KLD’s Rebuttal


New York – Several days ago, Integrity Research Associates reported on an article from The International Herald Tribune written by Joe Nocera regarding Socially Responsible Investment (SRI) research companies. Integrity Research’s review and comment on the article was, in retrospect, more aggressive than it was intended to be with regard to its judgments about the quality of KLD’s research product. Our general policy about commenting on research quality indicates that we do not pass judgment without having conducted our own detailed due diligence on the research provider and its process.

Integrity Research has spoken with KLD management on this issue and has decided to conduct our own detailed assessment of the firm, which will be included in our ResearchSelect knowledge-base. In addition, we have agreed that KLD should respond to the Nocera article (and our blog post) if it wanted to.  The company has taken us up on our offer.  The KLD rebuttal is included below:


Like the children’s game of telephone in which a message becomes unrecognizable as it passes from one player to another, information today is transformed as it rapidly passes through the keyboards of journalists and other new media.

“KLD Gets Some Bad Press” (April 10, 2007) amplifies a criticism leveled at KLD Research & Analytics by Joe Nocera in an article published in the International Herald Tribune. He questioned the very possibility of socially responsible investment (SRI) based on his contention that it “creates the illusion that the world is black and white when its real color is gray.” He also questions whether analysts at KLD possess the ability to make informed evaluations about the environmental, social and governance (ESG) performance of a large universe of companies because, among other things, they “never go abroad to do on-site inspections.”  These criticisms distort both the goals of investors and the research KLD produces.

What is SRI research?

SRI research is an evaluation of the ESG performance of companies. This research provides information and analysis to investors and money managers who integrate these factors into their investment process and is designed to generate relevant, consistent, and meaningful comparison across a universe of companies. It is transparent (see www.kld.com) in keeping with one of the core principles of SRI – that greater transparency and disclosure on the part of companies will enable investors to make more informed decisions.

KLD’s research is based on publicly available information collected from several key sources:

  • company regulatory filings, environmental and sustainability reports, and other documents posted on their web sites;
  • government data sources;
  • stakeholders such as industry associations, unions, environmental organizations, and the like;
  • more than 10,000 global media sources from which information is gathered electronically;
  • other partner SRI research firms based in markets around the world.

In addition, KLD analysts converse directly with officers at the 1,000 largest US companies and send them a research report inviting review, comment, and further disclosure. One of KLD’s competitive advantages is this communication channel developed over the past 18 years, providing insights not available from firms that rely solely on external data gathering.

Contrary to the impression given in the recent coverage, KLD has been collecting data on issues like charitable giving and emissions levels for longer than any of its competitors.  Further, no SRI research firm performs on-site factory inspections, nor should they be expected to do so.

Analysts evaluate a broad array of quantitative and qualitative information, including hundreds of data points. They present the information as discrete metrics and in narrative analysis to provide investment managers flexibility in their use of the reports.

How do investors use SRI research?

Institutional, high net worth and retail SRI investors account for $2.3 trillion of the assets under management in the US, according to a study by the Social Investment Forum (www.socialinvest.org), or roughly 10% of all assets under professional management. More than $4 trillion is invested in SRI strategies globally, based on aggregated figures from other studies in Europe, Asia and Canada.

Investment managers use KLD’s SRI research for four primary purposes:

  • Screening portfolios to meet demand from clients
  • Integrating analysis of risks and opportunities associated with ESG factors
  • Automated pre-trade compliance with client mandates through integration into trading platforms
  • Engagement with corporations about ESG issues

What does SRI research tell you?

SRI research serves a very different purpose than financial analysis; it is not intended as a predictor of short-term share price movements. Rather, SRI research can be properly understood as a complement to financial analysis, additional information to help investment managers make stock selections by identifying risks and opportunities associated with ESG factors.  These efforts may be on behalf of a client’s specific mandate or the investment manager’s conviction that ESG factors contribute towards creating the most accurate picture of a company’s financial strengths and concerns.

It is axiomatic that no company is perfect when it comes to ESG performance. KLD’s research allows managers to determine where companies’ performances fall on a continuum. Some companies have strong ratings and some have poor ones.

Is it reasonable to infer from KLD’s ratings that a company is “good” or “bad”?

This is the wrong question because the purpose of SRI research is to understand where companies have strengths and weaknesses, not to label them as “socially responsible” or “socially irresponsible.” Social researchers, money managers and investors understand that the world of corporate ESG performance is gray – the opposite of Nocera’s confused view that “SRI creates the illusion that the world is black and white.”

Comment by Scott Drysdale:
Socially responsible investing is in itself a bizarre concept. Advocates inherently disagree with the concepts of free people allocating resources in open markets. Instead they believe in the distorted and oft-disguised class-envy arguments of Karl Marx.

The notion that people who don’t have an at-risk position should enjoy equal or greater decision-making authority as those who do have skin in the game is the crux of “socially responsible” inveting. It is evil. Another name for this is stealing. After all, the thief wants something that belongs to someone else. The thief justifies stealing simply because he wants what is not his. And, he really wants whatever it is. He did nothing to deserve owning it, but that’s not the point. He wants it. So, he steals it.

So, too, the “socially responsible” crowd. They do nothing to deserve the material outcome they want. But, they really want it. They come up with a host of ways they want it and how everybody else will benefit if they get it. But, at the end of the afternoon, they do nothing to deserve getting it. What’s socially responsible about a “stakeholder” (what is that anyway?) taking something from an investor/owner?

So, the notion that firms, much less investments, should be evaluated on the Marxist paradigm of responsibility seems the antithesis of social justice. As KLD points out, they focus on factors that for the most part are negatively correlated with stockholder/capital-risk-taker interests.

While we’re at it, let’s examine the arrogance of the entire statement “socially responsible,” as if capitalists are not socially responsible. Is it responsible for corporate managements to give away the profits of the firms they supervise to charitable organizations? Why should managements do this and, perhaps more so, why should anyone consider this an honorable practice? The revenue stream of the firm rests first and foremost on the capital put up by investors. Without it, there are no jobs, no products, no taxes, no earnings. Nothing.


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