sustainable development and socially responsible finance and investing

Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment

Sustainable DevelopmentSust. Dev. 16, 137–140 (2008)Published online in Wiley InterScience(www.interscience.wiley.com) DOI: 10.1002/sd.359

Sustainable Development and Socially Responsible Finance and Investing

Guest editors: Bert Scholtens,1 Pontus Cerin2 and Lars Hassel2,3

1 Centre for International Banking, Insurance and Finance, University of Groningen, Groningen, The Netherlands

2 Umeå School of Business, Umeå University, Umeå, Sweden3 Department of Accounting, Åbo Akademi University, Turku, Finland

Received 15 January 2008; revised 7 February 2008; accepted 14 February 2008

Keywords: sustainable development; fi nancial markets; socially responsible investing

SUSTAINABLE DEVELOPMENT DOES COME AT A COST, BOTH IN MATERIAL AND IN FINANCIAL TERMS. How high this cost will be is not very clear. In part, this results from the fact that, despite the

numerous defi nitions of sustainable development,1 there is no society-wide well accepted stan-

dard defi nition. For example, the United Nations division for sustainable development lists 30

areas as coming within the scope of sustainable development. Among these areas, very broad issues

such as biodiversity, climate change, consumption and production patterns, education and awareness,

health, industry, international law, science and waste are mentioned. Therefore, it seems very hard to

come to grips with a concise and practical defi nition of sustainable development. Nevertheless, some

estimates of (constituents of) the costs of sustainable development have been made. For example, the

famous Stern Review (Stern, 2007) on the economics of climate change estimates that if no action is

taken the overall costs and risks of the change in the climate may be equivalent to losing at least 5% of

global gross domestic product (GDP) each year. This cost will remain forever. If a wider range of risks

and potential effects is taken into account, the estimates of the damage of climate change could rise to

20% of GDP. However, if immediate action were undertaken – reducing greenhouse gas emissions to

avoid the worst impacts of climate change – it could be limited to around 1% of global GDP each year.

According to the Stern Review, the investment in mitigating and reducing climate changes that will take

place in the next 10–20 years will have a profound effect on the climate in the second half of this century

and in the next. Current actions and policies over the coming decades could create risks of major dis-

ruption to economic and social activity, on a scale similar to those associated with the great wars and

the economic depression of the fi rst half of the 20th century. Regarding world poverty, similar estima-

tions have been made (e.g. Pogge, 2007): a relatively small amount of world GDP would suffi ce to get

rid of world poverty. However, note that world GDP is estimated by the IMF and World Bank to be about

US$ 48 245 billion in 2006, implying that even small percentages are to be associated with enormous

amounts of money. Furthermore, it is not clear whether the proposals by Stern and Pogge can really be

successful and whether they are complementary in any respect. Moreover, it is not clear at all whether

the same order of magnitude with respect to investment holds in other areas of sustainable development

1 See for example Susan Murcott, Massachusetts Institute of Technology ([email protected]), AAAS Annual Conference, IIASA Sustainability Indicators Symposium, Seattle, WA, 16 February 1997.

138 B. Scholtens et al.

Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment Sust. Dev. 16, 137–140 (2008)DOI: 10.1002/sd

(such as the loss of biodiversity). However, reports such as the Stern Review do reveal that considerable

sums of money are involved in dealing with climate change.

Traditionally, subsidies and taxes are a means of channeling funds to and from industry. This is

usually within the realm of government policy, as well of course as more direct command and control

regulations. These policies are widely applied with respect to various aspects of sustainable develop-

ment. Nevertheless, there are no clear signals that sustainable development is more achievable today

thanks to this government policy. On the contrary, some argue that we increasingly drift away from a

sustainable economic development (see Stern, 2007). As business is regarded as part of this problem

