Thursday, May 29, 2008

Is SRI a fad?

[Drucker, Vanessa. "Full throttle," Fund Strategy, 19 May 2008.]

This recent article by Vanessa Drucker raises an interesting question about the growth of SRI in recent years and the likelihood of its continued success:

"There is little doubt that environmental awareness is a long-term secular trend. However, a substantial component of today's heightened focus is directly tied to the price of oil and any looming energy crisis. The price of oil and other commodities has skyrocketed over the past quarter, driven by a confluence of forces. Although light sweet crude has crossed $120 a barrel, recall that, not so long ago, in mid-January 2007 it was only trading at $50. Mean reversion could bring the price skidding down again.

"Another scenario could easily dampen the ethical consumer's spending pattern, if a recession takes hold. 'Are organic foods luxury items?' asks Thomas, who adds that so far this year, the organic trend has not slowed, even in America. The stocks of the companies trade at higher price-to-earnings valuations than those of non-organic rivals, and those lofty prices will increase the risks of compression in volatile markets. Meanwhile, competition is thriving along the supply chain, as new entrants squeeze margins.

"The rise and fall of the dotcom stocks left behind bad scars and memories. Some may wonder if the fashion for environmental investing echoes the hype and exuberance of that era."

There is certainly some reason to expect that as long as SRI funds and SR-driven corporations do well that investors will support them. As well, there are equally strong reasons to expect that if investors are doing well they may be more likely to accept greater risk than would otherwise be the case in order to give a "moral boost" to their portfolio. But Drucker's questions about the long-term viability of some aspects of SRI are worth consideration. First, are SR-driven corporations truly unique in the marketplace and if the qualities that make them successful can be copied, won't other companies do the same? And second, is SRI essentially a luxury good that could lose its appeal in a less than thriving economy?

Both questions have to do with balancing money and morals. In the case of the first question, many SRI advocates would be happy to see more companies adopt SR policies, even if it means greater competition for existing SR companies. This development would hardly hamper SRI, however, as the pool of available investments would expand under such a scenario.

The second question is more troubling for the future of SRI. If SRI is indeed a luxury good that can be eliminated in tougher economic times, and if SR companies are buoyed in part by this investment, then SRI could face significant problems should the market take a turn for the worse. That being said, such a series of events would likely only impact the size and scope of SRI, not its continued existence altogether. As mentioned earlier, the tradition has roots that are centuries old, and the ethical commitment associated with its practice runs deeper than the bursting of a market bubble.

What Drucker's suggestion does point out, and this is also something touched upon earlier, is the importance of making sure that one's investments are not tied wholly to the latest fad, but consist of a diverse enough blend to minimize the impact of any one sector's turbulence.

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