doing right, investing right: socially responsible investing and shareholder activism in the...
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BUSHOR-1074; No. of Pages 12
Doing right, investing right: Socially responsibleinvesting and shareholder activism in the financialsector
Chang Hoon Oh a,*, Jae-Heum Park b, Pervez N. Ghauri c
a Simon Fraser University, Beedie School of Business, 500 Granville Street, Vancouver, BC V6C 1W6, Canadab Samil-PwC LLC, LS Yongsan Tower, 191 Hangangro-2ga, Yongsan-gu, Seoul 140-702, KoreacKing’s College of London, 150 Stamford Street, London SE1 9NH, UK
Business Horizons (2013) xxx, xxx—xxx
Available online at www.sciencedirect.com
www.elsevier.com/locate/bushor
KEYWORDSSocially responsibleinvestment;Shareholder activism;Corporate socialresponsibility;CSR;Financial industry;Dow JonesSustainability WorldIndex
Abstract In this article, we present an overview of corporate social responsibility(CSR) in the financial sector. We focus on how socially responsible investment andshareholder activism have been integral parts of corporate social responsibility in thefinancial sector. We examine how the financial sector and its firms are evaluated andrated via a sustainability index, the Dow Jones Sustainability World Index, and showthat even leading financial institutions do not employ proactive practices regardingsocially responsible investment and shareholder activism. Finally, we provide exam-ples of two companies, UBS AG and the Co-operative Banking Group, that do utilizeproactive practices.# 2013 Kelley School of Business, Indiana University. Published by Elsevier Inc. Allrights reserved.
1. Socially responsible investment andshareholder activism
[Howard] Pearce ditched financial servicesgiants State Street and Capital International ashis global equity fund managers because of poorannual performance, and because they had notsigned up to the UN Principles for ResponsibleInvestment. Asset manager signatories to the
* Corresponding authorE-mail addresses: [email protected] (C.H. Oh),
[email protected] (J.-H. Park),[email protected] (P.N. Ghauri)
0007-6813/$ — see front matter # 2013 Kelley School of Business, Ihttp://dx.doi.org/10.1016/j.bushor.2013.07.006
principles agree to factor environmental, social,and governance factors into investment deci-sions. . . .He argued that appointing fund man-agers that consider risks such as climate changewould produce better returns, in a way that wasentirely consistent with his fiduciary duty(Ethical Corporation, 2008).
Howard Pearce was head of the £1.5 billion Envi-ronment Agency pension fund in the UK. His senti-ments, as expressed in the featured quote,illustrate how concern about socially responsibleinvestment (SRI) can affect the business practicesof financial institutions. In a previous issue ofBusiness Horizons, Archie Carroll (1991) suggested
ndiana University. Published by Elsevier Inc. All rights reserved.
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that four types of social responsibility constitutetotal corporate social responsibility (CSR): economic,legal, ethical, and philanthropic. The Howard Pearceexample shows how institutional investors considerenvironmental, social, and legal responsibilities intheir investment decisions. SRI has migrated from aminor activity practiced by a small number of spe-cialist retail investment funds to a mainstream in-vestment philosophy considered by an increasingnumber of large financial institutions (Sparkes &Cowton, 2004). In this article, following Carroll’ssuggestion, we broadly define SRI as that which con-siders ethical, philanthropic, social, and environ-mental impacts (Kurtz, 2008).
When the first author of this article completedhis MBA in corporate greening and responsibility in2003, the program was the only MBA program inSouth Korea that provided a concentration in aCSR subject. Although the professors and studentswere motivated by the topic, not many studentstook jobs in CSR-related positions, partly becausenot many qualified CSR positions existed andthe pay rate of most CSR positions was lower thanother positions gained by having an MBA. A fewyears later, the MBA program discontinued its CSRconcentration; not many firms were interested indoing business ‘right’ at that time. Economic val-ues overwhelmed social and ethical values evenfor those motivated students and the MBA pro-gram. However, recently, several universities inSouth Korea have begun offering CSR-related MBA,certificate, and executive programs. This changeimplies the growing attention (and likely economicvalue as well) being paid to CSR–—that is, doingbusiness right. Likewise, since CSR began to makeits way into the mainstream corporate lexicon inthis decade, the concept has gained widespreadsupport and acceptance in the business world(Keeler, 2010). Thus, the formal adoption of CSRpractices and strategies is almost universal, atleast among larger companies.
In general, the direct impact on the businesspractices of financial institutions caused bysocial, environmental, and governance factors ismarginal. However, through SRI and shareholderactivism, their indirect impact can be largerthan their direct impact or the impact of othersectors. According to the Forum for Sustainableand Responsible Investment (2012), the assetsengaged in sustainable and responsible investingpractices amounted to $3.7 trillion last year, rep-resenting 11.3% of the $33.3 trillion in total assetsunder management in the United States. The sizeof the assets increased about 500% since 1995from $639 billion. In fact, some leading financialinstitutions proactively embrace CSR in their
operations by investing right as well as by doingright.
