Socially Responsible Investing: Data-Driven Decision Making

Abstract

Socially responsible investing (SRI) is an investment process that screens investment opportunities based on ethical, social, corporate governance, or environmental. SRI has been growing rapidly; total U.S.-domiciled SRI-managed assets increased from $3.74 trillion in 2012 to $6.57 trillion in 2014. The growth of SRI puts it in a position to encourage sustainability as such firms have better access to capital markets. Unfortunately, while financial performance indicators have become standardized, social and environmental performance ratings have not. As the prominence of SRI grows, so does the number of metrics available to evaluate corporate social performance: there were 21 ratings in 2000 and that number grew to 108 by 2012. The complexity of environmental and social performance contributes to the proliferation of rating metrics. Different aspects of environmental performance might be important to different rating schemes. For instance, one rating could place emphasis on greenhouse gas emissions, while another rating could focus on water usage. The heterogeneity of such ratings creates a situation in which the results of an assessment of environmental performance can differ based on which criteria are used. This case examines this phenomenon. This case study examines 13 publicly traded chemical companies in order to understand the various measures and dimensions of corporate environmental performance. Students are presented with real-world data on corporate environmental performance (including pollutants released and third-party corporate social responsibility ratings) and asked to incorporate environmental and social performance into investing decisions. This case highlights some of the challenges of evaluating corporate environmental performance. This includes the positive correlation between environmental strengths and concerns. That is to say, firms that tend to have significant environmental issues, tend also to invest in sustainable practices. Thus looking only at environmental strengths might present a misleading picture of firm corporate environment performance. A companion teaching note is available upon request from the authors.