UMass Amherst has just released its first Toxic 100 report since 2005. This is a pretty sophisticated analysis of air emissions, taking into account not just the volume of emissions, but also toxicity and how many people are impacted - even the direction of prevailing winds.
If you're interested in the ongoing product recall issue, Jennifer Toney at Haas, who knows this material as well as anyone, recommends the following readings:
There is a reasonably thorough literature around stock price reactions to product recalls, but it seems to me to mostly miss the point. The real damage of a recall is likely to be reputational, so any impact on the stock price is going to occur over time. I think it would be better to try and focus on the long-term valuation effects.
Johnson & Johnson's response to the Tylenol incident (good briefing here) is regarded as the classic blueprint for how to handle a safety problem. But not all companies do so successfully. Perrier's leadership in the premium bottled water segment once seemed unassailable, until small amounts of benzene were found in the product, prompting the recall of 160 mm bottles. But in both cases the ultimate impact on firm value wasn't apparent until long after the fact.
I don't know if recalls can be studied quantitatively - the big ones are rare enough that it might be better to use the case study method. One thing that seems apparent is that each situation has its own logic. At a minimum the analyst needs to consider:
This is a probably a good example of something that can't be measured, but matters. I doubt we'll ever have an 'R' score that quantifies the impact of lost reputation of firm value. But analysts ignore reputational effects at their peril.
I've just finished Dan Ariely's Predictably Irrational, and recommend it to anyone who wants to learn more about behavioral economics. Ariely is a leader in challenging conventional economic wisdom, and provides empirical evidence of many situations where conventional economic analysis doesn't work well.
I was going to write in this post about the similarities and dissimilarities between this book and Freakonomics, which we've discussed here in the past. But, procrastination pays once again - Ariely yesterday wrote a note on this himself (read it here).
The books are similar in many ways, but taken together they frame a multi-disciplinary debate about how far economic analysis takes us. Behavioral economists are challenging some fundamental assumptions economists like to make about human behavior. It seems to me they are winning some and losing some, depending on the situation being analyzed - reading both of these books will give you a good sense of whose model might be better in a given situation.
A nice summary of the rise of behavioral finance can be found at Robert Shiller's website.
This blog has been in suspended animation for awhile because I have been hard at work on another project: revamping sristudies.org.
I started sristudies.org in 1999, as a way to make available online citations and notes on the (then) small number of studies of socially responsible investing. Nine years on, the number of studies has grown exponentially, and I have to set aside more and more time each year to try and keep it reasonably up-to-date.
The job is already too hard for one person to do well, so I have begun to take the first steps to make sristudies.org a more collaborative project. The big changeover is now almost complete - I've moved the site to a wiki platform (hosted by the nice people at wikispaces.com), and updated most of the links so they refer to the new site. You can see the new site here. On the new platform I'll be able to give the database more consistent attention, and, I hope, will be able to put some structure around a database that now numbers several hundred studies.
I know, it doesn't look like much...we'll fix the graphics, it's on my list.
What I have done is update the new site with all the strong studies I saw in 2007. The simplest way to see these is to click the 'Bibliography' link and use your browser's search function to find all instances of '2007' on the page. Another way is to type '2007' in the search box.
I won't even attempt to summarize the class of '07 - the studies were uniformly thoughtful and challenging. You could start with Alex Edmans' Moskowitz Prize-winning piece, but I'd strongly recommend that you also have look at what Al Goss has been up to, and you should probably give Derwall's latest study a close look, too, and I don't know how to classify Christine Arena's book but you should look at it...and so on. A lot is happening, not just at the conferences and investment firms, but also among academic researchers around the world.
With the new platform, I hope it will be easier to keep up, and, ultimately, make this a collaborative effort. For now I'm leaving the old site up, but ultimately the sristudies.org web address will redirect to the wiki.
Last Sunday we had the pleasure of awarding the Moskowitz Prize to Alex Edmans of the Wharton School for his outstanding study of the 100 Best Companies to Work For. Alex's study covers the entire period that these ratings have been published in Fortune. His presentations at SRI in the Rockies were superb (see links below). If you're going to Wharton, get signed up for this guy's classes - he is a great lecturer, and he is rock solid on financial theory and his knowledge of the recent literature.
The winners of the Moskowitz Prize are taking on a different character, and I wanted to take note of it here. In the 'old days' (pre-2004), studies tended to focus on the broad concepts - social responsibility, sustainability, etc. In retrospect, Marc Orlitzky's study was the culmination of this line of thought. He demonstrated that the concept of social responsibility was not just conceptually valid, but could also be framed as a valid statistical construct. He then argued that social responsibility had been positively associated with financial outcomes (although the effects he found were much stronger for accounting-based than for market-based measures).
If Orlitzky was right that social policies have been financially beneficial (and there is still plenty of debate about that), the question becomes one of how the mechanism operates. It's probably true that some social policies are good for financial results while others are bad. But which policies contribute positively and which contribute negatively?
The three most recent winners have zoomed in on a single issue and tried to answer these questions. Nadja Guenster looked at the impact of Innovest environmental ratings on fundamentals and returns. Brad Barber examined the impact of the CalPERS corporate governance program on stock valuations. And Alex's study looks at how employee relations policies impact portfolio performance.
In each case, the analyst focused on a measurable and important subcategory, and demonstrated that there was a positive historical association with returns. Each study focused on a social variable that was well-specified, and used state-of-the-art risk models to assess performance.
Before we get too excited about these performance studies, however, it's important to remember last year's Honorable Mention paper by Harrison Hong and Marcin Kacperczyk, which showed that sin stocks have had exceptional returns over the years. Like Gunster, Barber, and Edmans, this study zooms in on an important social variable and looks at returns through the prism of a modern risk model.
This trend strikes me as a very healthy development for social investment research. Academics are moving away from general conceptions of social responsibility and doing detailed analysis of the individual stakeholder categories. The results have generally been happy, so far, but, as the case of sin stocks show, social investors should be ready for unpleasant surprises as well.
We know that, in aggregate, social screens haven't added value over the past 20 years. Now we know some have been positive and some have been negative. As we go further down this path, social investors will increasingly be challenged with hard data to re-consider some of their portfolio construction decisions. That will be healthy, but it will not be comfortable.
Recall fatigue? RC2 recalls additional toys.
Just a couple more quick links on the toy safety situation:
According to some press reports (e.g., this one) Mattel has apologized...to China. This Washington Post article, however, says there are two sides to the story. (Also note the analysis in the article by Eric Johnson at Tuck, which sounds on-the-mark to me.)
I mentioned him last year, but I just wanted to put up a fresh endorsement for the work Jeffrey MacDonald is doing at the Christian Science Monitor. In the past two years the Monitor has probably interviewed more social investment practitioners, and written more articles on social investing, than any other publication. As number of practitioners explodes, with many of them trying new approaches, MacDonald's stories are a great way to keep up.
Yesterday Mattel announced that it was recalling another 800,000 toys due to lead paint issues.
A couple of additional observations:
Another day, another lead paint recall...
Both toy manufacturers that announced recalls this summer - MAT and RCRC - have been down significantly, both in absolute terms and vs. the market (green line is S&P 500, red line RCRC, blue line MAT):
If you are a business student looking for an interesting paper topic, this situation has plenty of material to work with.
A brief but good backgrounder from Forbes.
News today: China Issues Food, Toy Recall Rules to Tighten Safety, from Bloomberg.