Banking giant Citigroup Inc. (henceforth, Citi) isone such institution internalizing CSR to its opera-tions. According to Pam Flaherty, Citi’s director ofcorporate citizenship and president and CEO of theCiti Foundation (Keeler, 2010, p. 24):
For us, it’s not just about bringing CSRinto the strategic part of the business; it’shaving our business colleagues feel that theyhave a leadership role and an opportunityto figure out how they can make a positivedifference.
In early May 2010, Citi announced a CSR project thatwould focus on the U.S. economic recovery, and setup a $200 million fund to spur lending to smallbusinesses in low-income communities. Citi hasbeen working with NGOs to help fund organizationsthat provide loans (Keeler, 2010, p. 25):
While the $200 million fund might look like asimple charitable effort, it is more than that forCiti: ‘‘Is this charity? No, this is a businessdeal!’’ she [Flaherty] says.
In this article, we review SRI and shareholderactivism in the financial sector, and examine theperformance and practices of the financial sectorand its firms in regard to SRI and shareholder activ-ism. We also provide two real cases that featureproactive strategies and practices.
2. Why does the financial sector needCSR?
The financial sector consists of a heterogeneousgroup of companies such as banks, stock exchanges,asset managers, investment holdings, and insur-ance companies. According to RobecoSAM, a com-pany specializing in sustainable investments andmarket analysis, CSR is central to competitive ad-vantage in the financial sector: ‘‘Accountabilityand leadership are crucial for building a competi-tive advantage. Adherence to international best-practice standards in corporate governance,risk management, and compliance is essential’’(SAM, 2012b, p. 2).
The literature has identified three links betweenthe financial sector and CSR based on type of socialinvestors. Kinder (2005) offered a taxonomy of so-cial investors: value-based investors, value-seekinginvestors, and value-enhancing investors.
� Value-based investors invest with their moralstandards.
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� Value-seeking investors enhance their portfolioperformance.
� Value-enhancing investors use shareholder activ-ism to improve investment value.
The link is becoming increasingly important andstronger as the portion of SRI in total investmentsis increasing, as mentioned previously.
First, value-based investors act in accordancewith deeply held religious or ethical standards.Their desire to have investments that are consistentwith their morals leads them to include non-financial decision variables–—such as environmentalimpact, human rights, and company governance–—incompiling a portfolio. Ethical investments by mostreligious institutions that practice SRI fall into thiscategory. Thus, the first developer of commercialethical investment products was religious institu-tions. For example, Methodists and Quakers wereresponsible for the launch of the first ethical unittrusts in the U.S. and UK (Sparkes & Cowton, 2004).The funds, and sometimes the interest revenuesflowing from the deposited funds, are likely investedtoward underprivileged or needy countries andorganizations.
Second, value-seeking investors use social andenvironmental data to enhance portfolio perfor-mance. Some evidence, although controversial,shows that value can be captured in this way. MarkFulton, managing director and global head of cli-mate change investment research at the DeutscheBank Group, recently summarized that in more than100 academic research studies, ‘‘89% of the studieswe examined show that companies with high ratingsfor ESG [environmental, social, and governance]factors exhibit market-based outperformance, while85% of the studies show these types of companiesexhibit accounting-based outperformance’’ (Fulton,Kahn, & Sharples, 2012). Financial institutions needto provide such social and environmental informationas an information gatekeeper to investors.
Third, value-enhancing investors use shareholderinvolvement and activism to improve investmentvalue. These investors often focus on corporate gov-ernance and the ethical issues of the executives.Scholtens (2006) noted four investor strategies thatinfluence firms: (1) voting on crucial issues, (2) en-gaging in dialogue, (3) filing shareowner resolutions,and (4) investing in or diverting from the company.While shareholder rights are an instrument used toimpact the direction of the firm, they are not the onlymeans that can be used. Private capital and bankcredit are important financial instruments for provid-ing external financing to the firm, particularly indeveloped economies (Scholtens, 2006).
The roles played by value-seeking investors andvalue-enhancing investors distinguish the financialinstitution from other industry firms through theCSR perspective: financial institutions can do rightand invest right, while other industry firms canonly do right. Thus, the financial sector’s role inCSR can be much larger than that of other sectors.Herein, we focus on the second and third types ofinvestors and how they enhance the CSR of firmsand society.
3. Socially responsible investment
3.1. Trend, roles, and performance
‘SRI’ refers to the practice of directing investmentfunds in ways that combine investors’ financial ob-jectives with their commitment to social concerns,such as social justice, economic development,peace, or a healthy environment (Haigh & Hazelton,2004). Although most major fund managers haveintroduced SRI funds, the explicit incorporation ofenvironmental, social, and governance (ESG) crite-ria into portfolio selection methodology is a rela-tively new trend. SRI funds started to grow innumber beginning in the early 1970s in the U.S.and the mid-1980s in the UK and Australia. InDecember 2001, 280 SRI funds were operating inEurope; in 2003, 71 were identified in Australia and153 in the U.S. (Haigh & Hazelton, 2004). Accordingto the Social Investment Forum Foundation (2011),at the start of 2010, professionally managed assetsfollowing SRI strategies stood at $3.07 trillion, anincrease of more than 380% from the $639 billion in1995. Over the same period, the broader universe ofassets under professional management increased byonly 260% from $7 trillion to $25.2 trillion. Duringthe most recent financial crisis, from 2007 to 2010,the overall size of professionally managed assetsremained roughly flat, while SRI assets showedhealthy growth (Social Investment Forum Founda-tion, 2011). Thus, approximately one asset dollar ofevery ten under management in the U.S. is investedaccording to some type of social constraint based onour broad definition (Kurtz, 2008).
