The Hurdle to Responsible Investing – Fiduciary Duty

Despite varying degrees of impact, the allure of an investment policy with the potential to affect corporate and social change has been a recurring theme among a portion of socially-minded investors.  Otherwise known as “Socially Responsible Investing (SRI)”, or “Environmental, Social, & Governance (ESG) Investing”, we have seen various attempts of integration into the investment process since the 1970s.

The Achilles heel of ESG today, as with all previous iterations, is fiduciary responsibility.  Plan sponsors make decisions for recipients with a wide range of social orientations; they are unable or unwilling to sacrifice return for social or other exogenous factors and will switch mandates given underperformance.  Thus, the argument for ESG investing cannot be that investors are willing to compromise return in order to “feel good” about environmental or social factors.  Rather, the argument for ESG must be that investing in such a manner leads to equal, or superior performance.  Of course, there will always exist some mission-driven endowments and foundations that will accept a trade-off, but by and large, no such trade-off will be acceptable. Herein lies the hurdle. The data is mixed. Consequently, there are a plethora of investors who remain unconvinced that ESG investing has the ability to outperform.

Until those charged with fiduciary duty are convinced that ESG-investing truly leads to greater long-term performance, the market will remain split in their views.

11 thoughts on “The Hurdle to Responsible Investing – Fiduciary Duty

  1. You pose an interesting question here. The case can be made that there is a short-term cost to doing good, and thus, in the short-term results would actually be less for the sustainable company. However, one would also think that in the long-term, the sustainable company would be less prone to lawsuits, adverse government action, clean-up costs and the like, thus, in the long-term the sustainable company will have better returns. Thus, less in the short-term, but more in the long-term. We have seen many such cases. BP and the oil spill would be one such. BP thought they were saving money with improper controls and low-cost cementing of their well in the Gulf of Mexico, but the resulting disaster cost them dearly to the tune of $50 billion dollars. So, in the short term, they saved some pennies, but cost them many dollars. The short-term greed we see from many companies may get rewarded by Wall Street for a short time period, but not for true long-term performance. Thus, the interests of the long- term investor and the sustainable company are aligned. Longer- term sustainable companies should outperform. I wonder if there have been any good studies in academia? Great blog. Thanks for starting it.

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  2. I saw a Harvard study that said exactly what you hypothesized here. They looked at several hundred companies, 1/2 they categorized as socially responsible and 1/2 not. In the short-term they found no difference in performance, but in the long-term the socially responsible companies outperformed. I fill find the link and post it. Anyone see other studies?

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  3. Jennifer-thanks for starting this blog. I definitely agree that more firms need to look into the social impacts of investing. I look forward to following this.

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  4. Jennifer: Good start on the blog! I look forward to reading more on this topic from you. I think a big aspect of SRI/ESG going forward will be the rules of the investing game. If investors expect standards/rules to change (i.e. price on carbon) going forward, how will that impact their decisions today? Also another interesting topic for thesustainableinvestor to investigate would be Benefit Corporations (or B-Corps for short). These are companies who, per their website “meet rigorous standards of social and environmental performance, accountability, and transparency,” rather than solely maximizing shareholder value. Well-known B-Corps include über-green Patagonia and Method. Would like to know if a Fortune 1000 corp. will turn B anytime soon and/or if the B’s will influence the non-B’s. Anyway, great post and keep ’em coming!

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  5. Thanks for raising an extremely important issue! I look forward to hearing more from thesustainableinvestor. This is a nice refresher from the usual discussion on Wall Street.

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  6. Jennifer
    Thank you for a great commentary on a very important issue. I am not working on Wall Street but I have often wondered why the market does not reward sustainable investing?

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    • Cool blog! I do not work on Wall Street either, but am interested in sustainability in many different fields. I second Sarah’s question above: why should companies be penalized for investing responsibly?

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