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June 26, 2002
SRI Simulations Beat Benchmarks
by William Baue
The Triple Bottom Line Simulation demonstrates to institutional investors how socially responsible
investing generates positive financial, social, and environmental returns.
SocialFunds.com --
Investors, like car shoppers, appreciate the opportunity to “test drive” investment strategies
before committing to them financially. Simulations allow investors to do just that--track
performance before investing. In mid-June, Wisconsin-based Capital Missions Company hosted more than 40
institutional treasurers in New York City for the second Triple Bottom Line Simulation Conference.
 Since its launch in May 2001, the Triple
Bottom Line Simulation has tracked five portfolios that apply different socially responsible
investing (SRI) strategies. Investors began the test drive last year with $100 million in
simulated assets in each portfolio. The simulation is different from back testing because it
starts with assets and goes forward, allowing investors to compare the simulated portfolio’s
performance to their existing portfolios.
Several of the simulated portfolios
outperformed their benchmarks over the past year, dispelling the myth that investors must sacrifice
financial performance in order to achieve positive social and environmental performance. The
benchmarks in the simulation are a composite of the relevant indexes for each SRI product in each
portfolio.
“Institutional investors, if they do social investing at all, tend to think of
it as something to be done with a tiny percentage of their portfolio,” said Capital Missions CEO
and Founder Susan Davis. “The simulation demonstrated that sophisticated institutional treasurers
can socially invest 100 percent of a $100 million portfolio across all asset classes and realize
returns that closely match or exceed financial benchmarks.”
The best financial performer
of the five portfolios was the Shareholder Advocacy Simulation, which increased its assets to
$101.8 million while outperforming its benchmark by 0.68 percent for the year. This portfolio
includes investments that promote shareowner action such as dialogue with management, to improve
social and environmental practices and policies.
The value of shareowner action has been
demonstrated in the Brightline
Simulation, which is unrelated to the Triple Bottom Line Simulation. Corporate governance
advocate Robert Monks commissioned the development of the Brightline Simulation to model the
effects of corporation externalization. Externalization refers to the diversion of costs from
within the company to without. For example, companies that reduce costs by disregarding
environmental laws “externalize” these costs onto the environment. Mr. Monks ran the Brightline
Simulation for the top five companies in the oil industry to demonstrate how government regulation,
shareowner action, and externalization affect stock performance.
“[G]iven a sufficient
level of government regulation, and when competition in the oil industry is measured over a
sufficient length of time: (1) the most aggressive externalizers lose to the less aggressive
externalizers, [and] (2) shareholder action weakens this effect,” said Mr. Monks at the Coalition for Environmentally Responsible Economies
(CERES) Annual Conference held this April in Washington, DC.
In addition to the
Shareholder Advocacy Simulation, other Triple Bottom Line Simulation portfolios beat their
benchmarks for one-year performance. The Social Venture Capital Simulation, which invests in
socially and environmentally responsible startup companies, outperformed its benchmark by 1.29
percent. This made it the best performing Triple Bottom Line portfolio in comparison to its
benchmark, though its assets fell to $97.37 million.
The Community Development
Simulation, which invests in community development financial institutions (CDFIs), outperformed its
benchmark by 0.11 percent while also increasing its assets to $100.33 million. The Social
Screening Simulation, which employs both negative and positive screens, increased its assets to
$100.90 million, though it underperformed its benchmark by 0.69 percent. The General SRI
Simulation, which blended the SRI strategies used in the other four portfolios, decreased in assets
to $98.96 million, and underperformed its benchmark by 1.78 percent.
“After reviewing the
year’s performance, the institutional treasurers were very surprised at the above market returns,”
said Ms. Davis.
At the recent conference, the institutional treasurers created a
“Simulation Network” to steer the ongoing simulation. The group decided to shift the structure of
the portfolios from reflecting different SRI strategies to reflecting different types of
institutional investors.
“The treasurers felt the simulations needed to be customized for
foundations, wealthy families, and pensions, etc., because they invest according to different laws
and constraints and tax considerations,” said Ms. Davis.
This coming year, instead of
test driving different SRI strategies, the Triple Bottom Line Simulation will test drive how
different types of institutional investors fare with social investing.
©
SRI World Group, Inc. All Rights Reserved.
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