Generally speaking, SRI funds have two distinctfeatures. The first is that they may influence firms tochange their behavior. Shareholders, especially in-stitutional investors, have many different tools attheir disposal to influence corporate and managerialbehavior, including shareholder resolutions at annu-al general meetings, class-action lawsuits, mediacampaigns, and private negotiations between share-holders and management teams (Deutsche BankGroup, 2012). By analyzing a sample of shareholder
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proposals at S&P 1500 companies from 1997—2009,Bauer, Moers, and Viehs (2012) concluded that insti-tutional investors filed 2,392 proposals and withdrew810 proposals (33.9%) before the meeting. Proposalsare withdrawn when negotiations between the man-agement and the sponsor are successful prior to theannual general meeting. The number of proposalsfiled by institutional investors is less than othersponsors such as individual investors (4,824) andunions (2,726), and comparable to coordinated ac-tivism (2,275). However, the withdrawal rate wasvery high compared with those of individual investorproposals (4%) and coordinated activism proposals(27.7%). Similarly, the withdrawal rate of union pro-posals was 34.6%. This explains the importance ofinstitutional investors in shareholder activism.
According to the Interfaith Center on CorporateResponsibility (2004), SRI funds filed 56 resolutionswith American and Canadian companies, while reli-gious organizations filed 129 resolutions with thesame type of companies in 2003. From 2008 to2010, more than 200 organizations, including publicfunds, labor funds, religious investors, foundationsand endowments, and investment management firmsfiled or co-filed shareholder resolutions. These insti-tutions and money managers collectively controlled$1.5 trillion in assets at the end of 2009 (SocialInvestment Forum Foundation, 2011). As more largeinstitutional investors–—such as pension funds–—adoptSRI principles, companies may be persuaded tochange their operations; howbeit, managementteams are not obliged to implement such changeseven if they receive more than 50% of the votes.
The second distinct feature of SRI funds is thatwhile their financial performance is no differentfrom that of conventional investments in the shortterm, it is likely to be superior in the long term.Companies taking a lead in CSR will gain a competi-tive advantage and likely outperform their peers. Byinvesting in these socially responsible companies,retail investors in such SRI funds would have oppor-tunities to make profits from the high growth po-tential of sustainability-driven products (Haigh &Hazelton, 2004). After an extensive review of theacademic literature, Fulton et al. (2012) concludedthat securities with a strong corporate commitmentto CSR are positively related to corporate perfor-mance, and their returns are comparable to those ofconventional benchmarks. Specifically, since theearly 2000s, corporate governance has been stronglylinked to a corporation’s financial performance. Inthe review, the environmental factor of ESG wasexpected to offer great stock return potentialthrough a first mover advantage. However, socialfactors were difficult to measure and led to incon-clusive and immature results.
The academic literature has paid great attentionto the stock market as a tool to make firms moresocially, ethically, and environmentally responsible.Shareholders may affect the cost of capital to thecompany, and can use their voices and actions toguide the company toward more responsible behav-ior. However, shareholders have only limited impacton CSR because: the amount of funding for firms viathe stock market is not boundless in most countries;governance mechanisms are imperfect; limited lia-bility reduces the incentives to monitor non-financialperformance; and the share of ownership is oftenwidely dispersed. In contrast, venture capitalists andbanks provide a large volume of external financing tofirms in most countries. As such, venture capitalistsand banks have the capability to make businessesmore sustainable. They also have incentives to do so,as their borrower’s performance directly or indirectlywill affect their investors (Scholtens, 2006).
Table 1 illustrates how fund managers pursuemanagement change in the firms in which they investthrough SRI. Fund managers claim that SRI funds canoutperform other non-SRI funds and lead corporatechanges. Thus, the rise of SRI encourages companiesto adopt socially responsible business practices, andeventually gives a nudge to their industry peers.
Although investors’ concerns regarding responsi-ble corporate behavior with respect to social con-sequences of investment were key to the creation ofSRI funds, these concerns now appear to have beenshadowed by efforts to measure the validity andperformance of the same (Haigh & Hazelton,2004). In the next section, we will review a widelyused benchmark of SRI funds, the Dow Jones Sustain-ability Index.
