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A Better Way To Do SRI – Socially Responsible Investing

Socially responsible investing (SRI) has been on the rise for the last few years, but for most people the emotional value that comes from SRI isn’t enough to make up for significant loss of value or unpriced risk. Usually this means that SRI is reserved for a sliver of the overall portfolio (if used at all), but a note from Credit Suisse shows that using multiple indices to filter results can gives investors feel-good options that are competitive with the market.

MSCI Intangible Value Assessment assessing risk

MSCI Intangible Value Assessment (IVA) attempts to rate the financial and material risks associated with environmental, social, and governance issues. While it doesn’t measure social action directly, it does account for a management team’s ability to handle social and ethical risks to the company, giving ratings on a AAA – CCC scale. This is arguably a fair guide for someone interested in SRI, but it doesn’t perform as well as the iShares MSCI World Index (MUTF:URTH) over time.

“Rather than focusing solely on a stock’s IVA rating to judge and predict performance, we leverage HOLT to establish a ranking system to select companies,” write Credit Suisse analysts Mujtaba Rana, Richard Kersley, and Kiranjot Grewal.

They used the Credit Suisse’s HOLT model to select the best-in-class and worst-in-class stocks to see how much impact the second filter had on performance. It’s no surprise that worst-in-class stocks did quite poorly (though it does credit the model’s predictive ability), but the best-in-class stocks chosen from highly rated IVA stocks beat iShares MSCI World Index (MUTF:URTH).

SRI IVA Holt overlay

SRI evaluating compaines

That’s great news for proponents of SRI because it shows that throwing companies with poor environmental records or opaque management practices out of your portfolio doesn’t have to mean taking a hit. This result doesn’t extend to every SRI index – it’s entirely possible that a different subset of responsible or green stocks would be a loser no matter how you mix them – but this suggests what could become a standard practice. Marketing specific combinations of indices, one for ethical and transparent business practices and another only addressing performance, could be a better way to get skeptical investors to take a second look at SRI.