Research Supporting Socially Responsible Investing?

Dorothy Hinchcliff has another column about Socially Responsible companies on FA-mag.com, the Financial Advisor magazine website. She notes with approval some research that indicates that "socially responsible firms enjoy a lower cost of capital."  This is an important finding for firms pursuing SRI strategies.

The researchers, four academics from the University of South Carolina, University of Alberta, and University of Saskatchewan, used a discounted cash flow analysis applied to future cash flows, "the kind analysts would use," to arrive at the cost of capital measure.  In this manner, the researchers  estimate future cash flows for their subjects and found the discount rate that equates the forecasts with the current value of the equity.

The researchers used valid methodology in a robust manner to arrive at their conclusions.  They therefore claim that these "empirical" results are superior to actual observed returns.  That may be so from the standpoint of the corporate financial officer in charge of raising the capital to execute the company's strategic plan.  What is important to investors is the realized returns. 

Ms. Hinchcliff does her cause a disservice in citing this research.  The cost of capital to a company is the expected return to an investor.  The goal of investment professionals is to increase the expected return on a risk-adjusted basis.  This research actually reinforces the notion among many advisors that an investment in SRI strategies is an acceptance of lower returns.