Social Responsible Investments (SRI)

Lecture 9 discusses the rise of social responsible investment: A European context.

SRI is about ethical and socially responsible investments. These are terms used to describe any area of the financial sector where the social, environmental and ethical principles of the investor influence which organisations or ventures they choose to place their money with. This could mean avoiding investments in industries such as the tobacco, alcohol, gambling and arms trade industry, or industries that use animal testing. Renneborg et al. (2008) describe SRI as an investment process that integrates social, environmental and ethical considerations into investment decision making.

SRI links into the ethical trading and ethical standards that people operate by.

Traditionally, a portfolio’s performance has been judged by two variables: risk and return. Through this scope, it is an investment manager’s responsibility to construct a portfolio that generates the highest return while maintaining a tolerable risk level. A faulty assumption in this philosophy is that the investor has no interest in the social costs incurred through the creation of this portfolio. For a variety of reasons, whether environmental, religious or political, investors are in fact concerned with how their money is generating its return. SRI has emerged from this social awareness. (Winnie, 2007)

From an investment point of view, there is some ambiguity regarding what is considered as social responsible investing. A problem with this is that there are many different viewpoints on what constitutes the proper values to seek in companies; it is difficult to provide a universal definition of SRI. For some investors, being socially responsible means not investing in companies involved in alcohol, while for others, alcohol is perfectly acceptable. The most commonly screened companies are those involved in tobacco, which is almost universally seen as detrimental. (Schyndel, 2011) For example, an investor may maintain strong moral principles against investing in tobacco companies because of the obvious health implications that are associated with smoking. The investors may face a dilemma when considering whether to invest in a company that sells tobacco products despite not being directly involved in the manufacturing of them.

The importance of social responsibility in investing is far from self-evident. It has been said by economists that maximisation of shareholder wealth is the corporate purpose and infusion of social objects will destroy the free enterprise system. A corporate executive’s responsibility is to make as much money for the shareholders as possible, as long as he operates within the rules of the game. When an executive decides to take action for reasons of social responsibility, he is taking money from someone else, from the shareholders, in the form of lower dividends; from the employees, in the form of lower wages; or the customer, in the form of higher prices. (Smith, 1952)

Harrington (1992) argues that in the critics view social investing is really irresponsible investing, at best a form of charity or simply a way to lose other people’s money. Many argue that instead of investing in a socially responsible manner, investors should seek to maximise their profits and then, in the words of one critic, if they desire, each such investor should make contributions and gifts from their gains to aid causes that they consider socially responsible.

This argument is deeply flawed. It ignores the fact that the investment decision in itself may have created or contributed to the social problem in the first place. (Harrington, 1992)

An example of a company that operates by SRI is Starbucks. Since Starbucks Coffee started in 1971, the company has focused on acting responsibly and ethically. One of Starbucks' main focuses is the sustainable production of green coffee. With this in mind, it created C.A.F.E. Practices, a set of guidelines to achieve product quality, economic accountability, social responsibility and environmental leadership. The company supports products such as Ethos Water, which brings clean water to the more than 1 billion people who do not have access. To date, Ethos Water has committed to grants totalling more than $6.2 million. (Liodice, 2010)

Another company that trades using the ethical standards of SRI is Toms, the American shoe company. Blake Mycoskie started Toms Shoes on the premise that for every pair of shoes sold, one pair would be donated to a child in need. This innovative idea resulted from a trip to Argentina where Mycoskie saw an overwhelming number of children without shoes. Toms Shoes recognized that consumers want to feel good about what they buy, and thus directly tied the purchase with the donation. In just four years, Toms Shoes has donated more than 400,000 shoes, evidence that consumers have clearly embraced the cause. Toms has also recently launched eyewear using a similar ‘one for one’ model. For every pair of Toms glasses sold, a child in need will receive medical care, prescription glasses or sight-saving surgery. (Brune, 2007; Chansanchai, 2007 and Wong, 2008)

Socially responsible investing is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $3.07 trillion at the start of 2010, a 34% increase since 2005, according to the US SIF's Report on Socially Responsible Investing Trends in the United States (2010)

However, there is a major question about whether businesses have an ethical dimension. If the main aim in a company is to maximise shareholder wealth, should they not aim to achieve this no matter what? SRI maximises shareholder wealth from a limited pool of investments, which in turn could potentially cause missed investment opportunities.