Professional Documents
Culture Documents
Russell Sparkes
Christopher J. Cowton
Introduction
Reviewing the development of socially responsible
investment (SRI) in recent years, this paper argues
that not only has it grown significantly but it has also
matured, in the sense that it has become more
complex and begun to enter the mainstream of
investment practice. This maturation of SRI has
important implications for its relationship with corporate social responsibility (CSR). SRI has changed
from an activity carried out by a small number of
specialist retail investment funds (in the form of unit
trusts and mutual funds), probably of negligible or
minor economic importance, into an investment
philosophy adopted by a growing proportion of
large investment institutions, i.e. large pension funds
and insurance companies. We argue, with support
from other recent authors, that this shift in SRI from
margin to mainstream could play a crucial role in
obliging or influencing quoted companies to address
CSR issues. For most corporate executives could
ignore SRI issues when they were limited to a fringe
minority, but this is no longer possible when they
are raised by institutional investors, which are the
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most important ownership group of quoted companies in many developed economies. The need for
corporate executives to pay attention to those
investors is not just a question of institutional
investors economic power, though; we argue it is
also a function of the way in which those investors
pursue SRI, which we describe and explain as part of
the development of an increasingly complex and
mature approach to SRI. We further argue that this
approach potentially meets some of the earlier ethical criticisms of certain forms of SRI but, ironically,
probably owes its existence to those pioneering approaches.
The paper is structured as follows. First, our
understanding of certain important terms and basic
features of SRI is outlined. Second, we examine
various approaches to SRI which have developed,
outlining some of their technical and ethical features.
Third, we explore the implications of the adoption
of SRI by mainstream institutional investors, which
can be seen as a major landmark in the maturing of
SRI. Fourth, we discuss how those investors might
influence companies adoption of CSR. In the final
main section before the Conclusion we then return
to the ethics of SRI and also make some proposals
for future empirical research.
Coming to terms with socially responsible
investment
The field of SRI has been characterised by debate
(Bruyn, 1987; Hylton, 1992) or lack of consensus
about definitions (Cooper and Schlegelmilch, 1993;
Frankel, 1984). Even the terminology is not settled.
Thus broadly similar or related terms which appear in
the literature include social (Bruyn, 1987; McGill,
1984), divergent (Schotland, 1980), creative (Powers,
1971), green (Simpson, 1991), targeted, development
and strategic (Wokutch et al., 1984) investing or
investment. However, the two most common terms
are socially responsible investment the term used in
this paper and ethical investment. Before proceeding
further it may be appropriate at this point to analyse
these two terms and, in particular, to consider whether
there is any difference in meaning between them.
Ethical investment is the older term (e.g. Domini,
1984; Simon et al., 1972). This may reflect the fact
that the first investors to set ethical parameters on
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that warrants its exclusion from the ethical considerations that are brought to bear on other areas of life
(Bourke, 1997; Capital: A Moral Instrument?, 1992;
Sparkes, 1998). Any individual or group which
truly cares 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, and it is only
in the past two or three decades of late modernity
(McCann et al., 2003), and especially in recent years,
that such a perspective has been explicitly reflected
in dedicated SRI retail funds offered to the public.
Since their inception in 1971 in the U.S. and
1984 in the U.K. the basic model used by SRI retail
funds has been to base their ethics upon a relatively straightforward and negative approach of
excluding shareholdings in companies judged to be
unethical an avoidance approach. This is still the
predominant approach in the U.S., according to
Schepers and Sethi (2003). Building on the churches traditional concern over alcohol, tobacco,
gambling and perhaps defence, other issues have
included South African involvement during the
apartheid era, the environment, human rights, pornography, and animal welfare issues.
An ethical case for avoidance follows naturally
from the prima facie case stated above, that consistent
standards of behaviour should be applied in all areas
of life, including investment. Larmer (1997, p. 400)
contends that holding a share suggests approval, and
simply approving of an immoral action is immoral, while Gunnemann (1972, p. 193) argues
that simply holding this stock and making a profit
from it indicates some acquiescence, or some support for a particular activity of the corporation or the
company. Mills (1996, p. 2) similarly argues that
the righteousness of any monetary return is conditional on the absence of the exploitation of customer, workers, creditors and suppliers. In this
strand of argument, integrity or moral purity
(Simon et al., 1972, p. 25) appear to be the priority.