(e.g. by Pogge, 2007) and even as a cause of unsustainability, it seems logical to look into the private

sector for investing in sustainable development too. The private sector has huge fi nancial resources that

might be used to the avail of sustainable development. Financial markets are enormous in size and

gigantic fl ows of money change hands every day. So far, very little of these resources is directed at sus-

tainable development. One of the methods that can be used to arrive at funds to make economic con-

sumption and production more sustainable is via the stock market (Scholtens, 2006). An example is

socially responsible investing. By investing in fi rms that refrain from harming the environment or

people, that have more and better systems in place to achieve environmental and social goals or that

show a particular ethical conduct, investors have the opportunity to make available more funds and/or

funds at a lower cost for the fi rms that try to operate in a more sustainable or responsible manner. To

make their investment more socially responsible, investors will have to assess which fi rms perform

according to their preferences and are in line with sustainable development. For most investors, this is

relatively new as, basically, they are used to investigating mainly the fi nancial return and risk character-

istics of stocks. Therefore, apart from fi nancial information, they will have to assess and account for

information about social, environmental and ethical policy and conduct of the fi rms they consider

investing in.

At the 13th International Sustainable Development Conference held by the International Sustainable

Development Research Society (ISDRS), 10–12 June 2007 in Västerås, Sweden, about 280 scholars from

six continents met during three days and shared lively discussions. One of the tracks was on socially

responsible investing. It was the fi rst time the ISDRS paid specifi c attention to this issue. In four ses-

sions, 12 papers were presented and discussed by an audience of about 60 scholars. As such, it was a

very lively meeting and many participants were enthusiastic. The organizers of the track contacted the

editor of Sustainable Development, Richard Welford, who offered his help. The result was that fi nally six

papers were selected for a special issue of Sustainable Development. Given the nature of the topic and

the background of the journal, it will be clear that a multidisciplinary approach has been chosen. As

such, we have research that goes into investors’ motives to impact on fi rms’ conduct and policy regard-

ing social responsibility. Furthermore, the role of institutions in investors’ behavior is accounted for.

Special attention is paid to the ways in which investors try to account for non-fi nancial information.

Then, there are empirical studies that go into the connection between environmental and fi nancial

information and that assess how fi rms’ performance regarding different elements of corporate social

responsibility can be associated with their fi nancial risk and fi nancial return.

Sjöström goes into shareholder activism for corporate social and environmental responsibility. Share-

holder activism relates to actions of owners of stock trying to impact on the policy of the fi rm in which

they own stock. Different types of institution engage in shareholder activism with a socially responsible

agenda. Sjöström’s paper is an overview of the literature on this topic during 1983–2007. She fi nds that

it appears that three different fi elds of analysis emerge. The fi rst is studies that address the issues and

voting results of shareholder proposals in the US, and identify typical targets for such activism. The

second is studies that look into the effects of shareholder activism on corporate policy and practice. The

third is studies that can be grouped by the type of institution that conducts shareholder activism,

Sustainable Development and Socially Responsible Finance and Investing 139


especially NGOs, unions and pension funds. On the basis of this review, Sjöström tries to identify

missing perspectives in the analysis of shareholder activism.

The research of Bengtsson draws attention to how contextual factors shape the principles and practices

of socially responsible investors in Denmark, Norway and Sweden. He fi nds that institutional factors

are important in explaining homogeneity among Scandinavian investors in socially responsible invest-

ments (SRIs). Furthermore, institutional factors also contribute to signifi cant variation in SRI principles

and practices between and within countries. In particular, the fi ndings draw attention to the different

opportunities available to individual investors, and the strategies they adopt in their application of

SRI.

Henningsson tries to fi nd out how fund managers make sense of social, environmental and ethical

information about companies. The paper uses a qualitative research approach involving in-depth inter-

views with fund managers in Sweden. The analysis is infl uenced by a combination of system

and network theories where social networks are imposed on fund managers when they make sense of

corporate information. With reference to a growing SRI market, the rationales of social forces imposed

on fund managers do not seem to have changed in order for them to include social aspects. Instead

these aspects are taken care of elsewhere in organizations, leaving fund managers as nodes in social

networks outside. However if social aspects become an issue for the market positioning of companies,

they could probably make more of a difference for the rationales of social forces surrounding fund

managers.

