SRI Notes

sristudies.org - New and Improved

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.

Moskowitz Prize - The New Trend

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.

A Strong Study on Corporate Philanthrophy

I was happy to see Barron's this week recognize (link here, sub required) a strong study of corporate charitable giving from NYU that won an Honorable Mention in this year's Moskowitz Prize competition. 

This is one of those topics that raises all sorts of interesting questions, but where there has been virtually no empirical work (the only other decent study I'm aware of is Navarro's 1988 paper).  One of the most important aspects of this paper is the work they did trying to sort out causality.  Of course rich companies give money to charity - but do they derive a business benefit from doing so?  Consistent with Orlitzky, they find the answer is 'yes'. 

Does that flow through to stock prices?  Don't know.  More work is needed!  But this team is to be commended for exploring this neglected but important area.

A full copy of the NYU study is available here.  My sristudies.org abstract of it is here.

2006 Moskowitz Prize

I had the pleasure last night of awarding the 2006 Moskowitz Prize to Brad Barber of Cal Davis for his excellent study of the CalPERS corporate governance focus list.  The Center for Responsible Business at Haas has issued a press release on the award, which is here.

Two other papers received Honorable Mention, the first time the judges have recognized more than one runner up.  Both are interesting and very much worth your time:

Harrison Hong and Marcin Kacperczyk did a terrific retrospective analysis of tobacco stock returns, using state-of-the-art risk models and going back to the 1920s.  Social investors won't be thrilled to hear that this one class of sin stocks has delivered significantly superior risk-adjusted performance for most of that time period.

The judges also awaded an Honorable Mentionn to Baruch Lev, Christine Petrovits, and Suresh Radhakrishnan for their paper on the relationship between corporate charitable giving and firm growth.  This is the first study of this topic I have seen since Navarro's Journal of Business study back in 1988, and one that will be of great interest to SRI clients.

I have posted abstracts of all of these studies in the bibliography section of sristudies.org.

Center for Responsible Business Website

The Center for Responsible Business at Haas has updated its website, and it now includes information on the Moskowitz Research Program and the Moskowitz Prize, including a section on the volunteer judges who make the prize possible.

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.

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.

2005 Moskowitz Prize Winner

I had the pleasure last night of presenting the 2005 Moskowitz Prize to Nadja Guenster of Erasmus University in the Netherlands, who accepted on behalf of her three co-authors. (Official announcement is here.)

Nadja gave a great presentation on the study this morning at the SRI in the Rockies conference in Snowbird, Utah. Here is my abstract of the study, and the full text is available here.

If you are interested in the financial impact of environmental and sustainability practices, I think it is fair to say that this is a must-read. We have seen several studies showing environmental alpha in recent years, most recently Derwall(2005). But until now no one had really explained how or why this was happening. Nadja's piece is careful, thorough, and full of good judgments about methodology and data.

Congratulations also to Meir Statman, who received an Honorable Mention for his article on socially responsible indexes.  Meir is having a good year, as he also is headlining the just-released Journal of Investing special issue with a different piece on SRI.

Travels of a T-Shirt

Pietra Rivoli, a Georgetown economist and expert on corporate social responsibility, has written a new book which is getting great advance reviews.

Read an excerpt here.

Pietra's also very knowledgeable about SRI - she's been a Moskowitz Prize judge for many years, and wrote a thoughtful defense of the industry in Business Ethics Quarterly in 2003.