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Corporate Social Responsibility (CSR) is an idea that corporations have to consider the interests of customers, employees, shareholders, communities, and ecological considerations in all
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Socially responsible investing (SRI) describes an investment strategy which combines the intentions to maximize both financial return and social good.
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green@work : Magazine : Back Issues : Mar/Apr 2007 : SRI

SOCIALLY RESPONSIBLE INVESTING

Putting the Focus on CSR
Corporate social responsibility is increasingly being examined from the traditional financial-analysis perspective, in addition to that of the investor.

by Mary Jane McQuillen


As many of us have read in the media over the recent years, the topic of corporate social responsibility (CSR) is a prevalent theme of global proportions. More frequently, the issues around CSR had been launched from the investor or shareholder perspective. Increasingly, however, CSR is being examined from the traditional financial-analysis perspective as well.

This shift represents a logical maneuver, as some would observe that the ecology of social investment has ostensibly been a directive from the investor to the investment, via the investment manager to the investment research provider—and continues to rotate from there. The demand side of such analysis peaks and oscillates between the buy-side and the sell-side. Here are two examples of mainstream initiatives below.

The burgeoning demand for robust environmental, social, corporate governance (ESG) integration, in the context of established sell-side sector analysis, was demonstrated by the dozen international buy-side firm members of the United Nations Environment Program Finance Initiative (UNEP FI) Asset Management Working Group, which in the United States includes Calvert Group and ClearBridge Advisors (formerly known as Citigroup Asset Management). That said, an unprecedented report in 2004 was published through the UNEP FI Asset Management Working Group, called “The Materiality of Environmental, Social and Corporate Governance Issues to Equity Pricing,” whereby sell-side firms incorporated ESG factors into their sector reports (such as pharmaceuticals, apparel, utilities, etc.).

Two years later, the second report in the “Materiality” series, “Show Me the Money,” was released this past summer, and included additional sectors not covered in the first report, such as forestry, food and beverage, autos, etc.

The significance of these reports is not fractional in the milieu of forward-thinking yet evasive determinants of good corporate performance. As most analysts would concur, sustainability in a “growth of earnings” framework is viewed as one of the attractive characteristics for an investment. Today, many investors would agree that sustainability should be defined with ESG inclusion, and thoughtfully applied in a holistic manner by capable analysts in the financial community. To reiterate, the ESG components would not supersede the investment analysis.

At the Socially Responsible Investing (SRI) Committee at the New York Society of Security Analysts (NYSSA), the world’s largest financial analyst member organization, there has been a steady increase in the number of analyst and portfolio manager members joining the SRI Committee—from a few dozen five years ago to about 100 members this year. Programming for the NYSSA members by the SRI Committee have included almost 24 events focusing on industry-relevant ESG criteria in the investment decision-making process.

Even in New York City, some analysts are dissecting data and observing the potential influence of climate change on valuation models, as manifested in cost of capital, carbon cap regulation and the price of energy. This thinking is no longer the sole domain by residents in California, Seattle and Vermont.

Given the relatively minimal text space for such an expansive and vital topic, I will close here by citing an early adopter of ESG analysis on the sell-side, Abbey Joseph Cohen—an investment strategist at Goldman Sachs Inc.—who noted that the environment is not just a “green” issue, but that there are important implications to fundamental analysis that should be considered by investors.

Mary Jane McQuillen is the director of the Social Awareness Investment Program at ClearBridge Advisors, a unit of Legg Mason Inc., and chairwoman of the Socially Responsible Investing Committee of the New York Society of Security Analysts.


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