Do-gooder investors may actually do well

Investing in companies based on socially conscious criteria probably doesn’t penalize investment performance, and in fact may help, according to a report released last month by the United Nations Environment Programme Finance Initiative and Mercer LLC.

Mercer is a unit of New York-based Marsh & McLennan Cos. Inc.; the U.N. initiative is a partnership between the United Nations Environment Programme, based in Gigiri, Kenya, and 160 private financial institutions.

The report analyzed 20 academic studies that examined investments where environmental, social and governance factors were taken into consideration. It found positive performance in half the cases, neutral impact in seven and negative performance in three.

The report also reviewed 10 brokerage studies that examined whether a company’s behavior on these issues materially affected its bottom line. That research suggests a positive correlation, but the report concludes that more studies are needed to tie elements such as share price or sales growth directly to socially conscious actions.

“Brokers and investors are starting to see the argument that [environmental, social and governance] issues are material,” said Craig Metrick, U.S. head of responsible investment at Mercer. “These are not just ethical issues anymore, but investment issues.”

Investors increasingly are going to demand that investment analysis incorporate socially conscious issues and that those concerns are linked to compliance, risk and opportunity, Mercer said in the report.

Wall Street representatives said they need more evidence that environmental, social and governance factors should be weighed in analyzing a company’s health and prospects.

“We want to see that decisions made by companies now impact their sustainable growth and profitability,” said Gordon Bell, director and portfolio manager for ClearBridge Advisors LLC of New York, a unit of Baltimore-based Legg Mason Inc.

There are examples of when management teams have “screwed up” and not taken such issues into account, he said, noting governance issues that led to the bankruptcy of Clinton, Mass.-based WorldCom Inc.

It’s intuitively possible that the two are positively correlated and that firms that “get it right” on socially conscious issues could be at an advantage, Mr. Bell said. “That’s our suspicion,” he said.

ClearBridge, which produces its own research and buys outside research, already looks at some environmental, social and governance factors, and is interested in looking at others, Mr. Bell said.

Firms such as ClearBridge that look for companies they expect to perform well in the long term want more research into the effects of socially conscious factors so they can incorporate the answers into their investment decisions, he said.

Such research is probably less useful for hedge firms, day traders or other investors that focus on the short-term performance of companies, Mr. Bell said.

The evidence is already overwhelming for Bethesda, Md.-based Calvert Group Ltd., which has integrated environmental, social and governance factors into its investment analyses since its 1976 start.

Calvert would like to see the public recognize that investors don’t have to sacrifice performance to support socially conscious firms.

“There has been a misconception that socially responsible investing automatically translates to worse performance,” said Steve Falci, chief investment officer for equities at Calvert, which is one of the largest socially conscious mutual fund firms in the United States, with about $15 billion in client assets.

Socially conscious investing, sometimes called sustainable investing, has evolved to where investment managers aren’t just screening out sectors such as cigarette makers or oil companies, he said.

Instead, companies may be in-cluded in socially conscious investments because they are the “best” in their industry in terms of environmental, social and governance criteria, Mr. Falci said.

Additionally, investment managers may be active owners that push companies to improve their environmental and other practices, which benefits the company in the long run, he said.

Integrating environmental, social and governance considerations when evaluating financial performance helps identify companies that are better positioned to succeed, Mr. Falci said.

At Mercer, consultants are seeing a growing number of clients interested in integrating financial performance with [environmental, social and governance] issues, Mr. Metrick said.

For instance, Mercer announced last month that PGGM, a Zeist, Netherlands-based pension fund, had hired the firm to search for emerging-markets investments that make environmental, social and governance considerations a central focus of their strategy.

PGGM officials said they believe that investments that consider socially conscious issues will perform better long term.