However, it has been questioned whether purity,
as implied by avoidance, is really a feasible ethical
goal. Simon et al. (1972, p. 26) describe it as
hopelessly naive because the interconnectedness
of the corporate sector involves the investor in an
endless series of illusions and arbitrary decisions,
while Powers (1971) suggests that the search for
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growth prospects. Such funds have therefore concentrated their investments in the environmental
technology area, although again they are relatively
small in number. In general, avoidance remains the
dominant model for SRI retail funds.
Simon et al. (1972), who are critical of avoidance,
prefer moral effectiveness to moral purity. In other
words, they are more interested in affecting companies adoption of CSR than simply keeping an
investment portfolio clean. However, the problem of passive investment involving avoidance and,
perhaps, more positive criteria, is that as long as it is
on a small scale it is unlikely to have any impact on
larger, heavily-traded companies because the share
price will tend to return to a level reflecting financial
fundamentals (Boatright, 1999). This has led some to
suggest that SRI should involve active attempts to
put direct pressure on companies, taking advantage
of shareholder rights. In this shareholders may find
themselves allied with others who are campaigning
for corporate change, some of whom may own a
token shareholding. There have been a few notable
examples of this kind of behaviour in the U.K.
(Mackenzie, 1993), but U.K. SRI investors appear
to prefer to conduct business behind closed doors
(Friedman and Miles, 2001, p. 536). The practice has
a considerable tradition in the U.S.A., where it is
easier to table critical shareholder resolutions (Graves
et al., 2001; Purcell, 1979), but Schepers and Sethi
(2003) cast doubt on how successful such efforts
have been. Part of the reason has been that institutional investors have often sided with management
and so resolutions have rarely received a large proportion of the votes cast. We return to this issue
below.
When SRI was limited to a few SRI retail funds
of insignificant size, it had minimal ability to assert
CSR values on companies. However, in countries
such as the U.K. and Australia, SRI funds have increased significantly in number and size in recent
years (McCann et al., 2003; Solomon et al., 2002;
Sparkes, 2002). Friedman and Miles (2001, p. 526)
refer to a staggering 78.6% increase in U.K. SRI
funds between 1997 and 1999 and a perception that
their influence is growing as a result. Nevertheless, if
they remain based upon a passive policy focused on
avoiding investment in companies disapproved of
their impact is likely to remain marginal, at best.
(Such negative avoidance approaches probably also
49
has occurred in the U.K., encouraged by government legislation. The U.K. Government has not
required pension funds to adopt SRI. However, in
July 1998 it did announce plans to require, from July
2000, all trustees of occupational and local government pension schemes to state their policy on SRI.
This has been a significant driver in the growth of
SRI, encouraging many trustees to develop SRI
policies (Solomon et al., 2002).
The growth in pension funds adopting SRI
techniques and analysis is of the greatest importance
for CSR, as they are the majority owners of most
quoted businesses. As such they have the power to
request, and if necessary instruct, corporate executives to include social and environmental guidelines
in their business objectives. Such growth, both to
date and in the foreseeable future, has a number of
important consequences. It means that, inter alia, SRI
now has a much greater influence on the financial
markets and the economy as a whole. Corporate
executives need to take notice of their most powerful investors, and if those investors are embracing
SRI in some way, social issues will inevitably find a
significant place on the corporate agenda. Such
pressures and incentives have been reinforced by the
phenomenon of socially responsible stock indices
being produced, such as the FTSE4Good series and
the Dow Jones Sustainability series. It is notable that
some companies (e.g. O2) refer to their presence in
such indices in their own publications. This seems to
have further prompted the launch of an increasing
number of agencies and consultancies seeking to sell
CSR advice to the corporate sector.
Although the introduction of legislation on SRI
disclosure for pension funds built on the precedent
and progress of SRI retail funds over the previous
decade and a half, the core SRI retail fund approach
of avoidance of large elements of the stock market
sets considerable practical challenges for institutional
investors. One of the difficulties with the classic
avoidance approach is that it reduces diversification
and misses out on potential growth opportunities.
