Mark Mansley’s new book on Socially Responsible Investing (SRI) is as well-written as it is timely. Historically, SRI has been a rather marginal and neglected backwater in the institutional investment world, but recent UK pension regulation reform – not to mention 100% annual growth rates in the size of the SRI market – have attracted plenty of attention from pension funds and asset managers alike. Both groups will find Mansley’s insights and analysis instructive.
Potentially skeptical readers should be reassured at the outset – Mansley is no shrill, far-left campaigner. Quite the contrary; an alumnus of both Schroders and Chase Manhattan Bank, his analysis is balanced, thoughtful, and well-researched.
Mansley’s book tackles SRI from a number of angles: legal, fiduciary, and corporate governance to name only three. But his principal focus, appropriately in my view, is on financial performance and risk. Conventional City wisdom, generally reinforced by the consulting community, holds that environmental/social and financial objectives are inimical to one another. According to the prevailing mythology, screening out social and environmental laggards automatically reduces portfolio diversification, increases risk and lowers returns. Mansley however, produces copious evidence to suggest that such conclusions are at best facile and at worst actively misleading.
At the same time, however, Mansley is no misty-eyed sentimentalist about SRI; he readily acknowledges both its practical and theoretical limitations. The most obvious one is that it is inescapably subjective and value-laden – social responsibility lies very much in the eye of the beholder. Since it is virtually impossible to find two SRI funds which use identical screening criteria and identical degrees of stringency, any comparisons of risk-adjusted SRI returns becomes exceptionally problematic. This lack of standardised comparability makes City analysts nervous.
It shouldn’t. SRI hardly has a monopoly on subjective judgments in the investment world; the City only acts that way. Traditional securities analysis itself is riddled with subjectivity, but has simply done an infinitely better job of concealing it. Mansley’s book – and SRI more generally – point the way forward to the day when non-traditional competitive factors can add real value to investment analysis.
In the meantime, Mansley has some concrete suggestions for the harried pension fund CIO. He suggests a potential remedy, however: passive strategies built around SRI-enhanced mainstream indexes such as FTSE 350. The current crop of social indexes tends to make pension fund CIO’s extremely nervous, inasmuch as their tracking error against established indexes is often huge. SRI-enhanced mainstream indexes, on the other hand, should in principle be able to combine the strong risk control of a tracker fund with the alpha-generating potential of SRI research, provided it is sufficiently sophisticated and financially oriented.
At the end of the day, Mansley concludes: “The balance of evidence suggests that a superior social and environmental performance by companies may have a discernible positive effect in terms of a superior share price performance.”
And then he delivers the punch line, throwing out this challenge to the European asset management community: “The response to SRI at an institutional level has been uninspired. There is an opportunity to develop interesting new products and to leapfrog existing players. Whether someone will seize that opportunity remains to be seen.” Indeed.
Matthew Kiernan is executive managing director of Innovest in Toronto and New York
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