Business Ethics and Socially Responsible Investing - Literature review Example

Contents Introduction 2. Definition Basic Terminology 2 Business ethics 2.2. SRI and other Terms 2.3. Three Strategies 3. Origin and Historyof SRI 4. Growing Importance of SRI 1. Introduction Interest and awareness for social, environmental and ethical responsibility is gaining a growing significance in economics and business (Hamilton, et al. 1993; Spark and Cowton,2004). International bodies, confederations and stakeholders, including general public, society, media, corporations and financial communities are now giving importance to the environmental, social, and governance(ESG) factors along with financial factor in investment. This emerging phenomenon is known as Socially Responsible Investment (Hicks,2003; Schueth, 2003) Socially Responsible Investment (SRI), also known as ethical investment, is an investment discipline that in addition to the risk and returns issues in investment, takes into account social or environmental issues. The difference between SRI and conventional investment is the employment of specific investment strategies. The purpose of such strategies is to select or exclude certain assets from investment portfolio. (Renneboog et al., 2008,p. 1723). It simply means that conventional investment strategies are considered natural—having financial return on investment at the core. However, SRI strategies are either socially sensitive or socially dictating(Hicks,2003; Schueth, 2003) SRI has three major distinctive techniques, which may overlap or follow one another. These are screening, activism, and cause-based investment( Spark and Cowton,2004; Vivers, 2007) . Further, SRI may be carried out at individual as well as institutional level. Individuals normally develop mutual funds whereas institutions execute it through charitable foundations and pension funds. Since its modern emergence, SRI, its strategies, its terminology and its definition have been under strong debates ( Spark and Cowton,2004; Schueth, 2003 Hicks,2003). Thus, in the following, firstly I shall be presenting different view-point regarding Business Ethics. Then I will be discussing the definitions of SRI, their difference and consequently different strategies that are being employed. In next section I shall discuss the historical emergence of SRI and its connections with social and religious movement. At the end of this review , I shall present the growing importance of SRI at international level. 2. Definition and basic terminology 2.1. Business Ethics In current literature of business ethics, there are two major streams. One expects that business shall not be immoral enterprise and the second that consider the morality and self-interest at certain point sometime are opposite. ( Hicks,2003). The first group assume that business is amoral whereas second argue that if it is amoral it is immoral ( Hicks,2003).In current stream of business ethics literature second group is becoming dominant and either calls for the practice of personal values or even urges the investors to play an active role for the implementation of those values into the businesses.( Hicks,2003; Schueth, 2003, Vivers, 2007). 2.2. SRI and Other Terms There are various terms representing the concepts of business ethics. For instance, "Socially Responsible Investing" , "social investing," "socially aware investing," "ethical investing," "mission-based investing," and "double-bottom line investing.". These terms has been used interchangeably in literature (Pan and Mardfin ,2001; Schueth, 2003;Spark and Cowton,2004). However the two most common terms are “ethical investing” and “Socially Responsible Investment” (Spark and Cowton,2004, p 46). Term “ethical investment” is relatively older one and it reflects the fact that the movement was initially religiously motivated and churches played a vital role in the development of earliest ethical funds in UK, USA and Australia(Schueth, 2003; Spark and Cowton,2004). Later on, the term has gradually been replaced by Socially Responsible Investment (SRI). Many people have reservation on the use of the term “ethical investment” as it has readily had religious connotations (Spark and Cowton, 2004). Spark and Cowton(2004) quoted the Pension Minister of UK who, in 1999, publically encouraged the use of term Socially Responsible Investment(SIR). Still there are differences on the definition of SRI and many of these are used. Steurer et al. (2008, p) pointed out that there is no commonly accepted definition of SRI. Following two definitions cover what SRI sought to : ‘. It is in the concept of investing in concert with your principles. The SRI strategy asserts that investing is not value neutral and that there are significant ethical and social, as well as economic, consequences in how we invest our money. It is a commitment, if you will, to achieving social good through investment’ (Shapiro, 1992 as cited by Steurer et al.,2008, p .7) This definition makes clear that the investor will reflect