""'~ Composition, Performance, and Tracking Error

~ S ocially responsible investing (SRI) is moving into the mainstream of institutional investment management, but not uniformly and not without doubt. A 2004 Mercer survey reveals that 89% of investment managers in Asia and 69% of investment managers in Europe believe that SRI would be in the investment mainstream in the coming ten years, but only 36% of investment managers in the U.S. share that belief.! Nevertheless, a broad range of institutional investors do tollow SRI, even in the U.S., ttom the giant CalPERS fund, which serves public employees in California, to the medium-sized Christian Brothers Investment Service, which manages money for more than 1,000 Catholic institutions, and the relatively small New England Foundation for the Arts. Institutional investors who care about socialresponsibility do not neglect investment returns. A representative of Bon Secours Health Systems, a Catholic health-care ministry, for efanlple, told Dugan [2005], "As a Catholic organization We need to maximize returns to serve the ministries." Indeed, pressure to maximize returns might be more intense among institutional investors than among individual investors, because institutional investors must serve constituents and answer to boards that are obliged by fiduciary laws to give priority to low risk and high expected returns in their investment choices. Institutional investors who consider SRI ask: How are socially responsible companies different from conventional companies? Are the returns of socially r~sponsible stocks likely to be higher or lower than those df conventional stocks? And what are the tracking errors of portfolios of socially responsible stocks relative to conventional benchmarks? We answer these questions. MEIR STATMAN is the Glenn Klimek professor of ffiance in the Leavey School of Business at Santa Clara University in Santa Clara, CA. [email protected]