Tag Archives: Socially Responsible Investing

The Development of Responsible Investing

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Given the growing importance of responsible investing, it could be surprising that there is still no consensus of what the SRI term means to the investors (Sparkes & Cowton, 2004). The roots of the SRI notion can be traced back to various religious movements. Back in 1758, the Religious Society of Friends (Quakers) prohibited members from participating in the slave trade. At the time, one of the founders of Methodism, John Wesley outlined his basic tenets of social investing. He preached about responsible business practices and to avoid certain industries that could harm the health and safety of workers. Hence, the best-known applications of socially responsible investing were initially motivated by religion (Sparkes, 2003). This may well reflect the fact that the first investors to set ethical parameters on investment portfolios were church investors in the U.K., U.S., and Australia (Sparkes & Cowton, 2004). The churches also played a prominent role in the development of ‘ethical’ investment products (Benijts, 2010; McCann, Solomon & Solomon, 2003; Lydenberg, 2002). Sparkes (2001) defined the ethical investments as the exercise of ethical and social criteria in the selection and management of investment portfolios, generally consisting of company shares. However, he argued that ethical investing could have been more appropriate to describe non-profitmaking bodies such as churches, charities, and environmental groups (rather than companies). The author went on to suggest that value-based organisations applied internal ethical principles to their investment strategies.

Very often the ‘ethical investment’ has been considered as perfectly synonymous with the ‘socially responsible investment’ term including in the dedicated academic journals where one might expect that the concepts are clearly defined (Capelle‐Blancard & Monjon, 2012). Schueth (2003: 189) also noted that ‘the terms social investing, socially responsible investing, ethical investing, socially aware investing, socially conscious investing, green investing, value-based investing, and mission-based or mission-related investing all refer to the same general process and are often used interchangeably’. Likewise, Hellsten & Mallin (2006: 393) have used the terms “ethical investments” and “socially responsible investments” interchangeably. However, it may appear that there seems to be a progressive decline in the use of the term ‘ethics’ within the SRI debate. In part, this may reflect the fact that many people felt uncomfortable about using the word ‘ethical’ to describe investment matters. “Any individual or group who truly care about ethical, moral, religious or political principles should in theory, at least want to invest their money in accordance with their principles” (Miller, 1992, p. 248). The original ‘ethical investors’ were church investment bodies. It is only in the past decades that such a perspective has been explicitly reflected in dedicated SRI retail funds (Sparkes & Cowton, 2004). Since their inception in the U.S. (1971) and in the U.K. (1984) the basic model that was used by SRI retail funds has been to base their ‘ethics’ upon an avoidance approach; whereby, responsible investors avoided having shares in unethical companies (Schepers & Sethi, 2003).

 

SRI has evolved during the political climate of the 1960s as socially concerned investors were increasingly addressing equality for women and minority groups (Schueth, 2003). This time was characterised by activism through boycotts and direct action that has targeted specific corporations (Rojas, M’zali, Turcotte & Merrigan, 2009; Carroll, 1999). Yet, there were also interesting developments, particularly when trade unions introduced their multi-employer pension fund monies to targeted investments. During the 70s, a series of themes ranging from the anti-Vietnam war movement to civil rights, to issues related to equality rights for women, have served to escalate the sensitivity to some issues of social responsibility and accountability. These movements broadened to include management, labour relations and anti-nuclear sentiment. Trade unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions (Guay et al, 2004; Gillan & Starks, 2000; Smith, 1996).

In 1971, Reverend Leon Sullivan (at the time he was board member for General Motors) had drafted a code of conduct for the practicing business in South Africa; which became known as the Sullivan Principles (Wright & Ferris, 1997; Arnold & Hammond, 1994; Sullivan, 1983). However, relevant reports that documented the application of the Sullivan Principles revealed that the US companies did not lessen their discrimination toward the native South African people. Thus, there were US investors as well as large corporations who have decided to divest from these ‘irresponsible’ companies. In 1976, the United Nations has also imposed a mandatory arms embargo against South Africa (Nayar, 1978). The ranks of the socially concerned investors had grown dramatically through the 1980s as millions of people, churches, universities, cities and states were increasingly focusing their pressures on the white minority government (of South Africa) to dismantle the racist system. The subsequent negative flow of investment eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to the apartheid. While the SRI efforts alone did not bring an end to discrimination, it has mounted persuasive international pressure on the South African business community.