his or her personal values by investing in certain kind of business and avoid other kind of business. Here is another definition that underpins some other characteristic of SRI: The key distinguishing feature of socially responsible investment lies in the construction of equity portfolios whose investment objectives combine social, environmental and financial goals. When practiced by institutional investors this means attempting to obtain a return on invested capital approaching that of the overall stock market’ (Sparkes, 2002 as cited by Steurer et al.,2008, p .7) The combination and comparison of both the definitions reflect the broader and somewhat loose scope of SRI. Due to this loose and somewhat personal approach, many scholars have been questioning about the legitimacy of social responsibility criteria (Hamilton et al, 1993).However, SRI can focus on social issues including human capital, community development, and labour rights. It can take into account the environmental issues like urban and industrial pollution, and global warming. It also covers ethical issues including human rights, manufacturing or distribution of weapons, and tobacco or alcohol manufacturing and selling. It is also possible that someone take an approach that combines these three aspects. Sparkes(2002) has discussed that some people take SRI as the implementation of their personal values into their business lives whereas some other use it as a tool for social change. 2.3. Three Strategies: These different definitions and intended goals of SRI beget different practical strategies to be practiced by the investors in order to keep their investment ethical and socially responsible. In the following I shall discuss the three major strategies namely screening, shareholder activism and cause-based investing. 2.3.1. Screening Adopting this approach, socially responsible investors usually avoid investments in businesses involved in the production or services that are contrary to their values. This could be production and/or sale of alcohol, tobacco and weapons as well as business related to gambling, pornography and nuclear energy (Sparkes & Cowton 2004, p.46). 2.3.2. Shareholder Activism This approach implies that shareholders actively engage and influence the decisions of the investment managers. This could happen by engaging in dialogue, filing resolutions, using their voting rights at annual general meetings and even divesting from companies that fail to inline with those of shareholders expectations. (Ryan and Schneider, 2002; Schueth, 2003;Vivers, 2007) 2.3.3. Cause-based Investing By adopting this approach investors finance businesses or projects that advance their cause of support environmental, social or empowerment initiatives(Vivers, 2007) It has been mentioned earlier that the differences do exist in definitions and strategies of SRI. These differences reflect the long historical development of the concept. In next section I shall be discussing the historical evolution of the notion of SRI. 3. Origin and history of SRI The concept of socially responsible investment is not new. The roots of what has become known as socially responsible investing goes back to the ancient times. The Old Testament laid down many commands about how to invest ethically (Schueth, 2003; Vivers, 2007). Similarly, the Quran also spells clear instructions about the ethical investment and means of earning (Ross ,2005; Vivers, 2007) There is a general agreement that current consciousness of ethical investment or socially responsible investment was developed with the Quaker and Methodist religious movements in the 19th Century. Later on in 1928, Philip L. Carrot initiated Pioneer Fund—the earliest SRI fund initiated in the United States. This fund is still operating(Social Funds, 2010). The first SRI fund in the United Kingdom was the Friends Provident Stewardship Fund which was started in 1984 (Ali and Gold, 2002) The political scenario of 1960’s helped in raising awareness around issues of social responsibility (Schueth, 2003). This decade marked a series of social and environmental movements which emphasized civil rights and women’s rights on one hand and on the other these movements raised their voice against humans’ catastrophes in wars. Later on human rights movement broadened the scope of the SRI to the management and labour issues. These concerns also included anti-nuclear sentiment. Such movements and sentiments compelled the investors to think about their priorities in investing in anti-social businesses like drugs, and weapons manufacturing. Thus in the late 1970s, considerably larger group of American investors began to incorporate the concept of social investing into their international business approach (Pan and Mardfin ,2001). Such groups of businessmen showed their concerns about the racist systems of apartheid in South Africa. Consequently, international investors joined international human rights activists’ efforts to put economic pressure on South Africa to end apartheid. Those investors, during the 1970s and 1980s, used both screening and shareholder advocacy (activism) to press for change in South Africa. Those investors not only refused to invest in the companies involved in business in South Africa but also sponsored shareholder resolutions compelling companies to withdraw from South Africa (Pan and Mardfin ,2001). Some issues like Bhopal insident, Chernobyl incidents and the growing awareness on Global Warming has made SRI an important factor in international business.