CSR Investment in the next 'dot.com' boom but without the crash?

Socially Responsible Investment is a growing business, judging from the number of ethical investment funds being created in both the USA and Europe (Ethical Performance lists sixty ethical trust in the UK alone), and by the growth in public interest in the social responsibility of companies ñ for instance a recent MORI poll of 1000 British adults showed that 46% of respondents consider social responsibility to be 'very important' when deciding whether to buy a product or service from a particular company. This is 18% more than a similar MORI survey in 1998[1]. Could social investment be the next boom in investment by individuals, financial institutions including pension funds? It is certainly more than 'fashion' as can be seen by the fact that the public is increasingly aware of environmental and social issues as well as SRI legislation being introduced in the UK, Australia, Belgium, Germany, France and Sweden.

Smaller players such as Henderson or Morley or Friends Ivory and Sime are separate SRI providers and each have dedicated SRI teams which, nevertheless, are some of the largest in the City of London and are convinced of the social investment possibilities. But the mainstream investors are still wary according to CSR specialists at Dresdner Bank in London. Only small teams are involved at the majors and none have put together dedicated teams in the social investment area. Nonetheless, the author of this short article believes that CSR investment could well be a growing area if not the next dot.com boom once recessionary fears dissipate but this time without the dot.com slump.

To date mainstream financial analysts remain cautious to the idea of social investment. They do not see the relevance of information provided by social or environmental reports in their daily analysis of companies and as such are not likely to use the information being provided. They believe that it is harder to make money with social investment given their potentially reduced diversification, active risk exposure and, and are very skeptical of social investment indicators such as the KLD, FTSE4good, Dow Jones Sustainability and Jantsi Indices to name some of the well known ones. The skepticism towards the indices is also being shown by dedicated SRI houses. What these indices do however is raise awareness of SRI and the fact that mainstream index producers are getting involved in this area further demonstrates that SRI may not be a fashion statement.

Certainly, it is early days for social investment funds as back-tracking of the various indices shows. For instance the Canadian Jantsi social investment index (JSI) from its inception on January 1, 2000 through August 31, 2001, lost 12.47%, while the Canadian S&P/TSE 60 and the TSE 300 lost 12.11% and 10.69%, respectively, over the same period. A similar result was estimated for the FTSE4good and Dow Jones Sustainability Index over the same period. Hardly brilliant! We at MHCi kept our money in fixed interest bonds over the same period thus avoiding a loss. Which goes to show that social or any other type of investing doesnít mean putting your head in the sand when you see the storm clouds gathering!

Clearly, investment analysts wish to see the 'business case' for social investment and are not carried by the 'moral case'. So why are mainstream analysts not seeing the business case, where does the problem lie, what can be done about it? Let's look at these questions briefly one by one:

Why the slow up take of CSR issues by mainstream financial analysts?

• Investors are still mainly interested in making profits or driving value
• Imperfectly understood and badly measured in impact on both
• Political tinge of social democracy and even socialism/green party sympathy
• Legacy of belief that it is governmentís responsibility
• Opacity of company reporting
• Perception that major SR issues are beyond company control

What does business need to do?

• Understand available measures
• Report adherence to standards, be open
• Contribute to CSR dialogue eg on SA8000, join Institutes eg AccountAbility, GRI, SA8000
• Follow best practice

What do analysts need to do?

• Understand and popularize available standards
• Contribute to debate on business performance and CSR
• Communicate perceptions to businesses they analyse
• State their ideological beliefs on CSR openly

As we have shown in earlier 'monthly features', the business case for CSR investing is still under consideration although MHCi's models theorises gains (see j-curve).

Investment analysts should not, however, ignore fashion. They certainly did not in the dot.com boom when many wiser heads were seeing shades of the South Sea Bubble and were rewarded when the Nasdaq declined by half in a few months in 2000. When fundamentals come together with fashion then the time is to jump into the CSR investment. Precedent for fashion in investing was established by one of Britain's most famous economists and successful investors ñ John Maynard Keynes ñ who was the brainchild for the Bretton Woods institutions the IMF, World Bank and the more recent WTO. Alongside developing his General Theory of Employment in the 1930s in response to the crash of 1929, Keynes was an inveterate investors. Not getting up until midday, he used his 'bedtime' to work with his investment brokers. No slave to economic theory and no virgin to PE ratios, shareholder value and the like was he. Keynes ascribed his success to trying to understand human behavior - seeing where they were investing and following suit. Now over fifty years after his death would Keynes be looking at CSR investment? He would certainly have some ideas on how to handle the current recession and would be quick to spot the next 'fashion'.

September 11^th has spurred interest in social development. None of us in that field welcome the fact that vile acts have given impetus to concerns about social development. Nevertheless, the acceleration of interest in social development both through the nation state, and through corporations in recent months, are likely to herald a boom in social investment. Fashion means profits not only on the catwalk but also on the boardwalk!

Contributed by Prof Michael Hopkins, Managing Director, MHCi Ltd with thanks to Julian Roche, Ivor Hopkins of MHCi and two un-named(at their request) social investment advisers for comments and suggestions on an earlier draft.