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 Haas press release is here
- Alex's study can be downloaded here
- An audio recording of Alex's talk at SRI in the Rockies is here, and his slides are here
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.