Advances in the SRI agenda were being made in other contexts. By 1980 presidential candidates; Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation toward investments in pension funds (Gray, 1983; Barber, 1982). Afterwards in the mid to late 1990s there were health awareness campaigns that effected the tobacco stocks in the US (Krumsiek, 1997). For instance, the California State Teachers’ Retirement System (CalSTRS) removed more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations (Reynolds, Goldberg & Hurley, 2004). Arguably, such a divestment strategy may have satisfied the ethical principal of non-harming, but did not necessarily create a positive social impact (Lane, 2015).

During the late 1990s, SRI had also focused on the sustainable development of the environment (Richardson, 2008; Brundtland, 1989). Many investors started to consider their environmental responsibility following the Bhopal, Chernobyl and Exxon Valdez incidents. The international media began to raise awareness on the global warming and on the ozone depletion (Pienitz & Vincent, 2000). It may appear that the environmental protection and climate change issues were becoming important issues for many responsible investors. However, it may appear that businesses have failed to become more sustainable in their ecological dimension as the human ecological footprint exceeds the Earth’s capacity to sustain life by 60% (Global Footprint Network, 2016). At the same time, global resource consumption and land degradation is constantly impacting on the natural environment; as arable land continues to disappear. Evidently, the world’s growing populations and their increased wealth is inevitably leading to greater demands for limited and scarce resources. These are some of the issues that have become somewhat important rallying points for many institutional investors.

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Responsible Investing: Making a Positive Impact

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Impact investing is one of the fastest growing and promising areas of innovative development finance (Thornley, Wood, Grace & Sullivant, 2011; Freireich & Fulton, 2009). This form of socially-responsible investment (SRI) also has its roots in the venture capital community where investors unlock a substantial volume of private and public capital into companies, organisations and funds – with the intention to generate social and environmental impact alongside a financial return.

The stakeholders or actors in the impact investing industry can be divided into four broad categories: asset owners who actually own capital; asset managers who deploy capital; demand-side actors who receive and utilise the capital; and service providers who help make this market work.

Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate; depending on the investors’ strategic goals. Bugg-Levine and Emerson (2011) argued that impact investing aligns the businesses’ investments and purchase decisions with their values. Defining exactly what is (and what is not) an impact investment has become increasingly important as it appears that the term has taken off among academia and practitioners.

The impact investments are usually characterised by market organisations that are driven by a core group of proponents including foundations, high-net worth individuals, family offices, investment banks and development finance institutions. Responsible entities are mobilising capital for ‘investments that are intended to create social impact beyond financial returns’ (Jackson, 2013; Freireich & Fulton 2009). Specific examples of impact investments may include; micro-finance, community development finance, sustainable agriculture, renewable energy, conservation, micro-finance and affordable and accessible basic services, including; housing, healthcare, education and clean technology among others.

Micro-finance institutions in developing countries and affordable housing schemes in developed countries have been the favorite vehicles for these responsible investments, though impact investors are also beginning to diversify across a wider range of sectors (see Saltuk, Bouri, & Leung 2011; Harji & Jackson 2012). Nevertheless, micro-finance has represented an estimated 50% of European impact investing assets (EUROSIF, 2014). This form of investing has grown to an estimated €20 billion market in Europe alone (EUROSIF, 2014). The Netherlands and Switzerland were key markets for this investment strategy, as they represented an estimated two thirds of these assets. These markets were followed by Italy, the United Kingdom and Germany.

Generally, the investors’ intent is to ensure that they achieve positive impacts in society. Therefore, they would in turn expect tangible evidence of positive outcomes (and impacts) of their capital. Arguably, the evaluation capacity of impact investing could increase opportunities for dialogue and exchange. Therefore, practitioners are encouraged to collaborate, exchange perspectives and tools to strengthen their practices in ways that could advance impact investing. The process behind on-going encounters and growing partnerships could surely be facilitated through conferences, workshops, online communities and pilot projects. Moreover, audit and assurance ought to be continuously improved as institutions and investors need to be equipped with the best knowledge about evaluation methods. Hence, it is imperative that University and college courses are designed, tested and refined to improve the quality of education as well as  professional training and development in evaluating responsible investments.

For evaluation to be conducted with ever more precision and utility, it must be informed by mobilising research and analytics. Some impact investing funds and intermediaries are already using detailed research and analysis on investment portfolios and target sectors. At the industry-wide level, the work of the Global Impact Investing Network (GIIN) and IRIS (a catalogue of generally accepted Environmental, Social and Governance – ESG performance metrics) is generating large datasets as well as a series of case studies on collaborative impact investments. Similarly, the Global Impact Investing Rating System (GIIRS) also issues quarterly analytics reports on companies and their respective funds in industry metrics (Camilleri, 2015).

