what is a socially responsible or ethical investment? when ... · socially responsible investments...

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Socially Responsible Investments

Silvana SignoriUniversity of Bergamo

[email protected]

What is a socially responsible orethical investment?

When an investment is ethical (orsocially responsible)?

Silvana Signori – University of Bergamo 2A.A. 2012-2013

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Terminology

• Ethical

• Socially responsible

• Social

• Green

• Alternative

• Targeted

• … ... investing or investment


A definition

“Ethical investment” or “sociallyresponsible investment” is broadly definedas the integration of personal values,social considerations and economicfactors into the investment decision”

(Michelson et al., 2004, p. 1)


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Another definition

In a broad sense ethical investment is ‘‘theexercise of ethical and social criteria in theselection and management of investmentportfolios, generally consisting of companyshares (stocks)’’.

(Cowton, 1994)


“Ethical investment refer to a set of approacheswhich include social or ethical goals in additionto more conventional financial criteria indecisions over whether to hold a particularinvestment” (Cowton, 1999, p. 99)

“In ethical investment we are interested in how acompany makes its money, not just how much”

(Cowton, 1999, p.99)

A.A. 2012-2013 6Silvana Signori – University of Bergamo

‘‘There’s nothing wrong with making money but it’s how you make the money that counts’’ (Murray, 2003)

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Selection and management

TO HOLD

=

To buy

To sell

To maintain

To manage

…


Ethical investors

� Individuals - private investors� Groups� Institutions� Public investors� …� Religious organization� Pension funds� University (foundations)� …

� Financial and non financial institutions

� Managing their own or someone else money


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Development of SRI

The prima facie ethical case for SRI is thatinvestment should not be immune fromethical scrutiny, for there is nothing specialabout investment in general that warrantsits exclusion from the ethicalconsiderations that are brought to bear onother areas of life

(Bourke, 1997; Capital: A Moral Instrument?, 1992; Sparkes, 1998 quoted in Sparkes and Cowton, 2004).


Ethics and investments

Any individual or group which truly caresabout ethical, moral, religious or politicalprinciples should in theory at least want toinvest their money in accordance with theirprinciples’’ (Miller, 1992, p. 248).

→ approving of an immoral action is immoral

→ making profit from it indicate acquiescence …


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A brief history

- Religions (Jewish, Christian and Islamiclaws)

- Social, political and environmentalmovements (e.g.: apartheid in SouthAfrica)


Two investor motivations

• “Feel good” investors

→ Feel the need to put their money alignedwith their personal values and priorities

• “Social change” investors

→ Feel the need to support and encourageimprovements in quality of life (or incorporate behaviour)


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Three strategies

Screeningis the practice of including or excluding companies (orStates) based on social and/or environmental criteria.

Engagement (or shareholder activism)involves SRI who take an active role as owners(shareholders). These efforts include dialoguing withcompanies, filing, co-filing and voting resolutions.

Community investingprovides capital and other services to communities

underserved by traditional financial services institutions.Silvana Signori – University of Bergamo 13A.A. 2012-2013

Screening

Screening is the practice of excluding orincluding companies from investmentportfolios based on a range of social andenvironmental criteria.

(Michelson et al., 2003)

� Negative screening = “never if”

� Positive screening = “only if”A.A. 2012-2013 14Silvana Signori – University of Bergamo

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Negative screening = avoidance

AVOIDANCE

WHAT ?-Tobacco-Alcohol

-Gambling-Military contracting

-Pornography-GMO

-Etc.

HOW ?- Treatment of employees

- Advertising practices- Environmental concerns

Etc.

WHERE ?

Common negative screens � Armaments and nuclear weapons� Alcohol� Hazardous substances (such as pesticides,chlorine)� Environmentally damaging practices� Poor employment practices� Animal exploitation (e.g. fur industry, factory farming)� Activities, processes or products that have a major impact on climate

change (e.g. automobile, oil and gas industry, road building, etc.)� Ozone-depleting substances� Nuclear energy� Gambling� Animal testing� Genetic engineering� Tobacco� Oppressive regimes� Pornography� …


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Positive screening = supporting

SUPPORTING

WHAT ?-Healthy food-Green energy

-Organic producing-Pollution control equipment

-Etc.

HOW ?- Treatment of employees

- Advertising practices- Environmental concerns

-Etc.

→ Stakeholder analysis


Common positive screens (1)

HumanResources

Integration of human resources issues intocorporate strategy,Promotion of labour relations,Encouraging employee participation,Career development,Training and development,Quality of remuneration systems,Improvement of health and safetyconditions,Respect and management of working hrs.

