Pension funds and other institutional investors can't continue to avoid what is often referred to as socially responsive investing when it performs better than unscreened investments.
Now that the financial performance of social funds has for five and more years demonstrated that social and environmental screening is a useful adjunct to financial analysis, isn't it time for pension fund boards to incorporate it as a part of their fiduciary responsibility?
Assuming for the moment that financial performance was the only measure of "benefit" to plan participants, then trustees who have avoided socially responsive investments could be taken to task for not having invested in socially responsive instruments, such as the Citizens and Domini index funds. Over the last five years they have, on average, outperformed the Standard & Poor's 500 by 7.05% and 3.21% respectively annually.
Innovest Strategic Advisers similarly has demonstrated that an optimized environmentally screened S&P 500 fund, overweighting best-in-class and underweighting environmental underperformers, outperformed the benchmark by 190 basis points. For the dirtiest industries, outperformance has been over 500 basis points.
A recent analysis by Jon Hale of Morningstar showed the proportion of socially screened mutual funds that have received five stars over one and three years is greater than for non-screened funds, and about the same for a five-year period. He concluded, "(S)ocially responsible funds are clearly competitive with non-screened funds. And, from a risk-adjusted performance stand- point, screened funds have generally performed better than non-screened funds."
Christopher Luck of First Quadrant, in an analysis of the Domini fund over a 10-year period, shows an 83 basis point outperformance which he ascribes to the social screens applied to the portfolio, that is not explained by high technology, the "new economy" or other variables.
Many other quantitative studies report the same results: social and environmental screening does not affect financial performance negatively, and may actually, as the numbers cited above suggest, bring outperformance over traditional benchmarks.
Beyond the financial rates of return there is the broader question of what "benefit" to plan participants means.
For example, why should a state pension fund, supported by taxpayer dollars, continue to invest in tobacco companies that, according to California State Treasurer Phil Angelides, have cost the biggest funds $500 million in net asset value, when cigarettes, used according to the manufacturers' directions, cause 10,000 deaths per day worldwide?
The Council for Responsible Public Investments in Oakland, Calif., has noted that all states and counties that have divested from tobacco actually have gained financially from their decision.
The law requires that pension fund trustees assess financial rates of return. But the law does not require funds to stop there, as the soon-to-be-released study on tobacco divestment prepared by the impartial Investor Research Responsibility Center clearly demonstrates. So long as the appropriate process has been followed to assess comparable risk and return, trustees can, as part of their fiduciary responsibility, consider other factors. Moreover, this analysis finds, fund trustees have a duty to be forward-looking as they seek to secure the retirement incomes of future beneficiaries. One can argue, in fact, that looking at potential risks and rewards related to tobacco, the environment, treatment of employees, or any other of a range of concerns, provides the future orientation that trustees should have.
Early last December the Contra Costa County Employee's Retirement Association sponsored a very successful educational day on socially responsible investing for itself and other funds in California. Isn't it time for more open discussion of these issues by pension fund executives, following the lead of Contra Costa County?
With comparable, or even better financial returns, isn't it incumbent on fiduciaries to look at social and environmental issues to really ensure benefit to plan participants? Shouldn't this issue still outstanding be resolved once and for all in this new year? Fiduciary responsibility can no longer be separated from broader responsibility to the needs of plan participants.