3.2. Dow Jones Sustainability Index (DJSI)
Several sustainability indexes have been proposedby different organizations. Indexes may serve asbenchmarks for investors who integrate sustainabil-ity considerations into their portfolios, and providean effective engagement platform for companieswho want to adopt sustainable best practices. Inthis section, we provide an overview of the mostwidely used sustainability index, the Dow JonesSustainability Index (DJSI). Two main sources areused for our descriptive summary of the DJSI:The Dow Jones Sustainability World Index Guide(RobecoSAM AG, 2013) and Sustainability Asset Man-agement reports (SAM, 2012a—e).
The DJSI family is comprised of global, regional,and country benchmarks, and is offered cooperative-ly by RobecoSAM and S&P Dow Jones. Thus, custom-ized versions of the indexes can satisfy investors’specific requirements for their unique investment
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Table 1. Two roles of Socially Responsible Investment
Fund manager Type of role Claim
AMP HendersonGlobal Investors
Corporate change ‘‘Encourage companies to adopt higher social and environmentalstandards.’’
Outperformance ‘‘Social or environmental issues can affect long-term profitabilityand share price performance.’’
Australian EthicalInvestment
Corporate change ‘‘Genuine ethical investment can be a potent force in changing theattitudes of companies.’’
Corporate change ‘‘[T]he best long-term, stable returns will come from the support ofsustainable business [because] society will require business to meetthe full ecological costs of production and will. . .pay for thosegoods. . .which have lower ecological costs.’’
ChallengerInternational
Corporate change ‘‘[I]dentifying the most socially responsive companies in eachindustry [may] encourage their competitors to improve on theirown standards.’’
ContinentalVenture Capital
Outperformance ‘‘Reducing negative externalities seen as consistent with long termprofit maximization. . .’’
‘‘Environmental efficiency [attracts a] return premium.’’
Hesta Corporate Change ‘‘[SRI will] encourage Australian companies to achieve betterenvironmental practice.’’ ‘‘Our ‘best of sector’ model encouragescompanies to compete for investment by improving theirenvironmental performance.’’
Hunter HallInvestmentManagement
Outperformance ‘‘The objective. . .is to increase the wealth of. . .investors bysubstantially outperforming the MCSI World Accumulation NetReturn Index.’’
VanguardInvestmentsAustralia
Outperformance ‘‘Companies taking a lead in [sustainability-driven operations] willgain a competitive edge and outperform their industry peers.’’
Westpac Corporate Change ‘‘Our unique ‘best of sector’ approach to investing rewardscompanies with leading sustainability performance, whileencouraging others to improve their practices.’’
Note: Selected from Appendix A of Haigh and Hazelton (2004).
objectives. The family tracks the stock performanceof the world’s leading companies in terms of econom-ic, environmental, and social criteria.
The Dow Jones Sustainability World Index waslaunched in 1999 as the first global sustainabilitybenchmark. The Dow Jones Sustainability WorldIndex and respective subsets track the performanceof the top 10% of the 2,500 largest companies in theDow Jones Global Total Stock Market Index that leadthe field in terms of sustainability. The DJSI usesinformation from annual surveys and secondarysources–—such as annual reports, sustainability re-ports, websites, media coverage, and other formaland informal company documents–—to rate the CSRperformance of sample companies.
The survey questionnaires are specific to industrysectors. There are 19 super sectors and 58 subsec-tors in the DJSI. General criteria relating to standardmanagement practices and performance measures–—such as corporate governance, human capital
development, and risk and crisis management–—are defined and applied to each of the 58 subsectors.These general criteria account for approximately40%—50% of the assessment, depending on thecharacteristics of the sector. At least 50% of thequestionnaire covers industry-specific risks and op-portunities that focus on economic, environmental,and social challenges and trends that are particu-larly relevant to the industry sector.
A defined set of criteria is used to assess theopportunities and risks derived from economic, en-vironmental, and social developments for the eligi-ble universe of companies. The economic dimensionincludes corporate governance, code of conduct andcompliance, risk and crisis management, customerrelationship management, and innovation manage-ment. The environmental dimension includes envi-ronmental management systems, environmentalperformance, climate strategy, product stewardship,and biodiversity. The social dimension includes
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Table 2. Criteria and relative dimension weights for the banking, electricity, and pharmaceutical sectors in DowJones Sustainability Index
Criteria Banking Electricity Pharmaceuticals Note
Economic Dimension (weight) (38%) (35%) (40%) Economic Dimension(weight)
Anti-crime policy/measure � industry-specificBrand management � industry-specificCodes of conduct/compliance/corruption & bribery � � � generalCorporate governance � � � generalCustomer relationship management � � � industry-specificInnovation management � industry-specificMarket opportunities � industry-specificMarketing practices � industry-specificPrice risk management � industry-specificResearch and development � industry-specificRisk and crisis management � � � generalStakeholder engagement � industry-specificScorecards/measurement system � industry-specific
Environmental Dimension (weight) 24% 35% 10%
Biodiversity � industry-specificBusiness opportunities financial services/products � industry-specificBusiness risks large projects/export finance � industry-specificClimate change governance � industry-specificClimate strategy � � industry-specificElectricity generation � industry-specificEnvironmental footprint � industry-specificEnvironmental policy/management system � � � generalEnvironmental reporting � � � generalOperational eco-efficiency � � industry-specificTransmission & Distribution � industry-specificWater-related risks � industry-specific
Social Dimension (weight) 38% 30% 50%
Addressing cost burden � industry-specificBioethics � industry-specificCorporate Citizenship and philanthropy � � � generalControversial issues, dilemmas in lending/financing � industry-specificFinancial inclusion/capacity building � industry-specificHealth outcome contribution � industry-specificHuman capital development � � � generalLabor practice indicators � � � generalSocial reporting � � � generalStakeholder engagement � � industry-specificStandards for suppliers � � industry-specificStrategy to improve access to drugs or products � industry-specificTalent attraction & retention � � � general
Note: Adapted from The Dow Jones Sustainability World Index Guide, 2012 (RobecoSAM AG, 2013).
