What all the research has eventually told us, then, is what we probably already knew in the first place. But it has been necessary to go to such lengths to successfully challenge the notion dogmatically put about by the mainstream investment world that SRI is way too risky. There will still be stick-in-the-muds who continue to hold to that belief, but in the face of such a body of evidence they are declining in numbers. That should help to give SRI an increasingly important role, even if it is ultimately impossible to prove beyond all doubt whether it enhances returns or not.
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