NEW YORK, Nov. 23, 2005 - Socially responsible investing vernacular
distinguishes between SRI research, which factors social and
environmental considerations into investment decisions, and "mainstream"
research, which focuses on financial factors. Since its founding a
decade ago by CEO Matthew Kiernan, the investment research firm Innovest
Strategic Value Advisors has defied convention by straddling this
divide, integrating social and environmental sustainability
considerations directly into financial analysis.
"The approach we take is to be radical in a very conservative fashion,"
Kiernan told SocialFunds.com. "In contrast to what I would call the
'neoclassical' SRI space, where the factors influencing conclusions and
investment choices are pretty heavily influenced by values, we've always
had a complementary but different objective of trying to influence and
mobilize the 90-odd percent of the investment world that is not
self-consciously SRI."
"Rather than conceiving of ourselves as having both feet in the
neoclassical SRI tradition, which I see as a vertical slice of the
investment universe, we see ourselves as a horizontal slice across the
board -- really representing what we firmly believe to be the leading
edge of where the mainstream is going," explains Kiernan. "The social
logic behind this decision was that I felt if we could deflect the
trajectory of the $40 trillion mainstream investments toward
sustainability by even one degree, we would have mobilized an awful lot
of capital -- maybe even more capital than the traditional SRI space."
To accomplish this goal, Innovest employs a "best-in-class" approach:
instead of screening out so-called sin sectors, Innovest seeks to
identify the best performers on environmental, social, and governance (ESG)
as well as financial factors across all sectors.
"We use the subset of the SRI gene pool which gives us some critical
information about the management quality and the sustainability of the
competitiveness of firms, and we overlook the subset of SRI tactics that
don't give us any such information," says Kiernan. "For example, if you
tell me you're the CEO of a firm that makes contraceptive devices, that
would tell a lot of neoclassical SRI firms all they need to know -- you
would either be out of Vatican-sponsored portfolios or in a lot
of others."
The production of contraceptives represents just one of many factors
Innovest would take into account in assessing the sustainability of the
company. However, Kiernan does not consider Innovest's approach and that
of the so-called neoclassical SRI camp as mutually exclusive.
"For us to critique traditional SRI is a bit like criticizing an apple
for not being a banana, and vice versa," Kiernan says. "We have enjoyed
a relationship of creative tension with the neoclassical camp -- our
objectives are very similar, our tactics to get there are quite
different."
"I regard us as being on the same 'side,' and I don't think it should be
an either/or -- there's a place for both," he adds. "We have tried to
build from the very beginning a firm that could compete on as close to a
level footing as possible with mainstream firms like Goldman Sachs."
Kiernan is hard-pressed to identify Innovest's direct competitors -- not
traditional SRI research firms such as KLD Research & Analytics or the
Ethical Investment Research Service (EIRIS). Generation Investment
Management and Sustainable Asset Management (SAM) both integrate
sustainability factors into financial analysis, but neither truly
compares to Innovest.
"Unlike SAM or Generation, our model in creating and delivering asset
management products has always been to partner," Kiernan states. "We
have the legal ability to manage money directly, and internally we have
the skill set and people, but in order to get traction in the
institutional markets, we've always preferred to partner with a
traditional mainstream partner."
This strategy allows Innovest to circumvent the so-called "tyranny of
the track record," whereby institutional investors judge investment
vehicles by at least a three-year track record -- a phenomenon that
effectively prohibits innovative strategies. For example, Innovest
identified emerging markets as "the obvious battleground of
sustainability," and sought to develop an emerging markets
sustainability fund to capitalize on the inefficiencies of emerging
markets on both a financial as well as a sustainability basis.
"The only way we felt we could attract institutional money into an
emerging markets sustainability fund was to build it on the back of a
traditional fund that already had a successful track record, so we
worked with one of the State Street affiliate companies called Rexeter,
which used to be the emerging markets team for Kleinwort Benson,"
Kiernan explains. "By beginning with a strategy that has stood the test
of time, we could then tilt that product by adding the sustainability
factors in, at least the skeptic has a starting point for assessing
something that by definition isn't going to have a track record."
Another Innovest product -- an eco-enhanced S&P 500 index fund run in
partnership with ING that tilts the portfolio based on sustainability
factors -- has a bona fide three-year track record that "produced
something like 40 basis points of out-performance," according to
Kiernan.
One of Innovest's most recent product launches is the Global Compact
Plus analytical tool, which allows investors to assess the
sustainability performance of companies participating in the United
Nations Global
Compact, a voluntary framework of social and environmental
commitments. Three factors distinguish the new tool. First, it focuses
on the materiality of sustainability risks. Second, it focuses not on
what companies say they're doing, but on what they are doing ("there's
always going to be a gap between what they say and what they do, so if
all you know is what they say, you're really investing with one hand
tied behind your back," Kiernan points out.) And third, it rates and
ranks companies directly against their same-sector competitors.
The market for this product is also threefold: institutional investors;
corporations (for benchmarking against both themselves and their
competitors); and, interestingly, nonprofits such as UNICEF to use "as a
means of screening either their donors or their partners," says Kiernan.