Cunningham, Hassel and Nilsson analyze how the reporting of environmental information goes along

with fi nancial information. They fi rst give an overview of the research to date and fi nd that it predomi-

nantly has focused on the nature of the information reported by companies. Cunningham et al. extend

this prior research by examining the inclusion of environmental information by fi nancial analysts in

their research reports of companies in the chemical industry and in the oil and gas industries. Doing

so, they take a geographical perspective, dividing their subset into two regions, Europe and North

America. They fi nd that only about one-third of the analysts’ reports include any environmental infor-

mation. They fi nd that reports with environmental information are more extensive for North American

companies than for European-based companies. Cunningham et al. also observe that analysts tend to

report more environmental information on companies in their home regions. They also compare the

two industries and fi nd that it appears that the chemical industry is subject to more attention by analysts

than the oil and gas industry.

Hassel and Semenova provide a diversifi ed approach to explore the relationship between environmen-

tal and fi nancial performance by introducing risk- and opportunity-related extra fi nancial information.

Financial outcomes of risk and opportunity depend on two main factors, the inherent environmental

risk of the industry and the company specifi c environmental risk. Company specifi c risks can be

managed by using the opportunities of environmental preparedness and performance. Preparedness

measures the readiness of the company to meet future environmental demands, and performance how

well the company manages current processes from an environmental point of view. Financial perfor-

mance of the company is measured by operating performance by using return on assets, and market

value by using Tobin’s Q (the relation between market and book value of the fi rm). The study also con-

trols for several company-specifi c variables. They show that the inherent environmental risk of an

industry is, in line with the risk–return paradigm, positively related to operating performance, but

negatively related to the market value of companies when studying industries with different social

norms. Environmental preparedness and performance are both signifi cantly and positively related to

market value and operating performance of US companies. When analyzing industries with different

inherent risks, different relations with operating performance emerge. In high risk industries, environ-

mental management as a means to decrease fi rm specifi c risk is costly. The practical implications are

140 B. Scholtens et al.


that investors should target profi table companies in industries with high inherent risk whose market

value can be improved through environmental preparedness and performance.

Scholtens and Zhou aim to investigate how social responsibility performance is connected with the

fi nancial performance of the fi rm. They analyze the trade-off between corporate shareholder perfor-

mance and stakeholder relations by employing a panel fi xed effect model with robust techniques. The

analysis is based on 289 US fi rms and a 14 year time period. They investigate the upside and the down-

side of fi nancial performance and stakeholder relations. They fi nd no support for a positive association

between fi nancial performance and social strengths, which has been suggested by many previous

studies. In fact, there appears to be a weak negative association between corporate fi nancial performance

and both stakeholder strengths and concerns. This suggests that if management tends to satisfy share-

holders by reaching a higher stock return, stakeholder interests have to be sacrifi ced. Furthermore,

Scholtens and Zhou fi nd that fi nancial risk is signifi cantly related to stakeholder concerns, but not to

stakeholder strengths. Therefore, it appears that risk primarily is affected by socially controversial

activities.

To conclude, this special issue covers key elements that play a role in socially responsible fi nancing

and investing and brings forward new results and perspectives. It also reveals the richness of the fi eld

and the scope for additional research in this direction. Therefore, it is highly unlikely that these papers

will be the last in this journal to investigate how fi nance is connected with sustainable development.

The special issue editors very much hope and expect that the debate will continue and invite researchers

to discuss their ideas within the community of the International Sustainable Development Research

Society.

References

Pogge T. 2007. World Poverty and Human Rights. Polity Press: Cambridge.

Scholtens B. 2006. Finance as a driver of corporate social responsibility. Journal of Business Ethics 68(1): 19–33.

Stern N. 2007. The Economics of Climate Change. Cambridge University Press: Cambridge.

sustainable development and socially responsible finance and investing

Documents