human capital development, talent attraction andretention, occupational health and safety, stakehold-er engagement, and social reporting. These factorsare overlooked by traditional financial analyses.Table 2 compares the criteria and relative dimensionweights for the banking, electricity, and pharmaceu-tical sectors in 2011. It shows the importance of the
economic and social dimensions of sustainability inthe banking industry.
The ongoing monitoring of media and stakeholdercommentaries and other publicly available infor-mation from several sources–—such as consumerorganizations, NGOs, governments, and internationalorganizations–—is an integral component of the
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Figure 1. DJSI World Scores by Super Sector and Leader
20 30 40 50 60 70 80 90 100
Chemical sec tor
Akzo No bel
Utili ty sector
Ibedrola
Banking sector
Austral ia & New Zealand Ban king
Group
Financial Servic es
Itausa
Insurance sector
Swiss Re
Soc ial dimension Envi ronmenta l dimensionEcon omic dimension Total Score
Source: Authors’ calculation based on SAM (2012a-e)
assessment. Monitoring is conducted on a daily basisand includes a host of issues, such as economic crime/corruption, fraud, illegal commercial practices,human rights violations, labor disputes, workplacesafety, catastrophic accidents, and environmentaldisasters. A case is created if a company has beenthe subject of a specific allegation that could harm itsreputation, resulting in financial consequences rang-ing from lost business, lost customers, and decliningsales to liabilities, litigation, or fines. Such a case,therefore, requires reaction from the company inorder to address the issue and minimize negativeimpact from the crisis.
Figure 1 shows scores for selected super sectorsand their leaders. It appears that large firms infinancial sectors perform poorly compared to tradi-tional dirty industry sectors, such as chemical andutility sectors. This performance probably occursbecause NGOs, activists, and government agenciestightly monitor the practice of companies fromheavy polluting and labor-intensive industry sectors(Rivera & Oh, 2013). In particular, financial serviceand insurance firms do not have good sustainabilitypractices in the social and environmental dimen-sions, while banks do relatively well in the economicdimension. Although the CSR performance of lead-ers in these super sectors is much beyond the aver-age performance of the sector, the social dimensionof Swiss Re, Switzerland re-insurance company,and the environmental dimension of Itausa SA, aBrazilian financial service company, are relativelyweaker than that of other super sector leaders, par-ticularly compared to the Australia & New ZealandBanking Group LTD (ANZ).
According to SAM’s (2012a—e) Supersector LeaderReports, leading banks consider environmental andsocial factors in their strategic decision making,but need to regain trust from their stakeholders.In addition, it seems that the banking sector doesnot have SRI standards and shareholder activism inCSR practices (SAM, 2012a, p. 2):
The banking sector remains under public scruti-ny. As banks work to restore their credibility andcontribute to stable financial systems, leader-ship and accountability are key factors in build-ing a competitive advantage. . . .Leading banksare integrating environmental and social factorsinto their long-term strategies and performancereviews. A multi-stakeholder-driven approach todeveloping innovative and prudent financial ser-vices and products is essential.
DJSI World awarded ANZ the leadership position in thebanking sector. ANZ–—the third largest bank inAustralia, founded in 1835–—offers various bankingand financial products for both private bankingand small- and medium-sized businesses. ANZ oper-ates in over 32 countries and serves 8 million cus-tomers, with revenue of AUD 16.7 billion. The reportsummarized ANZ’s sustainability performance, whichemphasized sustainable investment and social andenvironmental screening in the credit assessmentprocess, including micro-financing (SAM, 2012a, p. 1):
ANZ’s sustainable business practices, excep-tional risk and crisis management procedures,and its strong focus on sustainable investmentproducts have earned it the leading position inthe banking super sector. In addition to usingcomprehensive social and environmentalscreening tools for its credit assessment pro-cess, it is actively engaged in the financing ofrenewable energy and emissions trading.
The report described the CSR of the financial ser-vices sector similarly to that of the banking sector,except for the element of public mistrust. Like thebanking sector, globalization, stakeholder pressure,and climate change are key issues in the financialservices sector, and highly educated employees arethe most essential resource in regard to CSR prac-tices. Unlike the banking sector, the financial ser-vices sector emphasizes the environmental andsocial factors in its investments of financial prod-ucts. The report described the CSR practice of thefinancial services sector (SAM, 2012b, p. 2):
Leading companies integrate environmental andsocial factors into their long-term strategiesand performance reviews. A multi-stakeholder-driven approach to developing innovative
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and prudent financial services and products isessential.
