Chapter1

Responsible Investing
Values-Driven and Profit-Seeking (S)RI
Dr. Jeroen Derwall
November 20, 2012
Equity Analysis and Portfolio Management (EBC4112) – Week 4

Agenda
 What is (S)RI and related concepts
 Equity RI: theory and evidence
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“Values” and “social norms”: what are the effects of ethical exclusion on returns?

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What do we need to know to obtain positive returns/alpha? Errors in expectations

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Segmentation of the SRI movement solves “performance puzzle”
 Both controversial and responsible stocks can have positive “alpha” - in short run

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New evidence: is alpha-driven RI feasible in long run?

 Conclusion

What is (Socially) Responsible Investing [(S)RI]?

Financial Markets & Sustainable Development
 (S)RI is growing tremendously but is still not mainstream
 Financial markets can perhaps promote sustainable development…  But are responsible investments in line with investors’ return/risk objectives?
 Debates about conflict between social and financial objectives of investment
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Is this a problem?

What do you think of these statements?
 “SRI is a dumb idea, screaming with contradictions, and yielding sub-optimal returns”
 “… we believe that, in the long run, an investment approach that identifies and invests in companies with sustainable business models serves shareholders best.
Towards that end, we have developed a process that combines thorough financial analysis with another, critically important set of factors that most investment managers ignore…” (PAX World Investments, 2010)

View of the “mainstream” nowadays?
 Institutions increasingly justify responsible investment using the argument that CSR/ESG criteria positively contribute to investment performance (alpha).
 More than 850 institutions have signed UN-backed principles for responsible investing (PRI).
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“as institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In