Socially responsible investment (SRI) techniques use screens to
include-or exclude-companies in portfolios based on social or
environmental performance. SRI is gaining traction-eleven percent
of professionally managed U.S. assets were invested using these
principles in 2007.

Though many investment firms use screens, each typically employs
its own methods. Boston-based KLD Research & Analytics, Inc.,
for example, evaluates firms on seven strengths (e.g. pollution
prevention) and seven concerns (e.g. regulatory problems).

A lack of go-to metrics for social and environmental performance
means each firm sets its own priorities. This leads to questions
such as: do you reward the high-polluting firm that is investing in
new technologies for tomorrow? Or the firm with a lower
environmental impact today?

Investors are forced to make a number of tradeoffs in evaluating
firms. For instance, should the focus be on issues that are
important to measure, or those for which data is readily
available?

Which environmental problems are more important for firms to
address- urgent issues with short-term financial impacts (such as
regulation of GHG emissions) or those that might lead to greater
environmental impact in the long-run?

Measuring companies’ environmental performance typically
involves three categories of indicators: environmental impact (e.g.
emissions), regulatory compliance (e.g. fees for violations) and
company processes (e.g. reporting).

Investors weight these categories depending on their
objectives-for some, environmental performance is used as an
indicator of overall good management; for others, very poor
performance is a signal of risk.

Researchers Magali Delmas (University of California, Los
Angeles) and Vered Doctori Blass (University of California, Santa
Barbara) examined the criteria for comparing companies and the pros
and cons of current SRI screens.

In their Business Strategy and the Environment article, they
developed a case study of 15 publicly traded chemical companies
including giants such as Avon Products, Inc., DuPont Company,
Johnson & Johnson, and Proctor & Gamble.

The authors found firms can be “good” and “bad” at the same
time. Those scoring poorly on environmental performance (like toxic
releases) and compliance with regulation also provided better
reporting and took on more pollution-preventing activities.

For example, Dow and DuPont ranked best on environmental
reporting but worst on toxic releases, while Avon and Clorox two
firms that were amongst the best for toxic releases were the worst
reporters.

This work clearly demonstrates the drawbacks of using any single
indicator. There is also a need for greater consistency and
transparency in measurements across investment firms. Given the
current piecemeal approach to valuing environmental and social
performance, there is a risk investors will lose confidence in
socially responsible investment methods.

Source - Delmas, Magali, and
Vered Doctori Blass. (2010) href=”http://onlinelibrary.wiley.com/doi/10.1002/bse.676/abstract”
target=”_blank”>Measuring corporate environmental performance: the
trade-offs of sustainability ratings. Business Strategy and the
Environment, 19(4): 245-260.