The Maturing of Socially Responsible Investment - A Review of the Developing Link With Corporate Social Responsibility

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The Maturing Of Socially Responsible

Investment: A Review Of TheDeveloping Link With Corporate

Social ResponsibilityRussell Sparkes

Christopher J. Cowton

ABSTRACT. This paper reviews the development of

socially responsible investment (SRI) over recent yearsand highlights the prospects for an increasingly strong

connection with the practice of corporate social respon-

sibility. The paper argues that not only has SRI grown

significantly, it has also matured. In particular, it has be-

come an investment philosophy adopted by a growing

proportion of large investment institutions. This shift in

SRI from margin to mainstream and the position in

which institutional investors find themselves is leading to

a new form of SRI shareholder pressure. Although this

bears some resemblance to lobbying campaigns which

might take advantage of shareholder rights, we seek to

distinguish it as an important phenomenon in its ownright – one to which corporate executives are likely to be

paying increasing attention in the years to come. We

further argue that this approach potentially meets some of

the earlier ethical criticisms of certain forms of SRI but,

ironically, probably owes its existence to those pioneeringapproaches. We conclude with some suggestions for

further research to inform discussion of the issues high-

lighted in the paper.

KEY WORDS: corporate social responsibility (CSR),

engagement, ethical investment, shareholder activism,

socially responsible investment (SRI)

Introduction

Reviewing the development of socially responsible

investment (SRI) in recent years, this paper argues

that not only has it grown significantly but it has also

matured, in the sense that it has become more

complex and begun to enter the mainstream of

investment practice. This maturation of SRI has

important implications for its relationship with cor-

porate social responsibility (CSR). SRI has changed

from an activity carried out by a small number of

specialist retail investment funds (in the form of unit

trusts and mutual funds), probably of negligible or minor economic importance, into an investment

philosophy adopted by a growing proportion of

large investment institutions, i.e. large pension funds

and insurance companies. We argue, with support

from other recent authors, that this shift in SRI from

margin to mainstream could play a crucial role in

obliging or influencing quoted companies to address

CSR issues. For most corporate executives could

ignore SRI issues when they were limited to a fringe

minority, but this is no longer possible when they

are raised by institutional investors, which are the

Russell Sparkes is a fund manager specialising in social invest-

ment for the Central Finance Board of the Methodist Church.

He is the Secretary of the Joint Advisory Committee on the

Ethics of Investment of the British Methodist Church, and a

Director of the U.K. Social Investment Forum. Russell

Sparkes is the author of numerous articles and speeches on

socially responsible investment. His books include The Eth-

ical Investor (Harper Collins 1994) and Socially Responsible Investment – A Global Revolution which was published

simultaneously in the U.K. and U.S. by John Wiley in

November 2002.

Christopher Cowton has been Professor of Accounting at

Huddersfield University Business School since 1996. He was

previously University Lecturer in Management Studies at the

University of Oxford and a Fellow of Templeton College. He

was Chair of EBEN-UK (The U.K. Association of the

European Business Ethics Network) from 1998 to 2001 and

is editor of the journal, Business Ethics: A European Review,

published by Blackwells. He is the author or joint author of

five previous papers in the Journal of Business Ethics.

Journal of Business Ethics 52: 45–57, 2004.

2004 Kluwer Academic Publishers. Printed in the Netherlands.



most important ownership group of quoted com-

panies in many developed economies. The need for

corporate executives to pay attention to thoseinvestors is not just a question of institutional

investors’ economic power, though; we argue it is

also a function of the way in which those investors

pursue SRI, which we describe and explain as part of

the development of an increasingly complex and

mature approach to SRI. We further argue that this

approach potentially meets some of the earlier eth-

ical criticisms of certain forms of SRI but, ironically,

probably owes its existence to those pioneering ap-

proaches.

The paper is structured as follows. First, our understanding of certain important terms and basic

features of SRI is outlined. Second, we examine

various approaches to SRI which have developed,

outlining some of their technical and ethical features.

Third, we explore the implications of the adoption

of SRI by mainstream institutional investors, which

can be seen as a major landmark in the maturing of

SRI. Fourth, we discuss how those investors might

influence companies’ adoption of CSR. In the final

main section before the Conclusion we then return

to the ethics of SRI and also make some proposals

for future empirical research.

Coming to terms with socially responsible

investment

The field of SRI has been characterised by debate

(Bruyn, 1987; Hylton, 1992) or lack of consensus

about definitions (Cooper and Schlegelmilch, 1993;

Frankel, 1984). Even the terminology is not settled.

Thus broadly similar or related terms which appear in

the literature include social (Bruyn, 1987; McGill,

1984), divergent (Schotland, 1980), creative (Powers,1971), green (Simpson, 1991), targeted , development

and strategic (Wokutch et al., 1984) investing or

investment. However, the two most common terms

are socially responsible investment – the term used in

this paper – andethical investment. Before proceeding

further it may be appropriate at this point to analyse

these two terms and, in particular, to consider whether

there is any difference in meaning between them.

