Geoff Wisner

The SRI Advantage: Why Socially Responsible Investing Has Outperformed Financially

by Peter Camejo et al. New Society Publishers, 2002. 265 pages.

Peter Camejo is the head of Progressive Asset Management and a former Green Party candidate for governor of California. His new book, The SRI Advantage, argues that socially responsible investing not only carries no financial penalty but that it actually outperforms traditional methods of investing.

Camejo makes his point in the very first words of his book. "Yes, it's true," he says:

Socially responsible investing (SRI) has financially outperformed conventional investment strategies. And not only has SRI outperformed, it has also lowered risk. Most investment strategies require adding risk to increase performance or accept lower performance as the price of lower risk. SRI reduces risk and improves performance.

According to Camejo, no academic studies have found that SRI underperforms traditional investing, while many indicate that it outperforms -- or does at least as well. Since many SRI funds are relatively new, real-world confirmation is somewhat ambiguous, but Camejo shows evidence that the more established SRI funds have done particularly well. For the ten years ended December 31, 2001, for example, the Parnassus Fund beat the S&P 500 by 2.43% per year.

When we apply social and environmental screens to stocks, Camejo maintains, we are not just arbitrarily reducing the universe of companies we can invest in. SRI screens are financial screens that have a financial impact on an investment portfolio, just as a concentration on value stocks or small-cap stocks can affect a portfolio.

Some have argued that SRI funds have performed well in recent years because they have been overweighted in sectors such as information technology. Yet a study by Innovest found that in the telecommunications and IT sectors -- even more than in traditional "smokestack" industries -- companies with high ratings for environmental performance outperformed those with low ratings.

Why exactly does SRI outperform? Camejo says it's because SRI reduces risk, and that the social screens we use remove risk by their very nature.

Company by company, what a social screen does is remove risk. Its overall impact is therefore to lower liability. Social screens will remove companies that tend to violate the law or market products that have questionable value or are most likely to lead to litigation, such as tobacco. Social screens knock out companies that engage in discrimination or are in conflict with their local communities or their workforce. Elimination of these companies reduces a specific kind of risk, what we can refer to as "company-specific risk." Wall Street does not measure such risk: it has instead used beta as its proxy for company-specific risk of all kinds.

Beta, he points out, is not a very good measure for this kind of risk. Beta measures volatility, so that a sudden jump in share price increases beta just as much as a sudden drop. In a well-run small-cap company, for instance, beta might be high even though company-specific risk is low.

From its inception on May 1, 1990, through July 31, 2002, the Domini 400 Social Index produced a total return of 314%, while the S&P 500 gained 262%. It's always nice to have beaten the S&P 500 -- never an easy task over a long period of time -- but if the advantages of SRI are so dramatic, why hasn't the Domini 400 outperformed by even more?

Peter Camejo believes that on a risk-adjusted basis, the Domini 400 Social Index really has outperformed by more than these figures would indicate. The Domini 400 has a beta of 1.1, slightly higher than that of the S&P 500, but Camejo believes that its actual company-specific risk is in fact lower than that of the S&P 500. This means that the actual risk-adjusted outperformance of the Domini index has been understated.

Many in the SRI community may believe that Peter Camejo is missing the point in The SRI Advantage. Social investors do what they do not because they think it will improve their bottom lines but because they think it will help bring about a more just, more peaceful, and more environmentally sustainable world. They would continue to practice SRI even if it had a negative effect on their returns.

Still, as Camejo points out, if we can prove that SRI outperforms -- or even that it consistently does at least as well as the traditional methods -- the "Why not?" rule kicks in. Why not invest in companies with better socially and environmental performance if there's no cost in return? When financial managers can no longer argue that practicing SRI is contrary to their fiduciary responsibility to maximize profits, then one of the major barriers to the spread of SRI will be removed.



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Geoff Wisner The SRI Advantage: Why Socially Responsible Investing Has Outperformed Financially by Peter Camejo et al. New Society Publishers, 2002. 265 pages. Peter Camejo is the head of Progressive Asset Management and a former Green Party candidate for governor of California. His new book, The SRI Advantage, argues that socially responsible investing not only carries no financial penalty but that it actually outperforms traditional methods of investing. Camejo makes his point in the very first words of his book. "Yes, it's true," he says: Socially responsible investing (SRI) has financially outperformed conventional investment strategies. And not only has SRI outperformed, it has also lowered risk. Most investment strategies require adding risk to increase performance or accept lower performance as the price of lower risk. SRI reduces risk and improves performance. According to Camejo, no academic studies have found that SRI underperforms traditional investing, while many indicate that it outperforms -- or does at least as well. Since many SRI funds are relatively new, real-world confirmation is somewhat ambiguous, but Camejo shows evidence that the more established SRI funds have done particularly well. For the ten years ended December 31, 2001, for example, the Parnassus Fund beat the S&P 500 by 2.43% per year. When we apply social and environmental screens to stocks, Camejo maintains, we are not just arbitrarily reducing the universe of companies we can invest in. SRI screens are financial screens that have a financial impact on an investment portfolio, just as a concentration on value stocks or small-cap stocks can affect a portfolio. Some have argued that SRI funds have performed well in recent years because they have been overweighted in sectors such as information technology. Yet a study by Innovest found that in the telecommunications and IT sectors -- even more than in traditional "smokestack" industries -- companies with high ratings for environmental performance outperformed those with low ratings. Why exactly does SRI outperform? Camejo says it's because SRI reduces risk, and that the social screens we use remove risk by their very nature. Company by company, what a social screen does is remove risk. Its overall impact is therefore to lower liability. Social screens will remove companies that tend to violate the law or market products that have questionable value or are most likely to lead to litigation, such as tobacco. Social screens knock out companies that engage in discrimination or are in conflict with their local communities or their workforce. Elimination of these companies reduces a specific kind of risk, what we can refer to as "company-specific risk." Wall Street does not measure such risk: it has instead used beta as its proxy for company-specific risk of all kinds. Beta, he points out, is not a very good measure for this kind of risk. Beta measures volatility, so that a sudden jump in share price increases beta just as much as a sudden drop. In a well-run small-cap company, for instance, beta might be high even though company-specific risk is low. From its inception on May 1, 1990, through July 31, 2002, the Domini 400 Social Index produced a total return of 314%, while the S&P 500 gained 262%. It's always nice to have beaten the S&P 500 -- never an easy task over a long period of time -- but if the advantages of SRI are so dramatic, why hasn't the Domini 400 outperformed by even more? Peter Camejo believes that on a risk-adjusted basis, the Domini 400 Social Index really has outperformed by more than these figures would indicate. The Domini 400 has a beta of 1.1, slightly higher than that of the S&P 500, but Camejo believes that its actual company-specific risk is in fact lower than that of the S&P 500. This means that the actual risk-adjusted outperformance of the Domini index has been understated. Many in the SRI community may believe that Peter Camejo is missing the point in The SRI Advantage. Social investors do what they do not because they think it will improve their bottom lines but because they think it will help bring about a more just, more peaceful, and more environmentally sustainable world. They would continue to practice SRI even if it had a negative effect on their returns. Still, as Camejo points out, if we can prove that SRI outperforms -- or even that it consistently does at least as well as the traditional methods -- the "Why not?" rule kicks in. Why not invest in companies with better socially and environmental performance if there's no cost in return? When financial managers can no longer argue that practicing SRI is contrary to their fiduciary responsibility to maximize profits, then one of the major barriers to the spread of SRI will be removed.