Holy Grail Found
Absolute, definitive proof that responsible companies perform better
By Marjorie Kelly
OK, yes, it's true that researchers don't speak this way: They'll never
say "absolute, definitive proof" of anything has been found
- not even that the sky is blue. Theirs is the language of positive
correlations, statistical significance, and other somnolent phrases.
I'm no statistician. I am instead someone who's observed the socially
responsible investing (SRI) field for 17 years, and in that time I've
seen countless theorists attempt to scale the Everest of SRI, reaching
for the summit of certainty: Do socially responsible companies perform
better financially? The answer has long been the statistical Holy Grail:
eagerly sought, ever out of reach.
I'm here to announce the search is over. The evidence is in. And even
the statisticians are saying it's conclusive. Social and environmental
responsibility does go hand in hand with superior financial performance
- that's the finding of two "meta-studies" in recent months.
A meta-study is distinguished by being a study of studies - it rolls
up years of research by various theorists, using various lenses, studying
different industries, different time periods, different definitions
of social responsibility, and so on. This lends such studies an outsized
The most impressive of these is the rigorous and groundbreaking study
that in October won the Moskowitz Prize of the Social Investment Forum,
awarded for outstanding research in social investing. It was conducted
by Marc Orlitzky of the University of Sydney, Australia, and by Frank
Schmidt and Sara Rynes from the University of Iowa. Their meta-analysis,
"Corporate Social and Financial Performance," was a study
of 52 studies over 30 years. They thus reviewed in one fell swoop three
decades of attempts to answer the perennial question. And they proved
that a statistically significant association between corporate social
performance and financial performance exists, which varies "from
highly positive to modestly positive."
The researchers offered ideas on what might be behind this correlation.
One theory is that corporate social responsibility (CSR) is an indicator
of good management - a kind of flag saying sophisticated, cutting-edge
managers are at work. A second theory sees the causation going the other
way: financially successful firms have more resources for social activities.
The study supported both theories. In a virtuous cycle, "financially
successful companies spend more because they can afford it, but [corporate
social responsibility] also helps them become a bit more successful."
It's not rocket science to see why CSR firms perform better financially.
CSR helps companies develop new competencies because it engages employees
organization-wide, calls for a "forward-thinking managerial style,"
and leaves responsible firms better prepared for "external changes,
turbulence, and crises," study authors wrote. It builds reputations
and enhances relations with bankers and investors. It helps firms attract
better employees and increase employee goodwill. It helps firms run
In November 2004, just a month after the Moskowitz Prize was announced,
a second major meta-study was released, commissioned by the UK Environment
Agency. Its resounding conclusion was similar: Companies with sound
environmental policies and practices are highly likely to see improved
financial performance. The analysis looked at 60 research studies over
the last six years, finding that 51 of them (85 percent) showed a positive
correlation between environmental management and financial performance.
Again, we have rigorous proof that good environmental management delivers
This second study, "Corporate Environmental Governance,"
was conducted by Innovest Strategic Value Advisors, an international
social research firm with over $1 billion in funds it sub-advises. The
Innovest report offered many anecdotes of superior financial returns
being paired with good environmental management:
* The Winslow Green Growth Fund has consistently outperformed its
peer growth funds, with average annual returns above the benchmark index
by 20 percent, 6 percent, and 11 percent over one, three, and five years
* Forest and paper products companies with above-average environmental
performance had 43 percent better share-price performance over four
years than those with below-average environmental ratings.
* In the oil and gas sector, the top environmentally rated firms outperformed
laggards in share price by 12 percent over three years.
Though the evidence is clear, not everyone will believe it. As Matthew
Kiernan, the CEO of Innovest, commented in the UK Environment Agency
report, the misconception remains that tracking environmental performance
"is at best a waste of time for investors, and at worst actively
harmful to financial returns." Indeed, when the Environment Agency
asked analysts to spontaneously name the factors they considered in
investing, just 3 percent mentioned environmental factors.
While doubters remain, they may unwittingly create opportunity for
SRI investors. Knowing that responsible companies outperform, savvy
investors have a head start in locating future winners before the broad
market does. The future of SRI may lie in searching for undiscovered
indicators that lead to superior stock selection. This has already been
done, for example, by McBassi & Co., which is creating a niche for
itself by buying stocks in companies that invest the most in human capital.
Its portfolio of such firms created in late 2001 has outperformed the
S&P by nearly 7 points over two years (see Business Ethics, summer
As some folks pretend the jury is still out, we might liken their stance
to "doubts" over global warming. What they're disputing is
not a scientific question but an economic worldview. Statistically speaking,
the perennial question has been answered. CSR does indeed go hand-in-hand
with financial outperformance. Thirty years and 112 studies later, the
Holy Grail has been found.