David Vogel in Wall Street Journal: Virtuous Companies Don’t Earn Higher Returns

By Edmund L. Andrews

Investment funds that focus on social and environmental responsibility have enjoyed explosive growth over the past decade, amassing $5 trillion in assets by the end of 2014.

As a general matter, the appeal is clear. Other things being equal, many investors would prefer to put their money in companies that treat workers and customers fairly, have small carbon footprints, or contribute to the broader social good.

But David J. Vogel, professor emeritus of ethics at Berkeley-Haas, argues in a new commentary for the Wall Street Journal that virtue is not its own financial reward.

Vogel offers a slew of reasons to be highly skeptical of claims that firms deemed socially responsible actually deliver higher investment returns. In fact, he argues, such companies may not even be all that responsible.

First, he argues, there is no consensus on how to define social responsibility, and social investment funds employ widely diverse criteria for building their portfolios. Some funds invest heavily in health care and technology companies, though companies in both sectors have engaged in irresponsible behavior.

Second, the data on corporate social responsibility is very limited. Only 2% of the world’s publicly traded companies follow the Global Reporting Initiative, the voluntary reporting guidelines on social responsibility. In many areas, notably carbon emissions, the data comes from self-reporting by companies.

Third, many companies have ambiguous records. “Should Dow Chemical be excluded from a sustainability-screened portfolio because of past pollution or included because of its recent leadership in tracking and reducing its environmental impact and that of its products?” Vogel asks. “What about a fossil fuel company that has recently expanded its renewable energy investment portfolio?”

On top of that, Vogel warns, a company’s reputation and record can be “a poor predictor of future behavior.” BP, for example, had a positive environmental reputation because of its efforts in renewable energy – until the massive Deepwater Horizon oil spill.

As a practical matter, Vogel adds, corporate social responsibility practices “are rarely of sufficient importance to earnings to affect its share price.”   Walmart may well have reduced costs through its “green’’ initiatives, he notes, but those cost reductions have been ignored by analysts because they are too marginal to affect future earnings.

You can read the full article here.

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