Report: Investors Should Look at SRI Criteria

January 13, 2005 (PLANSPONSOR.com) - Investors should consider socially responsible criteria alongside performance when investing, according to a recent report.

The World Economic Forum and AccountAbility, a London-based think tank, found that investors are too focused on short-term performance and as a result, are poorly equipped to consider non-financial factors in their investment decision. To aid managers in changing their outlook, the report also suggests possible changes to realign manager goals with long-term performance.

“Benchmarking within the fund management industry against short-term performance benchmarks that fail to take account of social, ethical, and environmental aspects of corporate performance is increasingly out of step with underlying client interests,” the report said.

The study cites recent problems at Wal-Mart and McDonalds related to discrimination lawsuits and health concerns, respectively, as reasons to look beyond financial factors in investment decisions.

Fund applying socially responsible strategies have quadrupled in the past ten years, according to the study, and now constitute over $2 trillion in assets under management.

The study suggests that to get away from only short-term performance goals, investment fund buyers should require asset managers to look at non-financial factors, such as worker conditions, when making decisions.

The report outlines an agenda for helping funds look beyond short-term gain and to align incentives within the institutional investment community and strengthen its ability to produce and understand non-financial information that may be relevant to financial performance. Among the recommendations are:

  • create an international set of good governance principles for pension funds akin to a corporate governance code
  • increase the duration of asset manager mandates
  • increase the disclosure of asset manager compensation structures
  • develop new business models for research on non-financial issues by analysts
  • re-evaluate the relationship and relative organizational standing of portfolio managers and buy-side analysts
  • pay, train and empower pension fund trustees more like corporate directors
  • create a professional competency for non-financial analysis
  • increase the emphasis on non-financial aspects of corporate performance in graduate business schools
  • widen the dialogue between analysts and corporate investor relations officers on non-financial information.

The full report is available  here .

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