Source: Vigeo


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Environment

Environmental strategy and eco-design,

Pollution prevention and control (soil, accident),

Development of "green" products and services,

Protection of biodiversity,

Protection of water resources,

Minimising environmental impacts from energy use,

Management of atmospheric emissions,

Waste management,

Management of local pollution,

Management of environmental impacts fromtransportation,

Management of environmental impacts from the useand disposal of products/services.

Source: VigeoA.A. 2012-2013 19Silvana Signori – University of Bergamo

Customersand Suppliers

Product safety,

Information to customers,

Responsible Contractual Agreement,

Sustainable Relationships with suppliers,

Integration of environmental criteria inthe purchasing process,

Integration of social criteria in thepurchasing process,

Prevention of corruption,

Prevention of anti-competitive practices.

Source: Vigeo


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HumanRights

Communityinvolvement

Respect for human rights standards andprevention of violations,Respect for freedom of association andthe right to collective bargaining,Elimination of child labour and abolition offorced labour,Non-discrimination.

Promotion of social and economicdevelopment,Societal impacts of company's productsand services,Contribution to general interest causes.

Source: VigeoA.A. 2012-2013 21Silvana Signori – University of Bergamo

CorporateGovernance

Board of Directors,

Audit & Internal Controls,

Shareholders’ rights,

Directors & Key Executives

remuneration.

Source: Vigeo


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Negative and positive screening

1) Negative + positive selection

2) Trade off between good and bad features


Bad performance

Good performance

The application of screening

� Not static

� Extension

� Primary and secondary involvement

� Significance/thresold

� Best-in-class or best-in-industry approach


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Best-in-class approach

A best-in-class or best-in-industry approachallows to compare companies within thesame industry sector (usually a “critical”sector) and ranked against each other, notagainst those outside the industry.

� To seek good financial returns

� To improve the overall social performance of firms in particular sectors (chimical, mining, automobile, etc.)


The question of information

Information is vital for the successfulimplementation of ethical investment criteria.

Sources: corporate annual reports (financialand ethical/social reporting), press releases,newspaper articles, statistics, etc.

- Reliability, availability and cost

→ social rating agencies


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The need of transparency

Ethical investment as a process…

The identity of specific criteria might becomeless important than ‘‘… the way in whichissues are identified and considered, thedegree of information obtained, (and) theaction that is taken in response’’ (Taylor,2001, p. 59 quoted in Michelson et al.,2004, p. 4).


Engagement or shareholder activism

Engagement can be defined as“influencing corporate policy by virtue ofthe position as investor and the associatedrights”

(Hummels et al., 2004)

� Exit vs voice (Hirschman, 1970)


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How do you do it?

Private methods

■ Raising questions or discussionof social issues in routinemeetings between institutionalinvestors and companymanagement.■ Writing to companymanagement about issues ofconcern.■ Arranging special meetings todiscuss such matters.■ Writing to other shareholders toexpress concerns.■ Joining with other like-mindedinvestors to undertake some or allof the above.■ Informing other investors on thedialogue as to build up pressure.

More public mechanisms

■ Attendance at annual generalmeetings to ask questions.■ Proposing shareholderresolutions.■ Exercising voting rights, e.g. onthe adoption of the report andaccounts or the re-election ofdirectors.■ Calling an extraordinary generalmeeting.■ Issuing press briefings.

Source: Just Pensions, a guide for trustees and fund managers, May 2001

29Silvana Signori – University of Bergamo

Soft and hard engagement

Dialoguing

Filing resolution

Voting

Comunication

Exit

Support

Soft engagement

Hard engagement

Shareholder activism


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Shareholder resolutions

Shareholders in a publicly traded company mayintroduce shareholder resolutions, or proposals, tothe company management to be voted on in thenext annual proxy vote. These resolutions maypertain to company policies and procedures,issues of corporate governance, or other issues ofsocial responsibility or environmental concern.Shareholder resolutions are a powerful way forshareowners to encourage corporate responsibilityand discourage company practices that areunsustainable or unethical. (www.ussif.org)


Who may file a resolution?

The U.S. Securities and Exchange Commission (SEC)recognizes that generally any shareowner holding atleast $2,000 in stock, for a minimum of one year priorto the company’s annual submission deadline, mayintroduce a shareholder resolution. However, formaximum efficacy it is recommended that individualscome together to form a shareholder coalition in orderto increase the impact of their proposal. Often, ashareholder resolution will fail to win a majority ofvotes, but still succeed in persuading managementdecisions because the resolution was favored by asignificant number of shareholders. (www.ussif.org)

A.A. 2012-2013 32

Silvana Signori – University of Bergamo

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What is a Proxy Voting?

