Asset managers Augustin Landier and Vinay B. Nair explain how to make your investments reflect your values--without sacrificing returns in the process. Their well-researched book offers portraits of typical values investors, presents statistics that convince the skeptical, and makes a convincing argument for adding socially responsible investments to your portfolio.
Questions for Co-Authors Augustin Landier and Vinay B. Nair
Amazon.com: In your book, you identify three types of values investors: blue, yellow and red. Can you describe them?
Landier & Nair: In Investing for Change, we divide investors into three stylized color categories based on their motives. (In reality, all investors are a mixture of these categories with regard to specific values and causes.) These categories are structured according to two key questions: What are your beliefs, and how much are you willing to pay for them?
YELLOW investors feel morally obliged to avoid companies that are incompatible with some of their values. They consider that doing otherwise would be immoral.
RED investors are at the other end of the SRI spectrum, as they are not motivated by moral concerns. Instead, they will not tolerate investment strategies that negatively impact performance in any way.
BLUE investors are pragmatic. They are only interested in being responsible investors if they are convinced that it can change the world in the direction of their values and that the financial cost is small.
Amazon.com: You estimate that Socially Responsible Investments (SRI) will outperform the benchmark indices in the long term. Does the recent turbulence that we've seen in the markets change that prediction?
Landier & Nair: There are two conflicting forces. On the one hand, as many investors have lost a lot in recent months, being socially responsible might seem to them as a sort of "unnecessary luxury" and this might delay the growth of responsible investing. On the other hand, there is a real demand to find a new meaning in financial markets, something beyond greed, and this might give traction to the idea that markets can be used to express values. Moreover, we are entering a period of regulation tightening, which is favorable to the more responsible companies. These last two forces make the current period favorable to the growth of SRI and therefore also to its returns.
Amazon.com: Which comes first, the chicken or the egg? Does corporate responsibility create wealth or do companies adopt socially responsible practices because they can afford to do so?
Landier & Nair: We explain in Investing for Change that increasing profits is not the only reason for companies to listen to the demands of responsible investors. In fact, being responsible sometimes does actually reduce profits. But it doesn't mean companies have to be altruistic to be responsible: responsibility can indeed create shareholder value indirectly by securing a strong base of loyal investors, which has a stabilizing impact on stock-prices and can allow companies to take a long-term view, to invest on more ambitious projects.
Amazon.com: Some investors may drop "sin industries" from their portfolios. Will strict values investors change the way that industries do business?
Landier & Nair: No. The fact that they are banned from responsible portfolios will not convince tobacco companies or casinos to become green energy companies! These companies cannot reasonably be expected to change industry. So, banning whole industries will not induce improvements in the way these industries are operated. If your goal is to promote change within these industries, as an investor, one way to do it is to include companies that do make an effort to reduce the damage they do and exclude those who don't. From a financial perspective, it turns out that including some companies from all industries (as opposed to excluding whole industries) has a positive impact on returns. That means that this inclusive approach is particularly suited for "Blue" investors, as it favors change while protecting financial returns.
Amazon.com: More women are adopting SRI's than men. What accounts for this difference?
Landier & Nair: There is evidence in the social psychology and economics literature that women are more prone to altruistic concerns. For example, it has been shown that when women are the recipients of public subsidies, they tend to spend it more on children's health and education than men.
Amazon.com: You write that "the future of the SRI movement hinges on the desire of the wealthiest individuals of the planet to use their investments to improve the world." How can those of us with more modest incomes affect change?
Landier & Nair: Well, the accumulation of a lot of individual initiatives can create a powerful force, that's the very idea of democracy. This requires however that responsible investors pick causes that are common to a world-wide majority of investors. As a "modest" individual, you can probably not promote your own unique personal causes but you can definitely join forces with others. So it's all about finding this global common-ground on which a large majority of investors agree and pick mutual funds or indices that are coherent with these values. We find in our research that the protection of the environment, the treatment of employees and the safety of products are the three topics on which such global consensus does currently exist. Another way to help is to spread the word: there are strong peer-effects in the way individual invest their savings.
Academics turned portfolio managers, Landier and Nair offer up evidence for socially responsible investing's potential for financial gain and real social change, highlighting how returns, risks and goals differ in ethical investing. The book traces the evolution of socially responsible investing (SRI) from its 18th-century Quaker roots to the first socially responsible mutual fund, 37-year-old Pax World, and finally to more recent responsibility indices and the increasing availability of corporate sustainability reports. The authors wisely credit the growing influence of the corporate governance movement, the increasing number of socially responsible mutual funds, large public pension funds' interest in responsibility issues, and the dynamic regulatory landscape for pushing change on environmental, human rights and other social fronts, making an ethical investment approach a viable option. The authors assess the research on stock returns in ethical investing and the trade-offs for one's principles, projecting that a more balanced socially responsible investment portfolio can grow close to industry averages on the S&P 500, for example, and better than benchmark portfolios. While the fictitious investors in the book grate, its appeal to invest in who you are is genuinely persuasive. (Dec.)
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