SRI Simulations Beat Benchmarks

Investors, like car shoppers, appreciate the opportunity to “test drive” investment strategies before committing to them financially. Simulations allow investors to do just that–track performance before investing. In mid-June, Wisconsin-based Capital Missions Company hosted more than 40 institutional treasurers in New York City for the second Triple Bottom Line Simulation Conference.

Since its launch in May 2001, the Triple Bottom Line Simulation has tracked five portfolios that apply different socially responsible investing (SRI) strategies. Investors began the test drive last year with $100 million in simulated assets in each portfolio. The simulation is different from back testing because it starts with assets and goes forward, allowing investors to compare the simulated portfolio’s performance to their existing portfolios.

Several of the simulated portfolios outperformed their benchmarks over the past year, dispelling the myth that investors must sacrifice financial performance in order to achieve positive social and environmental performance. The benchmarks in the simulation are a composite of the relevant indexes for each SRI product in each portfolio.

“Institutional investors, if they do social investing at all, tend to think of it as something to be done with a tiny percentage of their portfolio,” said Capital Missions CEO and Founder Susan Davis. “The simulation demonstrated that sophisticated institutional treasurers can socially invest 100 percent of a $100 million portfolio across all asset classes and realize returns that closely match or exceed financial benchmarks.”

The best financial performer of the five portfolios was the Shareholder Advocacy Simulation, which increased its assets to $101.8 million while outperforming its benchmark by 0.68 percent for the year. This portfolio includes investments that promote shareowner action such as dialogue with management, to improve social and environmental practices and policies.

The value of shareowner action has been demonstrated in the Brightline Simulation, which is unrelated to the Triple Bottom Line Simulation. Corporate governance advocate Robert Monks commissioned the development of the Brightline Simulation to model the effects of corporation externalization. Externalization refers to the diversion of costs from within the company to without. For example, companies that reduce costs by disregarding environmental laws “externalize” these costs onto the environment. Mr. Monks ran the Brightline Simulation for the top five companies in the oil industry to demonstrate how government regulation, shareowner action, and externalization affect stock performance.

“[G]iven a sufficient level of government regulation, and when competition in the oil industry is measured over a sufficient length of time: (1) the most aggressive externalizers lose to the less aggressive externalizers, [and] (2) shareholder action weakens this effect,” said Mr. Monks at the Coalition for Environmentally Responsible Economies (CERES) Annual Conference held this April in Washington, DC.

In addition to the Shareholder Advocacy Simulation, other Triple Bottom Line Simulation portfolios beat their benchmarks for one-year performance. The Social Venture Capital Simulation, which invests in socially and environmentally responsible startup companies, outperformed its benchmark by 1.29 percent. This made it the best performing Triple Bottom Line portfolio in comparison to its benchmark, though its assets fell to $97.37 million.

The Community Development Simulation, which invests in community development financial institutions (CDFIs), outperformed its benchmark by 0.11 percent while also increasing its assets to $100.33 million. The Social Screening Simulation, which employs both negative and positive screens, increased its assets to $100.90 million, though it underperformed its benchmark by 0.69 percent. The General SRI Simulation, which blended the SRI strategies used in the other four portfolios, decreased in assets to $98.96 million, and underperformed its benchmark by 1.78 percent.

“After reviewing the year’s performance, the institutional treasurers were very surprised at the above market returns,” said Ms. Davis.

At the recent conference, the institutional treasurers created a “Simulation Network” to steer the ongoing simulation. The group decided to shift the structure of the portfolios from reflecting different SRI strategies to reflecting different types of institutional investors.

“The treasurers felt the simulations needed to be customized for foundations, wealthy families, and pensions, etc., because they invest according to different laws and constraints and tax considerations,” said Ms. Davis.

This coming year, instead of test driving different SRI strategies, the Triple Bottom Line Simulation will test drive how different types of institutional investors fare with social investing.