Selections from a research paper on socially responsible investing and CSR
Encouraging CSR through Socially Responsible Investing
Socially responsible investing’s (SRI) recent move from fringe to mainstream has put additional pressure on companies to adopt sound corporate social responsibility (CSR) practices. From its roots in the Quaker Church to its current 3.7 trillion dollar share of investment funds, SRI has the potential to reward companies for their CSR efforts or give shareholder advocates a seat at the negotiating table. While there is some debate about which SRI investment strategies have the potential to do the most good, scholars generally agree that SRI is becoming more popular and its role in CSR will continue to grow.
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Why do investors engage in SRI?
Some investors only take issues like environmental and social problems into account when there is the potential for those things to affect the bottom line (Richardson & Cragg, 2010), but for many investors, SRI is a way to achieve financial goals while contributing to changes that could improve quality of life (Schueth, 2012; CHRISTUS Health, 2005). According to Schueth (2012), there are two types of SRI investors: the “feel good” group, and the “social change” group. The first is motivated by a desire to put their money to work “in a manner that is more closely aligned with their personal values and priorities,” (p. 190). The second group of investors is motivated by the feeling that they need to “put their investment capital to work in ways that support and encourage improvements in quality of life,” (p. 190) – rather than just engaging in SRI for internal harmony, the “social change” investors are looking to influence corporations and make a real changes in the world around them.
Lewis’s focus group study however, contradicts Schueth’s definition of the two investor types. Lewis (2001) conducted focus groups with “ethical” investors and “ordinary” investors in order to compare their motivations and feelings about their investments. His findings do validate Schueth’s “feel good” group in that members of the ethical investors focus groups seemed to have “put their sympathies into action, thereby maintaining a coherent ‘lifestyle’,” (p. 339). However, focus group participants did not mention a desire to pressure companies to change through their ethical investments. Where were the “social change” investors that Schueth described? One reason for this discrepancy may be that Lewis’s research focused on individual investors as somewhat independent actors. I agree with Schueth’s dsitinction of the two motivations for SRI, but believe that the “social change” type is more common among those with a group investment identity rather than an individual. It is clear from other research that nonprofits, unions, churches, and many other groups do indeed invest with the purpose of influencing corporate policy (CHRISTUS Health, 2005; Conyers, 2007; Moeller, 1984; Viviers & Eccles, 2012). Similarly, Colle and York (2009) point out that “to effectively engage with companies, one must first become an active stakeholder: silence does not pay,” (p. 88).
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Developing an SRI Strategy
By compiling all of this information and scholarly research, we can formulate a plan for creating a sound SRI program for a nonprofit, foundation, labor union, university, or other group looking to invest. Just like any CSR initiative, an organization should start with their mission statement and core values. The organization must determine its principle issue(s) or “pet project” – whether that is the environment, human rights, employee engagement, or a combination of many things – and determine what that might look like as an investment.
The organization should then decide which investment strategy or strategies it would like to utilize – positive screening, negative screening, shareholder advocacy, community investment, or some combination of these. This will likely depend on the amount of time and expertise the organization is willing to allocate to the SRI effort; negative screening is generally the easiest of the investment models, but as previously discussed, there are significant disadvantages to consider. Ideally, an organization should use a combination of screening (with a greater emphasis on positive screening) and shareholder advocacy. I agree with Colle and York’s assertion that negative screening should not be used as a “quick answer” just to avoid what some might consider “sin stocks.” If an organization does decide to use negative screening, members should look deeper into the issues and consider things like the way a firm deals with the impacts of its products rather than just the products themselves. For example, a vineyard may be initially screened out because it factors into “sin stock,” but the company may have a strong CSR program in which they educate college students about responsible consumption, fight for fair wages for migrant workers, and engage in sustainable harvesting practices. If an investment organization decides to include negative screening, it must be careful of throwing out a company before all information is considered.
It is incredibly important that an organization include all of its relevant stakeholders while formulating the SRI program. For example, if a university is developing an SRI program, Armoza (2011) suggests that leaders form a committee with students, faculty, and board members all represented. If all stakeholders have a voice in how the SRI policy is developed there will likely be higher buy-in among members of the organization.
The next step is for the organization to gather detailed, reliable, and perhaps most importantly up-to-date information and fact sheets about companies that may be a good fit for the investment portfolio. The criteria for investment (developed in previous steps through the mission, core values, and investment strategy) should match up with the actions and characteristics of the company in order for the company to be included in the investment portfolio. Again, representatives of each stakeholder group should be involved and have a say in the process of matching companies to the SRI criteria.
Once the organization selects the companies to invest in, there must be constant monitoring and adjustment of both the SRI strategy/criteria and the companies included in the portfolio. Of course there may be financial repercussions for not monitoring an organization’s SRI, but there is also the potential for damage to reputation. If a company in the organization’s portfolio starts making poor choices in its environmental policies or other CSR areas, there is a good chance it will reflect poorly on the investing organization if they are slow to react.
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There’s still work to be done
All of the trends pointed out in the literature suggest that SRI will continue to grow, becoming increasingly common and less of a specialized market. Corporations that have not yet developed a sound, mature CSR culture will likely lose out on investment dollars as more and more money is allocated using positive screening (the trend predicted by Sparkes and Cowton [2004]). I believe it is indeed in the investors’ best interests to move away from the current trend of negative screening, and I agree with Sparkes and Cowton that the percent negative screening will slowly start falling from the current 73%. As SRI becomes more popular and is taken more seriously, organizations will likely be more willing to allocate additional time and resources towards the research needed to engage in more diverse investment models like shareholder advocacy.
From a research standpoint, more quantitative studies must be conducted to determine SRI’s impact on company behavior (Viviers & Eccles, 2012). How persuasive is shareholder advocacy? Are there companies creating or changing their CSR policies in order to attract ethical investors? Do companies with CSR receive more investment dollars? The area of SRI’s societal impact also needs more conclusive coverage. How can we develop a metric to measure the impact of these investments in the big picture? What difference is SRI making in society, policy, and everyday life? Hopefully SRI research will move away from its focus on financial success (as the academic literature seems to have nearly come to the consensus that you don’t have to lose money), and move towards answering the bigger question: “How is SRI shaping CSR and society?”
