SRI jitters

In an earlier post, I discussed the question of whether SRI is more or less a fad that may quickly fade if the market turns sour. It seems that others are beginning to ask this question, particularly in light of the decision by the board of Calstrs, the California State Teachers' Retirement System, to reconsider its exclusion of tobacco stocks:

"Unlike some socially responsible funds that banned tobacco companies for health-related reasons, Calstrs said it divested in 2000 because numerous lawsuits against the industry and the specter of government regulation made the stocks too risky. It now says those risks have diminished.

"Calstrs also indicated that missing out on a 'market weighting' in tobacco stocks these past several years cost the fund more than $1 billion in lost investment returns.

"Calstrs wouldn't be the first pension fund to reverse a ban on tobacco shares. The Florida Retirement System voted in 2001 to overturn a similar ban after divesting from tobacco stocks in 1997. Still, Calstrs's decision 'will be watched closely,' said Amy Borrus, deputy director at the Council of Institutional Investors. 'At a time when pension funds are under tremendous pressure to boost returns, they are rethinking the costs of divesting from a whole class of shares.'"

In a recent article in the New York Sun, columnist Liz Peek wrote that "The reality is that the performance of these funds is skewed by their relative exposure to various industry groups. Good works today simply don't measure up to oil prices of more than $130 a barrel. Investors may (and possibly should) choose to support firms they consider highly ethical, but they may well have to accept lower returns to do so."

Not all are quick to suggest that SRI is either financially unsustainable or likely to experience an exodus, though.

"Research by Julie Hudson, analyst at UBS, suggests the SRI sector could shrink in the short term as 'firms under pressure may go into survival mode, de-emphasising anything that is not relevant to immediate survival'. Hudson counters this with a long-term view that SRI issues such as climate change, resource constraints, food scarcity, the energy challenge, and corporate control are driven by politics, public opinion, and consumer behaviour rather than market volatility.

"Hudson said: 'SRI investors don’t abandon their values in a downturn. When markets are volatile and visibility is clouded, all investors cast around for other inputs to help them understand companies better.'"