Shareholders, as owners of a publicly tradedcompany, have the right to weigh in on importantissues by participating in proxy voting.Shareholders affect change in management’spolicies and procedures through participation inthe company's annual general meeting either inperson, or more commonly, by proxy votingremotely, via mail, phone, or online. Proxy votingis the primary means by which shareholders areable to direct company management to act in asocially responsible manner. (www.ussif.org)


Proxy Voting (2)

Prior to the annual meeting, every shareholderin a company receives proxy resolutions (orproxy statements) and voting materials, via mailor email. These materials inform investors ofissues for consideration at the annual meetingeach year. It is important to review all materials,read the resolutions presented by othershareholders, and vote your proxy ballots inaccordance with your values and what youbelieve will improve the company's bottom line.

(www.ussif.org)


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Shareholder resolution process

Source: O’Rourke, 2002


Focus on …

� Shareholder activism vs shareholderadvocacy (advocacy campaigns)

� Coalitions (e.g.: ICCR – the InterfaithCenter for Corporate Responsibility)

� Transparency


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SRI strategies in the lifetime of an investment process

Combined strategies

Voting

Engagement

Positive screening

Negative screening

DivestmentPost-investmentPre-investment

Source: EUROSIF

Community investing

Community Investing consists on providingcapital and other services to communities(but also sectors, people, etc.) that areunderserved by traditional financialservices institutions.


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How does community investing work?

Community investing institutions useinvestor capital to finance or guaranteeloans to individuals and organizations thathave historically been denied access tocapital by traditional financial institutions.


…. follows

The community investing institutiontypically provides training and other typesof support and expertise to ensure thesuccess of the loan and its returns forinvestors.

(www.ussif.org)


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What does community investing do?

Community Investing projects are smalland local, and work by lending individualsand local groups the capital they need toimprove their own communities in a sociallypositive and environmentally sustainableway. They focus on affordable housing,small business creation, development ofcommunity facilities, and the empowermentof women and minorities. (www.ussif.org)


Does ethical investment hurt/pay

financially?


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source: Kurtz, 2000

Markowitz Right

Markets are pretty efficient, and

investors owning a subset of the

market portfolio must therefore

incur a diversification cost.

Markowitz Wrong

Investors owning a subset of the

market portfolio do not necessarily

incur a diversification cost.

Moskowitz Right

A portfolio of socially

responsible

companies should

outperform a portfolio

of less-responsible

firms.

No Contradiction: Financial

markets are efficient enough that

SRI portfolios incur a diversification

cost, but inefficient enough for this

cost to be offset by an SRI

anomaly.

Contradiction: The fact that SRI

portfolios do not appear to

outperform market benchmarks

remains unexplained.

Moskowitz Wrong

A firm’s social record

has no bearing on its

stock performance.

Contradiction: The fact that SRI

portfolios do not appear to

underperform market benchmarks

remains unexplained.

No Contradiction: SRI portfolios

have the same performance as

unscreened portfolios because

screening introduces no

unaddressable diversification costs

and there are no tradeable

information effects.

Effects due to managerial criteria

PERFORMANCE

Geographic and/or

sectorial diversification

Diversification

Information costs

Forecast

Small cap

growth

Segmentation Markets and/or

investment sectors

Fund Management

ability

Information

Timing

Learning

Fund dimension

Risk adjustment

Effects due to the investor’s ethical selection


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Ethical or traditional benchmark?

One major challenge is to choose an appropriate'benchmark' portfolio against which to judgeperformance. A general stock market indexmight seem to be a good yardstick, but ethicalfunds tend not to be invested in many of thelarger companies because they are likely tocontravene at least one negative criterion.

(Cowton 1991)


low

high

low

high

Ren

dim

en

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en

dim

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t

I II

IIIIV

Ethics Ethics


Trade-off ethics/profit

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Ethical complexity

- Lack of homogeneity- Pluralistic society

- In criteria adopted by SRI

- In the application of the criteria

- The need for transparency

- Eurosif transparency guidelines

- etc.


From margin to mainstream?

- Institutional investors’ economic and socialpower

- Government legislation

- Ethical indexes (Dow Jones sustainabilityindexes, FTSE4Good, Ethibel, etc.)


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Bibliography

- Cowton C.J. (1999), “Accounting and financial ethics: from

margin to mainstream?”, Business Ethics: A European Review,Vol. 8 n. 2, p. 99-107

- Schueth S. (2003), “Socially Responsible Investing in the

United States”, Journal of Business Ethics, Vol. 43, p. 189-194

- Michelson G. et al. (2004), “Ethical Investment Processes and

Outcomes”, Journal of Business Ethics, Vol. 52, p. 1-10

- Sparkes R., Cowton C.J. (2004), “The Maturing of Socially

Responsible Investment: A Review of the Developing Link With

Corporate Social Responsibility”, Journal of Business Ethics,Vol. 52, p. 45-57.


To know more…

Websites suggested:

- www.ussif.org - The Forum for Sustainableand Responsible Investing

- www.eurosif.org

- www.iccr.org

- …


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