We think a more reasonable, flexible approach to socially responsible investing is to forgo futile searches for Snow Whites and instead identify companies that are best in class in their industry and are making efforts in good faith to improve their performance on ESG issues, based on the Principles for Responsible Investment. In our judgment, an institution like the Bellona Foundation, the largest private environmental agency in Norway, has achieved the right mixture of idealism and practicality in socially responsible investing. Bellona doesn't entirely avoid companies engaged in necessary but polluting industries like mining and cement. Instead what Bellona tries to do is ensure that it's invested in mining and cement companies that are the most environmentally conscientious.

Enhancing Security Analysis
Two, we believe focusing on ESG practices adds a useful dimension to our security analysis in assessing investment risks and managing our stock portfolios.

We don't see a philosophical disconnect between doing the right thing and successful investing. Quite the contrary. We are convinced that ESG issues such as asbestos liability and pollution controls have tangible cost consequences for a company and thus need to be considered in assessing various risks as part of our security analysis.

In a larger sense, we think the degree to which a company follows responsible ESG practices can be a good litmus test of how well that company is adapting to social, environmental, and governance changes and how competitive that company is relative to its peers. To us, a company with good ESG practices is delivering a social good and exercising a financially prudent form of risk management.

Our investment counterparts in Australia were among the first to recognize the merit of incorporating ESG analysis in their work. For instance, firms such as Tyndall Investments in Sydney include analyses of ESG issues such as the carbon impact of a company's operations in their research reports.

For our part, we've developed an ESG model that our Growth Investing Team is using in its security analysis. The model helps us evaluate the ESG practices of about 3,000 U.S. and foreign companies, based on data the companies report. Our model rates companies on 39 criteria like corporate governance, environmental performance and policies, the percentage of women employees in management, levels of emissions, business ethics, and leadership in sustainability. In the model, the criteria are weighted differently for companies in different industries. For example, environmental factors have a higher weighting for oil companies than they do for banks, whose environmental impact from any of its activities is likely to be far less than from, say, an offshore oil spill.

Responsibility Pays
Three, we believe socially responsible investing can be rewarding, as our research has indicated that companies that adhere to responsible ESG practices tend to be better investments than their less socially responsible peers.

In essence, socially responsible investing boils down to investing in companies that are good in many ways. Companies that exhibit competence and in the process treat the environment, their employees, their customers, and their communities with consideration and in a spirit of mutual benefit can outperform for the simple reason that their actions reflect they have their act together; in short, they are better managed. Better managed companies in turn tend to be more profitable, and we believe earnings and earnings expectations are what drive stock prices in the long run.

A 2009 study by the McKinsey & Company consultants and Boston College showed that the majority of U.S. chief financial officers and investment professionals surveyed agreed that responsible ESG behavior typically creates value for shareholders. They cited these prospective benefits for companies: stronger corporate brands; more effective employee recruiting, motivation, and retention; greater operational efficiencies; and new business opportunities.

Correlated To Results
All of those benefits tend to lead to superior investment results. Mercer, the consulting firm, reviewed 16 academic studies about ESG and investment performance issued since 2007 and concluded that the weight of the evidence was that socially responsible investing pays off. Mercer found that 10 of the studies, or 62.5% of the total, showed evidence of a positive relationship between ESG factors and investment performance. The other six studies revealed a negative or neutral relationship between ESG factors and performance.