The evidence suggests that the underlying investors
in SRI retail funds are willing to accept lower
financial returns as a price worth paying in order to
invest in line with their conscience (see Lewis and
Mackenzie, 2000) and theoretically one would expect, ceteris paribus, that the adoption of SRI constraints would lead to lower risk-adjusted financial
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51
Even when something appears to happen it is difficult to measure the impact of shareholder activism
on corporate policies and practices because both
sides like to claim credit for progressive results
(Purcell, 1979, p. 30). For example, it was reported
in Ethical and Social Investment No. 10 (Winter 1986/
87, p. 5) that, while the Church Commissioners
publicly claimed credit for the decision of BET to
raise its wages in South Africa (thus vindicating the
Commissioners policy of influencing companies
rather than selling shares), a spokesman for the
company denied that the role of interested shareholders was decisive. Part of the reason for this is that
sometimes shareholder activism is just one part of a
wider campaign, which might, for example, include
political lobbying and consumer boycotts led by
NGOs.
At first sight single-issue advocacy campaigns look
very similar to SRI investors asserting social objectives. The two groups may share similar concerns
over a particular social or environmental issue, and
they may often work together to pressurise a certain
company. However, although the means of NGO
advocacy and SRI activism may be similar, the aims
and objectives of the two groups are in principle
quite different and need to be carefully distinguished.
NGOs are normally based upon a narrowly defined agenda that is perceived to be of overwhelming importance to their members. It seems fair to
state that they do not seem interested in general
shareholder democracy issues. Indeed, their advocacy campaigns may use (critics might say abuse)
shareholder rights to attend a companys annual
general meeting simply in order to complain in a
public forum about a companys activities. For
example:
Each year Partizans, a tiny but dogged London-based
campaigning group, has launched a campaign on
RTZ, the worlds largest mining company. Partizans
wants RTZ to act in a more environmentally
responsible way, and to treat indigenous people with
more respect. Partizans does not table resolutions, instead it asks difficult questions and seeks to attract press
publicity for the causes it represents. Occasionally it
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Discussion
The preceding sections have argued that socially
responsible investment has developed significantly in
several ways. As other writers have also noted, it has
grown in size, most obviously in the establishment
and advance of SRI retail funds but, we would argue, more importantly in the recent past through its
adoption by some major institutional investors. The
adoption of SRI by powerful mainstream investors
could in itself be seen as a sign of maturity, but we
would argue that the field has matured in other ways
too. For example, we now have SRI stock market
indices and there are several different approaches to
the practice of SRI in addition to the core avoidance
approach of SRI retail funds, including SRI risk
optimisation and engagement/activism. The latter
are better suited to institutional investors.
There has also been increased complexity in SRI
in ethical terms. As we noted earlier, the prima facie
ethical case for SRI is that investment should not be
immune from the ethical considerations that are
brought to bear in other areas of life. When church
investors started ethical investment they did so as
relatively homogeneous institutions, based upon a
relatively well-defined set of beliefs, and possessing a
system of authority which enabled disputed questions to be tackled. In other words, each church
investment fund may be regarded as a single fund
with an explicit set of beliefs and some form of
advisory body to advise on the practical implementation of these beliefs.
Ethical complexity increased once retail SRI retail
funds were launched. They enable individuals with
differing social and environmental concerns (see
Anand and Cowton, 1993; Cowton, 1999) to par-
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Conclusion
This paper has provided a review of developments in
socially responsible investment. The aim has not
been to look in detail at the issues and policies
pursued but rather to highlight important recent
trends which, we believe, mark a step change in
SRI and its connection with the practice of corporate social responsibility by major companies. The
mainstreaming of SRI as it is adopted by institutional investors (not just by charities and other values-based organisations or in dedicated SRI retail
funds) is a major step in the maturing of SRI which
offers the prospect of putting significant pressure on
companies to adopt CSR. If successful, it will meet
some of the criticisms levelled against earlier forms of
SRI from which it can be regarded as having
developed. Citing support from other literature, this
paper has explored how the process of influence
might take place. Shareholder resolutions will continue to have a part to play in the U.S. and will
become more common than they have been hitherto in other countries, but their use will need to be
viewed in the context of other engagement mechanisms, especially dialogue between institutional
56
Notes
1
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Russel Sparkes
Senior Fund Manager,
Central Finance Board,
Methodist Church,
UK
Christopher J. Cowton
Professor,
Huddersfield University Business School,
Queensgate,
Huddersfield HD1 3DH,
U.K.
E-mail: c.j.cowton@hud.ac.uk