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The first day of the RFK Compass Conference presented by the Robert F. Kennedy Center for Justice & Human Rights just ended.  The purpose of the conference is to explore expanding and modernizing the interpretation of fiduciary duty in a way that considers the sustainable long-term success of both corporations and pension funds.  This is a complex subject that spans the law and prudent financial practices.

As part of the discussion two progressive investment philosophies emerge, Sustainable Investing (SI) and Socially Responsible Investing (SRI).  The website www.sustainableinvesting.net provides this definition and distinction:

“SI vs. SRI

The desire to “do well by doing good” is common to both Sustainable Investing (SI) and Socially Responsible Investing (SRI). The key difference between the two approaches is that SI investors tend to give more weight and attention to environmental issues than do their SRI brethren.”

“Doing well” – means making an investment profit.

“Doing good” – means investing in companies that: (i) have a strong track record on environmental issues; (ii) offer their employees affordable health benefits; (iii) practice humane labor policies and nondiscriminatory employment; (iv) locate some of their operations in distressed communities; (v) have an established culture of product and workplace safety; (vi) promote ethical corporate governance and transparency; and/or (vii) establish fair and measurable standards for executive compensation, among other things, investment factors often given the “softer issues” label.

SRI theorizes that companies that possess these qualities will be more sustainable in the long-run because they will, as examples: (a) be less prone to industrial accidents, fines for environmental violations, and product recalls; (b) have a stronger, healthier, more productive and loyal workforce; (c) be supported and promoted by their communities; and (d) be less likely to commit corporate malfeasance.

It is not weird to be contemporaneously supportive and suspicious of these ideas.  SRI standards make sense as a model for business behavior, but as investment criteria do they require sacrificing some amount of risk-adjusted return to “do good,” i.e., social work at the financial expense of the investor?

David Blood used to run Goldman Sachs Asset Management.  Today he runs Generation Investment Management, a firm dedicated to SI investment and research.  Steve Strongin is the current Head of Goldman Sachs Investment Research, a group that publishes research called the GS Sustain, an analysis of 35 leading global corporations recommended for long-term investment based on an investment framework designed to evaluate sustainable competitive advantage.

Blood and Strongin argue that the principals of SI and SRI should not be used alone, but as additional criteria to investment selection.  Investors should seek out corporations that first and foremost have superior risk-adjusted returns, great management and a compelling strategic direction.  When these traditional metrics are contained within an enterprise that consistently acts as a solid corporate citizen, i.e., demonstrates the “doing good” characteristics of an SRI, you have the basis for earning superior returns over the long run.  This makes sense – along with great returns and a great strategic position, great behavior provides a risk umbrella, a hedge to social, environmental and health issues within and around the enterprise that should brace performance over the long run.