Thursday, February 19, 2009

Can Socially Responsible Investing Help Money Managers

This was the topic of a CFA Society luncheon seminar in Toronto today. Moderator of the event, the SIO’s Executive Director Eugene Ellmen, put forward the idea that “when markets return to normal, asset managers are going to be looking for new tools and we believe that ESG analysis and integration will be one of those tools.” Then the four panellists took their turn discussing the issue from various viewpoints.

Jordan Berger, head of Mercer’s Responsible Investment practice in Canada, provided an overview of where we are now in SRI, including some historical context. He concluded with the idea that as non traditional business risks are hitting the bottom line, mission based investors and mainstream investors are moving closer together. He posited a world where all investors will use integrated investment analysis, a holistic risk/return framework and a thoughtful approach to shareholder engagement.

Next up was Al Goss, Assistant Professor of Finance at Ryerson University. He presented the results of some recent research on Corporate Social Responsibility and financial distress. After taking us through some theories and some number crunching in his usual humorous manner, he told us that a statistically significant relationship existed between good CSR practices and less financial distress, as identified by defaults and takeovers. He noted though, that he had not completed his research on the aspects of which came first, that is, do companies with better scores on CSR indicators have less financial distress, or does the fact that they have less financial distress give them more money to spend on CSR? Regardless of the outcome of that question, he feels that enough work has been done to conclude that there is important information embedded in extra-financial metrics. You can check out some of his papers at

The third panellist was Brigid Barnett, CFA, Manager, Responsible Investing, CPP Investment Board. Brigid’s presentation focused on how the CPPIB implements their Responsible Investment Policy. She began by stating that “consistent with our investment only mandate we look at ESG factors only as they affect the potential risk and return of investments”. She talked about a number of collaborative initiatives that they have joined, such as the UN PRI and the Extractive Industries Transparency Initiative, and encouraged other institutional investors to get on board. Brigid also felt that by taking an active ownership approach the CPPIB was likely to improve long term returns and identified three current engagement focus areas, climate change, extractive industries and executive compensation.

The final presentation by Michael Jantzi took a more philosophical approach. Can SRI help investment managers make better decisions? Michael said there’s no definitive answer, and even 20 years down the road there may not be, but that doesn’t mean it’s not worth asking the question. However, if the questions we ask determine the answers we get, asking ‘does SRI improve performance?’ is perhaps not the only question we should be asking. Broadening our horizons to reflect on ‘how does SRI impact not only returns, but risk?’, or ‘does SRI impact different types of investors differently?’, or many other possible considerations, may engender further interesting debate.

The time constraints of a lunch event allowed for a limited Q and A. Michael noted a couple of things that are standard in the SRI toolkit, like transparency and disclosure, are now being picked up by mainstream managers. And Jordan raised the issue of developing regulatory regimes that protect broader interests without undermining the vitality and efficiency of markets.

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