For the most part, those responsible businesses often convert positive impact-investment outcomes into tangible benefits for the poor and the marginalised people (Garriga & Melé, 2004). Such outcomes may include increased greater food security, improved housing, higher incomes, better access to affordable services (e.g. water, energy, health, education, finance), environmental protection, and the like (Jackson, 2013).

Interestingly, high sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance (Eccles, Ioannou & Serafeim, 2012). This out-performance is stronger in sectors where the customers are individual consumers, rather than companies (Eccles et al., 2012).

It may be complicated and time-consuming to quantify how enterprises create various forms of humanitarian and environmental value, yet some approaches and analytical tools can help to address today’s societal challenges, including the return on impact investments in social and sustainability projects.

References

Bugg-Levine, A., & Emerson, J. (2011). Impact investing: Transforming how we make money while making a difference. innovations, 6(3), 9-18.
Camilleri, M. A. (2015). Environmental, social and governance disclosures in Europe. Sustainability Accounting, Management and Policy Journal, 6(2), 224-242.

Eccles, R. G., Ioannou, I., & Serafeim, G. (2012). The impact of a corporate culture of sustainability on corporate behavior and performance (No. W17950). National Bureau of Economic Research.

EUROSIF (2014). Press Release: 6th Sustainable and Responsible Investment Study 2014. Europe-based national Sustainable Investment Forums. http://www.eurosif.org/wp-content/uploads/2014/09/Press-Release-European-SRI-Study-2014-English-version.pdf (Accessed 14 May 2016).

Freireich, J., & Fulton, K. (2009). Investing for social and environmental impact: A design for catalyzing an emerging industry. Monitor Institute, January.

Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of business ethics, 53(1-2), 51-71.

Harji, K., & Jackson, E. T. (2012). Accelerating impact: Achievements, challenges and what’s next in building the impact investing industry. New York, NY: The Rockefeller Foundation.

Jackson, E. T. (2013). Interrogating the theory of change: evaluating impact investing where it matters most. Journal of Sustainable Finance & Investment, 3(2), 95-110.

Saltuk, Y., Bouri, A., & Leung, G. (2011). Insight into the impact investment market: An in-depth analysis of investor perspectives and over 2,200 transactions. New York, NY: J.P. Morgan.

Thornley, B., Wood, D., Grace, K., & Sullivant, S. (2011). Impact Investing a Framework for Policy Design and Analysis. InSight at Pacific Community Ventures & The Initiative for Responsible Investment at Harvard University.

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An Introduction to Socially Responsible Investment

Socially responsible investment (SRI) is the practice of incorporating social and environmental goals into investment decisions. Therefore, SRI is a strategy that encourages corporate practices that promote social responsibility and laudable initiatives such as impact investing, shareholder advocacy and community investing (Sparkes & Cowton, 2004; Guay, Doh & Sinclair, 2004; Schueth, 2003). At the same time, the rationale behind SRI is to consider both financial return as well as responsible investments for societal development. Its goals are based upon environmental issues, human rights, community involvement and labour relations (Ooi & Lajbcygier 2013; Sparkes, 2003; Friedman & Miles, 2001).

SRI’s professionally managed assets have emerged as a dynamic and quickly growing segment of the U.S. financial services industry (Schueth, 2003). In many cases, responsible and sustainable investments are influencing how asset managers invest in diversified portfolios (Lemke & Lins, 2014). This term refers to responsible investments that seek to avoid negative externalities. In fact, the investment portfolios of listed companies are often screened by SRI contractors (Renneboog, Ter Horst & Zhang, 2008). In fact, in recent years, SRI funds have become a popular investment opportunity. Many investors are attracted to businesses that will yield return on investment. Yet, it may appear that a large and growing segment of the population possess a spiritual yearning to integrate personal values into all aspects of life, including finance and investing (Schueth, 2003). As a result, many conscientious investors were avoiding businesses that are involved in alcohol, tobacco, fast food, gambling, pornography, weapons, contraception and abortion, fossil fuel production, and / or the military industries, among others (Logue, 2009; Ronneborg et al., 2008; Ghoul & Karam, 2007; Statman, 2000). In addition, responsible investors have become increasingly aware about the numerous instances of accounting fraud and other scandals that may have eroded their trust in corporate leadership. The areas of concern recognised by the SRI practitioners are often denoted under the heading of environmental, social and governance (ESG) issues, including social justice, human rights, anti-corruption and bribery issues and diversity on the boards (Camilleri, 2015).

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