While Itausa SA, the sector’s leader, may not haveachieved high rankings in environmental concern,the conglomerate has emphasized stakeholder rela-tionships and human capital in its CSR practices.Itausa SA is a conglomerate–—its main company isItau Unibanco Holdings SA–—whose businesses encom-pass the financial services sector, manufacturing sec-tor, petrochemical sector, and bank and businessautomation services sector. In 2012, Itausa employedmore than 122,000 worldwide. However, as reflectedby its scores, Itausa’s CSR focuses heavily on itseconomic dimension and business-related activities.Thus, the environmental and social dimensions of itsCSR practices are weaker than those of ANZ. Thereport stated that (SAM, 2012b, p. 1):
[Itausa] closely monitors the sustainable man-agement of all of its divisions, ensuring theeffective alignment of their environmental, so-cial, and cultural activities. To achieve long-term sustainable growth, Itausa places greatemphasis on stakeholder engagement and hu-man capital.
The insurance sector accommodates environmentalrisks, such as climate change and resource scarcity,into its businesses. As institutional investors, insur-ance companies invest the premiums of their policy-holders in public equity, bonds, real estate, andalternative investments such as private equity andhedge funds that have an impact on the environ-ment and the lives of people globally (VBDO, 2011).Although the insurance companies accommodateenvironmental risks into their businesses, SRI doesnot seem to have important strategic consequencesfor them (SAM, 2012c, p. 2):
Climate change and resource scarcity have be-come important issues as natural disasters andrelatively small events resulting from extremeweather conditions have well-known conse-quences for the insurance industry.
The leader of the insurance sector, Swiss Re, uses itsown expertise regarding risk management to analyzeits CSR risk. Established in 1863, Swiss Re has consis-tently been one of the major multinational corpora-tions (MNCs) in the global reinsurance sector. Swiss Reoperates a comprehensive portfolio that includesreinsurance, direct corporate insurance, direct lifeinsurance, asset management, risk transfer solu-tions, and health solutions. The company focusesits new products and CSR practices on serving emerg-ing and less developed markets. However, it appearsthat the stakeholder relationship–—except for
employees and development–—and governance issuesare not the primary focuses of its CSR practices (SAM,2012c, p. 1):
[Swiss Re] has adopted a comprehensive‘‘Sustainability Risk Framework,’’ which usestailor-made tools to identify, assess, andcontrol the group’s risk exposures. . . .[and]illustrate the company’s efforts in providingaffordable insurance to low income groups.
Besides the DJSI, there are other widely used sus-tainability indexes, including the FTSE4Good byFTSE; i-Ratings by Innovest; and Domini Social 400by KLD. These indexes commonly use both qualita-tive and quantitative information about environ-mental, social, and corporate governance issuesto measure and provide information on a company’ssustainability performance and practices.
Although the literature emphasizes the impor-tance of and increasing trend toward SRI and share-holder activism, the average CSR practices of largefinancial institutions do not typically include theseissues. In the next section, we examine two finan-cial institutions that have uniquely chosen to inte-grate SRI and shareholder activism into their CSRpractices.
4. SRI and shareholder activism inbusiness strategies
4.1. UBS AG
Founded by a merger between the Union Bank ofSwitzerland and the Swiss Bank Corporation, UBS AGis a Swiss multinational financial institution whosemain business is private wealth management, with astrong presence in retail and commercial bankingservices. Employing over 63,500 individuals in morethan 50 countries, UBS AG has five focused areas ofcorporate social responsibility: (1) governance andstrategy/responsible banking; (2) engagement andvoting rights; (3) corporate responsibility in oper-ations, including in-house environmental manage-ment, responsible supply chain management, andhealth/safety/accessibility; (4) employees; and(5) community investments.
UBS AG employs a top-down approach in regard toits CSR strategy. Typically, the board of directors andsenior management take the lead in matters relat-ing to corporate social responsibility. According toPhilip Lofts, a Group Chief Risk Officer (UBS AGCompany, 2013):
We [UBS AG] conduct our business in a sustain-able way and pay heed to human rights. . . .By
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including environmental and social consider-ations in our strategic thinking, risk manage-ment, and control framework, and in theproducts and services we offer our clients, wegain and retain business, enhance our reputa-tion, and position ourselves for future growth.
Led by Chief Investment Officer (CIO) Tom Naratil,a cross-divisional, values-based, and sustainableinvesting initiative was launched in 2011. This ini-tiative helps clients invest based on their personalethics and principles. The program aims to do morethan just achieve pure financial return; it enablesUBS AG to position itself as an industry leader inresponsible investing. To continue to strengthen itsefforts toward both preventing and combatting fi-nancial crime, the company has taken responsibilityto protect the integrity of the financial system aswell as the firm. UBS AG (2012b) is committed toassisting in the fight against money laundering,corruption, and terrorist financing. It worked closelywith environmental and social responsibility expertsto create new methods of screening potential busi-ness partners, vendors to UBS AG, and clients inrespect to issues regarding environmental risk. In2011, more than 11% (increased from 1.2% in 2009)of total invested assets of UBS AG were SRI investedassets.
