Socially Responsible Investment: Should it be more profitable?

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On the occasion of the promotion of investments in Responsible Investment Funds that is being carried out in Spain [1] , it is appropriate to remember the motivations why investors should be interested in these investments. Josep Lozano reminds us in an article on his blog and in Diario Responsable that: The ISR has sought to legitimize itself by insisting on its profitability... It had to be insisted that they were comparable funds from the point of view of the results they offered. But this has been a commercial triumph and a conceptual defeat, to put it quickly and bluntly. Because it has involved playing the game of legitimacy in the opposite field. It has continued to focus the debate on the question of who is more profitable, as if the only criterion that had to be taken into account when valuing a company (and investing) was profitability. In this article I complement, with some technical arguments, what Lozano presents so eloquently. I commented on my blog on April 23, 2008, in the first part of an article about responsibility and profitability of statistical studies had been carried out on the relationship between profitability and responsible practices and that conclusive results had been found in both senses (which are more profitable and which are not) and many results were inconclusive in neither direction. These statistical studies suffer from major flaws, the main ones being the determination of causality (you are profitable if you are responsible or you are responsible because you are profitable), the definition of responsibility (each study takes a practice or an imperfect indicator) and to concentrate on geographical areas and/or sectors.

The argument that is usually given is that the Phone Number List responsible company runs lower risks, can have better productivity, can capture other markets, sell at better prices, in short that it SHOULD have better profitability and therefore increase its price on the stock exchanges. It is possible that this is true in a particular company, or with a participating practice, as we showed in the second part of the article (May 14, 2008). But all this makes a series of implicit assumptions that are ignored. For SHOULD to become ES, the “transmission mechanism” of responsibility for profitability must work (Chapter 10 of my book, with Estrella Peinado-Vara and others, CSR in Latin America: Management ManualThe investing public is required to: · Find out about these responsible practices · Believe that these practices are beneficial for the company · Invest and increase demand for the shares of those companies This is not automatic. What the promoters promote and perhaps believe (do they invest in these stocks?) is not necessarily what the public believes or acts upon. When investing your money, other criteria may apply. But they don't sell it well either. Although responsibility is not reflected in short or medium-term profitability, it must be remembered that investors interested in these products tend to be institutional rather than individual investors, who explicitly consider the investment risk.



They understand risk, and even if the return were the same, these actions, due to their lower risk, can reduce the total risk of the portfolio, contributing to a better “risk-adjusted return”, which should be the investment criterion of these money. Additions to a portfolio should be considered based on the contribution they make to the portfolio's risk-return balance, not just the yield. Stocks with the same return as others, but with less diversifiable risk are preferable. In technical terms, these investments move the fund's portfolio toward the “efficient risk-return frontier.” These shares of responsible companies should not be sold with the argument that they offer higher returns, which is very difficult to prove, but rather that they offer a lower contribution to the risk of the portfolio, and may even reduce it. And the superiority of performance cannot be demonstrated reliably and consistently. As an example of the comparison of performance, we can see the case of the Vice Fund (invests in arms, gambling, tobacco and liquor companies) and the Ave María Fund (which invests in companies managed according to Catholic values, which we assume are more responsible than those of vice).