The study conducted by Innovest was a live simulation of the impact a slight “tilt” toward certain SRI criteria might have on a public pension fund’s portfolios. Overall, five of the six portfolios reported better gains with the Innovest social criteria by an average of 1%, with the one fund only underperforming by 0.04%.
To make certain the extra performance was due to the SRI, Innovest normalized away other potential explanatory factors – such as P/E, market capitalization, industry sector, interest-rate sensitivity – through advanced optimization techniques. This is in addition to tandem results recorded by Innovest adding the same social criteria overlay to a real $150 million portfolio also owned by the pension fund. After its first year, the social-enhanced portfolio has out-performed its benchmark by 1.5%, according to Innovest.
The Innovest results directly contradicted the findings of a recent publicized study from the Wharton School at the University of Pennsylvania. The Wharton Study concluded that including socially responsible investment factors in their assessment could cost active investors as much 3.6% per annum in lost performance (See Social Responsible Returns Are Tech Dependant ).
“The Wharton study appears to be fundamentally flawed – or at least severely limited – from the get-go,” said Bijan Foroodian, Innovest’s Director of Quantitative Analysis and one of the Innovest study’s co-authors. “For starters, the authors have not used proper, ‘apples to apples’ comparisons. At one point, the Wharton study compares the performance of broadly – based SRI funds with a group of 28 mainstream equity funds, of which fully 17 are real estate funds! Given the enormous differentials in the risk/return characteristics of these two different types of investments, this comparison is, at best, disingenuous.”
Additionally, Innovest points to the Wharton study’s primary focus on social funds practicing exclusionary, negative screening as falling short of more advanced techniques used in the construction of social conscience criteria. Instead, SRI portfolios designed to maximize performance should be stressing positive screens and must discriminate among the various social performance metrics; clearly they do not all have equal financial impact.
An executive summary of the report ”
New Alpha Source for Asset
Environmentally-Enhanced Investment Portfolios” ca n be found at www.innovestgroup.com/publications.htm . Complete copies of the study are available by contacting Peter Wilkes, at firstname.lastname@example.org .