UBS AG supports the Stewardship Code publishedby the UK Financial Reporting Council in 2010. TheCode aims to ‘‘enhance the quality of engagementbetween institutional investors and companies tohelp improve long-term returns to shareholders andthe efficient exercise of governance responsibili-ties’’ (Financial Reporting Council, 2013). In 2011,as a leader of the industry and active member of anumber of shareholder bodies, it voted on about50,000 separate resolutions at more than 4,600company meetings in order to participate in corpo-rate governance of companies in which it is in-vested.
The SRI team in the Global Asset Managementdivision in Switzerland communicates with compa-nies represented in the SRI funds it manages. Theanalysts and portfolio managers give feedback onrelated ESG issues that may impact the performanceof investments. This is part of the usual communi-cation process with corporate management teams.Once the SRI analysts receive controversial informa-tion on a company’s performance in environmentaland social contexts, the analysts provide the com-pany’s management with a chance to address how itis dealing with the problem and to give an account ofthe progress that has already been made. The an-alysts decide whether SRI is possible in the fundthrough the screening process (UBS AG, 2012a).
Finally, UBS AG is active in the community.In addition to making direct cash donations to com-munities–—for example, in 2011 it contributed CHF31.1 million to carefully selected not-for-profitpartner organizations and charities–—the company’scommunity investment program also includes a widerange of activities such as employee volunteering,matched-giving schemes, in-kind donations, disas-ter relief efforts, and partnerships with communitygroups, educational institutions, and cultural orga-nizations in all of its business regions (UBS AG,2012a).
4.2. The Co-operative Banking Group
A subsidiary of the Co-operative Group, whichboasts over 600 million members, the Co-operativeBanking Group (CBG) has become one of the largestfinancial institutions in the UK. CBG provides a widerange of insurance (Co-operative Insurance Society,founded in 1867) and banking (Co-operative Bank,founded in 1872) products and services. It is con-centrated in the northwest of England, wherethe majority of its 14,000 employees live (The Co-operative Banking Group, 2013).
The CBG focuses on six areas of CSR: (1) UK com-munities, (2) international development and humanrights, (3) animal welfare, (4) diet and health, (5)responsible finance, and (6) social inclusion. Thissection will focus on its ethical standards and respon-sible finance. Recognizing the importance of respon-sible finance in sustainable development, the CBGhas provided a comprehensive portfolio of productsand services to targeted sectors that promote sus-tainable development including renewable energy,energy efficiency, and the co-operative, charity, andsocial enterprise sectors.
Building on business integration and mutual co-operative heritage, the CBG tries to share a commonculture and one set of values with its employees,and thus develops a unified corporate community.Founded in the 19th century, the co-operative move-ment is based on a set of principles that includehonesty, openness, caring for others, and a commit-ment to social responsibility. Since the 1990s, theCo-operative Banking Group’s ethical stance, as wellas its social and environmental reputation, has re-flected these principles (CBI, 2005).
In the late 1980s, much of the UK banking industrysuffered from a reputation crisis and low profitabili-ty. The Co-operative Bank sought to recover fromthis blow by looking to its co-operative heritage andusing that to reinvigorate the brand with a moderninterpretation of co-operative values. According toresearch performed by the bank, a small but signifi-cant proportion of its customers joined because of
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ethical reasons (CBI, 2005). This discovery served askey momentum for the development of an EthicalPolicy to guide investments.
The first such Ethical Policy, published in 1992,pledged to invest customers’ money in companiesthat do not repeatedly damage the environment. In1996, the bank announced its Ecological MissionStatement; this reflected its appreciation of theminimum ecological conditions necessary for a sus-tainable society. In 1997, the bank introduced itspartnership approach; it recognized that the nextinevitable step entailed commitment to deliveringstakeholder value in a socially responsible and eco-logically sustainable manner (The Co-operativeBanking Group, 2013).
In 2003, the Co-operative Bank found that 17% ofits profitability could be attributed to those custom-ers whose primary motivation for using its serviceswas its ethics. In addition, 30% of its profitabilitycould be attributed to customers who believe thatethics is an important factor. This result is relativeto the £6.9 million of income lost due to ethicalreasons, estimated from the business rejected bythe bank’s Ethical Policy Unit (CBI, 2005). Further-more, compared with a stereotypical customer,ethically motivated customers generally come fromhigher socio-economic groups, are more likely toown multiple bank products, and are more likelyto be attached to the bank and recommend it totheir peers.
