Lehigh University
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The cost of being good

David Myers

There’s a new bottom line for the investment community—one that has more to do with maximizing social good than profits.

That’s the result of a new study by Lehigh’s David Myers and Anne Anderson, whose research shows that shareholders are no worse off investing in accordance with their social beliefs. Their comprehensive review of U.S. equities defies long-term conventional wisdom among the investment community.

With that in mind, Myers, the director of the Financial Services Laboratory, and Anderson, an assistant professor of finance, submitted their paper for the coveted Moskowitz Prize at “SRI in the Rockies.” The socially responsible investing (SRI) annual conference is the largest gathering of industry practitioners and associations in the world.

Generally speaking, SRI reflects the values and ethics of an investor who is looking to make a profit while, at the same time, also looking to positively impact society. According to the Social Investment Forum, a sponsor of “SRI in the Rockies,” the practice already accounts for almost 10 percent of the $24 trillion in the U.S. investment marketplace today.

The Moskowitz Prize recognizes outstanding research in the burgeoning field and, though their bid for the honor may have ultimately come up short, their research is already showing it has some staying power.

“The question we wanted to answer is, ‘Are you giving up bigger returns if you limit your choice to equities that reflect your core personal values?’” says Myers. “Our research showed the answer is a resounding, ‘No.’” It’s all about responsible investing and recognizing that your investing decisions can have a long-term impact on society.”

To date, there has been extensive research on socially responsible investing and the “triple bottom line,” which places emphasis on people, the planet and profit. No research, however, has been as comprehensive as that conducted by Myers and Anderson. They used 40 socially responsible investment screens—a company’s commitment to human rights, the environment, diversity, or the military, for example—to analyze the performance and returns of a variety of portfolios.

Anne Anderson

The research not only showed that investing with a conscience doesn’t hurt a portfolio’s outcome, but it can actually outperform traditional returns. “One of our portfolios, which included a combination of companies with specific screens, was the best performer over a 14-year period,” says Myers. “So over the long-term period we examined, being good actually paid off.”

SRI is a growing field that may significantly influence the next generation of business leaders and investors, Anderson explains.

“While it’s not a new concept, it’s still an idea that has yet to be clearly defined in the market,” Anderson says. “How do you define socially ethical behavior in today’s world?”

As educators, Myers, Anderson and their finance colleagues have brought the debate into the classroom with the hope of creating future investors who are attuned to the global issues already affecting finance.

“The great thing is, students are genuinely interested in making a difference and understand the repercussions of their actions. They want to be engaged and active and make decisions that will advance society,” says Anderson. “We’re challenging students to think critically and globally. This research shows that being good can pay off.”

That’s the consensus of the United Nations Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact—organizations that have gone as far as developing a roadmap for SRI called Principles for Responsible Investment. The joint initiative argues that environmental, social and corporate governance (ESG) issues can positively affect the performance of investment portfolios.

According to its Web site, investors “fulfilling their fiduciary (or equivalent) duty therefore need to give appropriate consideration to these issues…”

“In the past, when you asked investors why they were investing in a certain manner—if they’re decisions were being driven purely by profit and maximizing their returns—it wasn’t a difficult question to answer,” says Myers. “This line of research shows that we need to change our way of thinking.”

--Tom Yencho

Posted on Friday, November 09, 2007

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