( Schueth, 2003; Spark and Cowton,2004) 4. Growing Importance of SRI The growing importance of SRI is expressed by two major indicators. Firstly, there is an increasing number of SRI or sustainability funds and indices and there is an increasing amount of financial resources invested in socially responsible ways(Steurer et al.,2008, p .7) Secondly, there are internataional and national legislations making social factors as important in investment as financial factors. Considering the first factor, an analysis of the European SRI market growth reflects an increase of 36% over the time period of 2003-2006 (Eurosif, 2006 as cited by Steurer et al.,2008). And in 2006, responsible investments by European institutional investors accounted for EUR 1,138 billion. (Steurer et al.,2008, p .7) Even with the slowdown in economic growth during the past two years, SRI in Europe has shown a remarkable growth confirmed by data on 87% growth during the period from 2007 to 2009 (Eurosif, 2010,p. 21), At the start of 2010, professionally managed assets following SRI strategies were sum of $3.07 trillion worldwide. This marks a rise of more than 380 percent from $639 billion in 1995, (Feigenbaum, 2011) However, this is one aspect that reflects growing importance of SRI. Another aspect is for the first time how companies manage environmental, ethical and social reputations is on the core corporate governance agenda(Friedman and Miles, 2001). The resolution of the European Parliament in 2007 addresses SRI and possible roles of the financial sector in its three articles (Steurer et al.,2008, p .9)..Similarly, UN has introduced Principles for Responsible Investment that ask investors to take social, environmental and governance factors into account. (UNEP FI et al. 2005 as cited by Steurer et al.,2008, p .10 ). Such awerness and consequent legislation and resolutions are making SRI a mainstream consideration for the investors References ALI,U P, and GOLD, M.(2002) An Appraisal of Socially Responsible Investment and Implications for Trustees and other investment Fiduciaries [WWW] The University of Melbourne . Available From: < http://cclsr.law.unimelb.edu.au/research-papers/Monograph%20Series/SRI%20final%20report.pdf > [Accessed 19/8/2011 ] Eurosif (2010). European SRI Study 2010[WWW] Available from:< http://www.eurosif.org/research/eurosif-sri-study> [Accessed: 15/8/2011 ] FEIGENBUM, C (2011). GreenMoney Journal. [WWW]Available from: [Accessed 20/08/2011]. FRIEDMAN, A. L and MILES, S. (2001) Socially Responsible Investment and Corporate Social and Environmental Reporting in the UK: An Exploratory Study. References and further reading may be available for this article. To view references and further reading you must purchase this article. The British Accounting Review , 33(4), pp. 523-548 HAMILTON, S. et al. (1993) Doing well while doing good? The investment performance of socially responsible mutual funds, Financial Analyst Journal 49(6), pp.62-66 HICKS, S. R. C.(2003) Ayn Rand and Contemporary Business Ethics. Journal of Accounting, Ethics & Public Policy, 3(1), pp. 1-26 PAN ,P. G. and MARDFIN, J .K. (2001). Socially Responsible investing. [WWW] Legislative Reference Bureau, State Capitol, Honolulu, Hawaii Available From: [Accessed 17/8/2011 ] RASHOCKA , J. (n.d.) Socially Responsible Investment in Europe. [WWW] Poznan University of Economics. Available From: [Accessed 19/8/2011 ] Ryan, L. V. and Schneider, M: 2002, ‘The Antecedents of Institutional Investor Activism’,Academy of Management Review 27(4), 554-573. RENNEBOOG, L., TER-HORT, J and ZHANG, C. (2008) ‘Socially Responsible Investments: Institutional Aspects, Performance and Investor Behaviour’, Journal of Banking and Finance, 32(9),pp. 1723-1742. ROSS ,S. A. (2005). Socially Responsible Investment in UK Faith-Based Charities –Investigating the impact of religious values. MSc Thesis, Cass Business School, City University Social Funds (2010) [WWW].Social Investment timeline. Available from: .[Accessed 20/8/2011]. STEURER, R. MARGULA, S. and MARTINUZZI, A. (2008) Socially Responsible Investment in EU Member States: Overview of government initiatives and SRI experts’ expectations towards governments, Final Report to the EU High-Level Group on CSR. [WWW] Vienna University of Economics and Business Administration. Available From: [Accessed 19/8/2011 ] SPARK ,R. and COWTON, C. J. (2004). The Maturing of Socially Responsible Investment: A Review of the Developing Link with. Journal of Business Ethics. 52(1), pp.45-57. Read More