Many financial service organizations produce so-cial and environmental reports, but few subjecttheir core business activities to open, independentscrutiny. During 2011, Co-operative Bank’s EthicalPolicy Unit reviewed 437 financial opportunities, anincrease from 408 in 2010. Thirty-five of them (8%)were declined due to conflict with the bank’s EthicalPolicy (The Co-operative Banking Group, 2012).Corporate banking customers with a turnovergreater than £1 million are directly investigatedand annually reviewed for ethical compliance bybusiness development managers. In addition, allreferrals to the Ethical Policy Unit are subject toindependent third-party scrutiny. Approximately£18 million was lost in 2011 as a result of the ethicalscreening of the bank (The Co-operative BankingGroup, 2012).
However, this strict ethical policy has providednet benefits to the bank. Since 2008, when manyfinancial services providers experienced reducedsupport from the voluntary sector, the bank hasactually doubled the number of charities doingbusiness with it. In 2011, bank deposits from social,co-operative, and environmental businesses totaled£2.88 billion, which amounted to approximately42% of its total corporate and business banking
liabilities. Of this amount, community and charita-ble deposits grew by £127 million and public servicedeposits by £220 million (The Co-operative BankingGroup, 2012). In fact, the Financial Times and theInternational Finance Corporation chose the bank asEurope’s most sustainable bank in 2010 and 2011(The Co-operative Banking Group, 2012).
5. Conclusion and discussion
In this article, we presented an overview of corpo-rate social responsibility in the financial sector. Wefocused on how SRI and shareholder activism areintegral parts of CSR. We showed how SRI andshareholder activism have evolved over time inthe financial sector. Fund managers incorporateSRI practices to improve the performance of theirfunds as well as change the social, environmental,and corporate governance practices of companies inwhich they invest. Thus, SRI and shareholder activ-ism of financial institutions will be transferred toCSR practices of companies. In this vein, the role ofmultinational financial institutions is very importantdue to the lack of institutional pressure on CSRpractices in developing and less developed coun-tries. Multinational financial institutions can provideCSR guidelines to multinational corporations oper-ating in such countries. Although the role of finan-cial institutions in CSR focuses more on indirect andintermediate characteristics than direct ones, itrelates to sustainable economic development.
We examined how the financial sector and itsfirms were evaluated and rated via the most widelyused sustainability index, the Dow Jones Sustain-ability Index. We found that financial institutionsare, overall, underperforming from the CSR point ofview as compared to companies in other industrysectors. In particular, CSR performance in environ-mental and social dimensions of financial servicessector companies is worse than that of the other twofinancial subsectors (i.e., the insurance and bankingsectors). Looking at a leading institution in each ofthe three financial subsectors showed that evenleading financial institutions do not employ proac-tive practices in socially responsible investmentsand shareholder activism. It appears that most ofthe financial institutions are not doing right andinvesting right. . .yet.
We provided two cases of companies, UBS AG andthe Co-operative Banking Group, that engage pro-active practices as regards CSR. In the example ofUBS AG, we showed how a financial institution canmonitor the corporate social responsibility practicesand performance of companies, and provide suchinformation to investors. Although some clients may
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leave for other financial institutions due to the strictethical standards and shareholder activism of thefinancial institution, the same activities will attractmore and loyal value-based and value-enhancingcustomers. Thus, SRI and shareholder activism canprovide a competitive edge to financial institutions.In addition, the monitoring and information gate-keeping roles can improve social welfare by reduc-ing capital costs of socially responsible companies.
If financial institutions keep underperforming inCSR, it would be impossible for them to successfullymonitor the CSR practices and performance of othercompanies; it would eventually defame their repu-tation. In this environment, leading financial insti-tutions in CSR will enjoy their first-moveradvantages in an ever-growing CSR market. Partic-ularly in the last decade, the SRI market has wid-ened and now offers pension funds, employeeretirement savings options, and various insuranceproducts. Consequently, CSR products are not onlytargeting value-based investors but also value-seek-ing and enhancing investors. Financial institutionsneed to proactively accommodate CSR strategiesinto their daily operations.
Finally, we found that it took time and effort toestablish ethical standards throughout an organiza-tion (e.g., the Co-operative Banking Group) and torebuild a company’s reputation and trust. Therefore,before financial institutions begin to monitor thesocially responsible behaviors of companies and pro-vide information on such behaviors to investors, theyneed to regain the trust from their customers thatwas lost during the last economic and financial crisisby doing right (Herzig & Moon, 2013). According toChristoph Ammann, Chairman of the Bank Sarasin ofSwitzerland, ‘‘We do not believe that charitabledonations are appropriate to rebuild trust in banks.’’The bank gives to a number of charities, including theRoger Federer Foundation; however, ‘‘charitabledonations are not the cornerstone of Sarasin’s com-mitment to being a sustainable bank. Trust cannot bepurchased, but has to be gained on a day-to-day basiswhen delivering on commitment to clients and thepublic’’ (Scott, 2010).
The practice of doing right and investing right byfinancial institutions will make positive differencesnot only in regaining their reputations, but also inpromoting sustainable development of the world.
Acknowledgment
We would like to thank W. Travis Selmier, guesteditor of this special issue, for his constructivecomments and guidance. Financial support to thefirst and third authors for this project was provided
by the National Research Foundation of Korea (NRF-2011-330-B00092).
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