Socially Responsible Investment: from beyond the fringe

Socially Responsible Investment: from beyond the fringe

Anne Simpson describes the origins and growth of socially responsible investment and ‘non traditional’ value creation.

When CCB was launched in 1991 socially responsible investment (SRI) was considered exotic at best, sufficient in size and potential to pique the interest of the Economist Intelligence Unit. I was on maternity leave from my role at PIRC, itself relatively new with its pioneering investor activism by pension funds. The EIU had commissioned me to write one of their special reports rather grandly titled “The Greening of Global Investment: how politics, ethics and the environment are reshaping strategy”. The handsomely bound (and even more handsomely priced) volume set out the origins, development and prospects for socially responsible investment worldwide. I’m sure you can find a copy on eBay somewhere.

Even in those early days, the numbers looked impressive. The small sums invested by religious groups and other ethically concerned investors were swelling with funds offered by professional managers, both for small and institutional investors. The motives may have been mixed, but predictions that SRI was moving from the fringe to the mainstream looked convincing. The movement made for strange bed fellows: funds avoiding alcohol, arms, tobacco, gambling and contraceptive advice jostled alongside equal opportunities, environmental concern, cancellation of ‘third world’ debt, and marketing of dried baby milk formula , animal testing of pharmaceuticals, with the occasional fund avoiding Israel and others avoiding Arab nations. Few slogans can claim to embrace the concerns of the conservative right and the reforming left on a global scale, but ‘ethical investment’ managed to do this.

A key development was the plausible claim that SRI was a strategy that would reduce risk and enhance returns. No longer was this the application of heart over head in the investment process, it was a more intelligent approach which could factor the impact of social change into corporate performance, and make a successful investment strategy out of the same. Activism was a way to hasten this improvement in risk and return, and avoiding companies which did not match high standards was if anything, viewed as irresponsible.

It was clear at the time that a growing number of retail investors and pension funds were looking for ways to incorporate social, ethical and environmental issues into their investment strategies. Their concerns had been spurred by wider debates about the role companies were playing at home and abroad in controversial situations. The example was greatly inspired by the US: the civil rights movement had prompted shareholder resolutions on equal opportunities for employees; anti war protesters filed proposals to prevent the production of napalm and agent orange at the height of the Vietnam war; consumer groups put forward proposals on product safety and environmental impact in the automotive industry. The connection between societal concern and shareholders was mapped in books explaining that the ownership of shares brought a coincidence of interest between companies, investors and civil society. Dire warnings of the consequences were also issued, notably by management guru Peter Drucker who had written of “Pension Fund Socialism”.
US rules made it easy for shareholders to file resolutions on a wide range of subjects and it was not clear what the consequences would be, as by law these could only ever be advisory. They attracted publicity, drew companies into negotiation with shareholders and generally articulated the proposition that social responsibility was good for company performance, and for that reason was an issue for investors. A broader movement developed around the concept of ‘workers capital’ and the idea of stewardship – that ownership implied responsibilities and employees’ savings invested in companies gave an opportunity to align interests between the various stakeholders.

For purely ethical investors, such concern with profit was perhaps not seemly or even relevant. The first ethical fund launched in the UK was required to warn investors that returns should be expected to bear higher risk because of the moral restrictions on investment. Institutional investors dominated the share registers of the largest companies, yet their guiding principles were fiduciary, not ethical. The duties of prudence and care required that those acting as trustees for other peoples’ money (pensions, insurance and other savings) must pay attention to financial returns. Supporters of ethical investment were on their mettle to demonstrate that SRI would not harm returns, and if anything would help financial performance. The next wave of pressure on pension funds to consider ethics, namely, disinvestment from South Africa, did coincide with an escalation of risk in that economy and trustees could argue their decisions were motivated as much by their duty of prudence as their moral abhorrence to apartheid.

The connections between corporate responsibility and corporate performance are now better understood. SRI itself has proliferated into initiatives and standards with an array of acronyms and labels: ESG, GRI, Value Reporting, Non Financial Business Reporting, EAI, PRI and more. The UK’s (as was) Coal Board pension fund which was taken to court by the National Union of Miners is now governed by a Pensions Act which actually requires trustees to disclose their policies on ethical, social, environmental and governance issues in their statement of investment objectives. The United Nations endorses the concept of SRI and sponsors an initiative to encourage investors to co-ordinate activity to bring about change.

Other parts of the international community integrate the issues into their lending process, via initiatives such as the Equator Principles, originally sponsored by the International Finance Corporation. Even the mainstream investment community seems persuaded. The UN Principles of Responsible Investment are supported by hundreds of institutions and the ICGN’s own members recently approved a statement on Non Financial Business Reporting which recognises that value is determined by a range of factors that include corporate responsibility. The market now understands all too well that the bottom line is supported by governance, ethics and environmental policy. Although measurement and assessment of performance in these non-financial areas of business value creation must continue to improve we are no longer arguing about whether companies must make trade offs between performance and ethics.

Anne Simpson is the Executive Director of the International Corporate Governance Network, whose members include investors responsible for US$15 trillion in global assets (www.icgn.org). She is Senior Faculty Fellow at the Yale School of Management where she teaches corporate governance with Ira Millstein. She is a Member of the Operating Board of AccountAbility and the OECD’s working group which has produced its boardroom guide to implementing the OECD Principles of Corporate Governance. Anne is also a member of the Private Sector Advisory Group to the World Bank Group-OECD Global Corporate Governance Forum where she was formerly Head of the Secretariat. Prior to joining the World Bank in 1999 she was a co-founder and joint Managing Director of Pensions & Investment Research Consultants Ltd, an investment advisory firm providing institutional investors with research, policy advice and shareholder engagement services on corporate governance and corporate responsibility. She is the author of ‘The Greening of Global Investment’ and with ‘Fair Shares: the future of shareholder power and responsibility’.