SRI Notes

Ben Bernanke's Favorite Stock

posted by Jeff MacDonagh

Here’s some interesting commentary by Jeremy Siegel about our new Fed chair’s one and only publicly traded stock investment, Altria.  Two points worth considering:

1)     Mr. Seigel points out why social investors may actually contribute to creating stock buying opportunities for other investors.

2)     Altria’s appeal as a “long-term investment” flies in the face of what social investors claim, namely, that “what comes around goes around.”  A company that externalizes costs onto society to the tune of hundreds of billions of dollars cannot continue to do so indefinitely.  Maybe not, time will tell…

PriceWaterhouseCoopers looks at CSR information and analyst estimates

posted by Jeff MacDonagh

PriceWaterhouseCoopers is putting some resources into looking at CSR reporting, here’s an article sent to a few of us at Domini Social Investments by the author, Ms. Alison Thomas. PwC’s ValueReporting team studied two groups of equity analysts – one with only "traditional" financial information, and another that also had CSR information. Although this study’s sample size was limited, the results are thought provoking, if not stunning. When provided with CSR information, analysts have more consistency in their estimates (the good news), however, their earnings and revenue forecasts are lower (bad news? maybe not, maybe more realistic?). The funny thing is that the group with CSR information, despite having lower forecasts, still issued more buy recommendations, perhaps suggesting more confidence in their analysis (more good news).

This poses some important questions about how CSR information impacts traditional equity analysis. I have been a skeptic that it would be through altering the models used by analysts; e.g., the discounted cash flow methodology. Rather, my hunch is that it would be useful in providing analysts with more confidence in management’s growth strategy, for example. This study’s author put it best, "the fact that such sources of competitive advantage cannot be ‘valued’ does not mean that they cannot be ‘evaluated’."

BC's Best MBA Paper Award

Boston College has been very active on the corporate social responsibility front through its Center for Corporate Citizenship.

For the past 11 years, BC has awarded a prize for the best MBA paper on corporate citizenship. This year a Haas student won the prize - Douglas Young, for a paper on non-financial reporting by U.S. banks.

An archive of recent award winners is here (under "Document Type" select "MBA Award Paper", then click "Go").

Recognition for Pietra

Moskowitz Prize judge Pietra Rivoli's new book, The Travels of a T-Shirt in the Global Economy, was one of six shortlisted for this year's FT/Goldman Sachs Business Book of the Year Award. Today's Financial Times includes an excerpt from the book and some quotes from Pietra (link here, but subscribers only...).

Some other links:

• Last spring NPR did a series of reports based on the book, including a cool map.
• Here is a transcript of a presentation Pietra gave to an audience at the IMF.
• You can read an excerpt from the book here.

If you have a financial background, I'd also strongly recommend the paper Pietra did with Georgetown colleague James Angel in 1997.  There is a brief but good plain-English article on the study on page 5 of this issue of Georgetown Business magazine.

Short-Termism Makes Strange Bedfellows

U.S. Chamber of Commerce President Tom Donohue will speak November 30th at the Wall Street Analyst Forum in New York (details here).  According to an e-mail I received today, "Tom will challenge analysts, investors, and senior management to end the era of quarterly earnings guidance and the damaging short term outlook they encourage and instead move toward a system that more accurately values businesses and encourages long-term growth plans..."

I point this out because short-termism is one of the recurring themes of this blog (it recurs here, here, and here...), and also because Donohue is no friend of social investors and governance activists (last year he criticized CalPERS for its activism and was on the receiving end of criticism as well).

That Donohue and social investors see the same problem strongly suggests to me that it really is a problem.

Meir Statman

If you a make a list of financial theorists who have 1) taken a long-term interest in social investing, 2) published numerous studies of SRI in refereed journals, and 3) engaged social investors constructively about their work, you basically get one name: Meir Statman.

Since he won the Honorable Mention in this year's Moskowitz Prize competition and headlined the Journal of Investing special SRI issue with a different article, I thought I'd provide a little additional background on him and his work. Here are his studies that bear directly on SRI:

• Doing Well While Doing Good?, Financial Analysts Journal, 1993
• Socially Responsible Mutual Funds, Financial Analysts Journal, 2000
• The Religions of Social Responsibility, Journal of Investing, 2005
• Socially Responsible Indexes: Composition and Performance, forthcoming, 2005
  

I first ran across Meir's work when I was studying the diversification impact of social screens in the late 1980s and early 90s. In those days conventional wisdom held that 30 stocks should be enough to adequately diversify a portfolio. But in 1987 Meir's "How Many Stocks Make a Diversified Portfolio" showed that the number was much higher, possibly in the hundreds.

I figured that finding was good for a social index - it strongly suggested that broad indexes could offer a risk advantage over more concentrated portfolios. But it was also a cautionary note for social investors who were counting on the "Rule of 30" to protect them from diversification costs introduced by the social screens. It convinced me that social investors needed to be really careful about diversification, a conviction I still hold today. (A brief abstract of this study appears at sristudies.org.)

Meir's best-recognized work is not in the SRI field, however. He is regarded as one of the pioneers of Behavioral Finance, and his most-cited work is a Journal of Finance article, about the tendency of investors to sell winners too soon and hold losers too long. The full citation for Shefrin and Statman (1985) can be found here.

Social investors should take careful note of Meir's work, because many of his papers go well beyond the bounds of traditional finance and raise questions about the interplay of markets and human psychology. I am thinking particularly of his paper on fair trading, which has ethical and moral significance well beyond its contribution to the financial literature.

I asked Meir which of his writings he thought newcomers should look at, and he suggested "Normal Investors, Then and Now", which recently appeared in Financial Analysts Journal.  There is a good interview with him here.

Meir has made a serious study of social investors. Social investors would be wise to return the favor.