Letter to the Editor

The following is in response to several letters to the editor that appeared last week. Those letters were in response to Adam Kanzer’s article, Exposing False Claims about Socially Responsible Investing, which appeared June 4. Kanzer’s article was in response to Adam Apt’s article, Measuring the Cost of Socially Responsible Investing, which appeared May 21.

Dear Editor:

Thank you for the opportunity to respond to the letters submitted in response to my June 4th article. I stand behind my original assessment of Adler and Kritzman’s study.

When an 18-year track record contradicts something that is considered to be an axiom, it makes sense to review your assumptions. The Kurtz-DiBartolomeo study I cited in my article found that there was no so-called social factor in the 18-year performance history of the MSCI KLD 400 Social Index (KLD 400). Though the social and environmental screens did not produce alpha, they did not impose a cost .

The use of social and environmental factors is not an untested, brand new strategy. We are many years past the need for ”thought experiments,” as Siegel put it in his letter. Siegel also overstated my case. My claim about SRI performance, which is supported by a number of academic studies in addition to the Kurtz-DiBartolomeo study, is that social investing is not inherently costly.

Apt and Kritzman would argue that the KLD 400 results are not relevant to this study’s findings, because the study doesn’t apply to passive social investment. Apt argued that my distinction between actively managed and passively managed indices is incorrect. I would argue that there is a qualitative difference between a committee making regular decisions about which companies are in or out and a mathematical formula that automatically selects the 3,000 largest companies in a particular market, regardless of any individual’s judgment. The former, which reflects the process used for many years to maintain the KLD 400, utilizes human judgment to produce an investable universe that incorporates social and environmental factors, without regard to expected returns. The latter utilizes a computer program. The former is active; the latter is passive. A portfolio that tracks the results of either process is passive. Kritzman’s reasoning therefore applies to the management of the KLD 400, and his conclusions are contradicted by its long-term track record.

Apt referred to the definition of SRI used in the study, coined by John Langbein and Richard Posner – two early legal critics of SRI. Their critique was written in 1980 at a time when less than a handful of SRI funds existed. I find it curious that we’re even discussing that rather loaded definition in this day and age.

In his letter to the editor, Kritzman has offered a slightly better description of one aspect of SRI: “If you select a set of companies with a particular socially desirable attribute regardless of how you expect them to perform, you are engaged in socially responsible investing.” How do those attributes impact performance? Are they indicators of quality management? How do these factors affect one’s chances of selecting strong performers with more sustainable business models? These questions were written out of Kritzman’s analysis because he believes that he already has the answer.

According to Kritzman, “The fact that you perform less well than you otherwise would if you select the one underperforming good company is a cost attributed to socially responsible investing.” Again, according to the Kurtz- DiBartolomeo study, the KLD 400’s exclusion of tobacco had no cost. The Pioneer Fund has successfully excluded tobacco stocks for more than 60 years. I can’t imagine that the original exclusion was based on a performance thesis.

I am not arguing that SRI will necessarily outperform. I agree that certain exclusions or inclusions could incur costs to the portfolio, depending on what they are, how they are implemented and the skills of the manager. But this study does not measure those potential costs or benefits.

Kritzman described his study as presenting “a simple, unbiased framework that enables stakeholders to estimate the cost of restricting investment as a function of several relevant variables.” His set of variables is incomplete. It fails to recognize that there is skill involved in selecting those companies that are truly better or worse in terms of their sustainability performance. The study is fatally flawed by its reliance upon random exclusions. Any effort to use this model to understand SRI or fossil-fuel divestment would need to replace random exclusions with actual social, environmental or industry factors. The study also ignores questions of risk at the level of the issuer, the portfolio or the system (including macroeconomic and environmental), which socially responsible investors grapple with every day.

I agree with Apt that Kritzman has placed “far more weight on his results than his methodology can bear” and that Adler and Kritzman’s study is “very far from having proven that their conclusion has much bearing on whether to pursue SRI.” That is the essential point. The rest of this is abstract theorizing with little real-world relevance.


Adam Kanzer

Domini Social Investments LLC

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