Research: ‘SRI is bad for your portfolio’

(Published in the Financial Times on 16 november 2003).

Investing in companies with a strong environmental strategy is bad for your portfolio, according to a report by Pictet & Cie, which challenges widely held perceptions about socially resp onsible investment.

The Swiss investment bank’s study of 288 of Europe’s biggest listed companies revealed that a portfolio investing in companies with the best defined environmental policies would have underperformed the MSCI Europe index by 15 per cent.

The study also produced the controversial findings that sound corporate governance strategy and a good relationship with suppliers were also indicators of underperformance.

However, investors in companies that had good relations with stakeholders – clients and the general public – comfortably beat the index.

Christoph Butz, author of the study*, which ran from December 1998 to June this year, said it suggested that current screening methods for "sustainable" companies were inadequate.

"This report will disappoint those who think SRI automatically equals outperformance. The results do not shoot down a whole asset class, but it shows that some factors add value and some don’t."

Mr Butz said the study contradicted earlier analyses that suggested well defined environmental strategy was a sure indicator of good performance. He believes the contradiction lies in the lack of reliable data to back up company claims of environmental compliance – companies that managed to demonstrate compliance were rewarded.

A similar argument can be applied to the negative finding on good governance policy, he says. However, evidence that "squeezing" suppliers improves financial performance was difficult to mitigate, he added.