Ethical investment is the older term (e.g. Domini,

1984; Simon et al., 1972). This may reflect the fact

that the first investors to set ethical parameters on

investment portfolios were church investors in the

U.K., U.S., and Australia. The churches also played a

prominent role in the next stage, the development of commercial ‘‘ethical’’ investment products, as

Methodists and Quakers were responsible for the

launch of the first ethical unit trusts in the U.S. and

U.K. (see Sparkes, 2002, Chapter 3). However, as

time has passed the term ‘‘ethical investment’’ has

increasingly been replaced by that of ‘socially

responsible investment’.1 In part this reflects the fact

that many people feel uncomfortable about using the

word ‘‘ethical’’ to describe investment matters. This

type of reluctance was publicly expressed by the U.K.

Pension Minister Stephen Timms in his 1999 speechto Parliament announcing new SRI pensions regu-

lations to which we will return later (Timms, 1999):

(It) has traditionally been referred to as Ethical

Investment, but what I prefer to call Socially

Responsible Investment. I believe that when a name

becomes so loaded a term that the very mention of it

stifles intelligent debate rather than encourages it, then

it’s time for a change.

Perhaps some people are uncomfortable about

identifying the grounds for ethics or think that it

carries religious or moralising overtones. Others

object to the use of the word ‘‘ethical’’ because it

seems to imply that mainstream approaches to

investment are ‘‘unethical’’ (Purcell, 1980; Capital:

A Moral Instrument?, 1992) – though following that

line of reasoning, the usually preferred term of

‘‘socially responsible investment’’ would seem to

imply that normal investing is socially irresponsible,

which might be no more appreciated than an im-

plicit accusation of ‘‘unethical’’.

While the terms SRI and ethical investment are

often used interchangeably, in some contexts, for some purposes, it may be worth making a distinction

between the two – although in practice the dis-

tinctions made are not always the same. For exam-

ple, Sparkes (2001) proposed a heuristic distinction,

suggesting that the older term could usefully be re-

stricted to non-profit making bodies such as chur-

ches, charities, and environmental groups. The

argument was that ‘‘ethical investment’’ could

accurately describe the process whereby value-based

organisations applied internal ethical principles to an

investment strategy, but that it was hard to see how

46 Russell Sparkes and Christopher J. Cowton



it could apply to the profit maximising behaviour of

fund management companies supplying ethical unit

trusts (see Anderson, 1996). This was prompted by aconceptual issue pointed out by Cowton (1994):

At one level, ethical investment can be seen as just

another product innovation that helps widen

choice…. The irony is that its occurrence can be ex-

plained in pure, profit-seeking capitalistic terms, as

financial institutions seek to influence and exploit their

environment in the interests of profitability. Thus

individual investors, potentially at least, have their

values met or satisfied by institutions/people who do

not share these values at all, whose sole motive might

be to make more money.

Others might apply the term ethical investment to

the specialist or dedicated retail funds too, but view

SRI as a broader umbrella term (Collier, forth-

coming) which covers various related activities.2

Certainly we are content to use the term SRI to

cover the various approaches that we discuss in the

next section, all of which conform in some way with

Cowton’s (1994) definition of ethical investment (in

a broad sense) as ‘‘the exercise of ethical and social

criteria in the selection and management of invest-

ment portfolios, generally consisting of companyshares (stocks)’’. Notwithstanding some variety,

other definitions advanced in recent years possess a

strong family resemblance (for an overview see

Sparkes, 2001), and rarely does anything important

for a particular argument hang on which one is

chosen. Questions regarding abstract definition or

the choice of which term to use, though sometimes

of some significance, are probably of less importance

than developing an understanding of the range of

practices which have come to be associated with the

use of the terms. It is the contention of this paper that the practices encompassed by SRI have signif-

icantly changed over recent years and that this

development has fundamentally altered its ability to

influence corporate social responsibility.

The development of socially responsible

investment

The prima facie ethical case for SRI is that investment

should not be immune from ethical scrutiny, for

there is nothing special about investment in general

that warrants its exclusion from the ethical consid-

erations that are brought to bear on other areas of life

(Bourke, 1997; Capital: A Moral Instrument?, 1992;Sparkes, 1998). ‘‘Any individual or group which

truly cares about ethical, moral, religious or political

principles should in theory at least want to invest

their money in accordance with their principles’’

(Miller, 1992, p. 248). The original ‘‘ethical inves-

tors’’ were church investment bodies, and it is only

in the past two or three decades of late modernity

(McCann et al., 2003), and especially in recent years,

that such a perspective has been explicitly reflected

in dedicated SRI retail funds offered to the public.

Since their inception in 1971 in the U.S. and1984 in the U.K. the basic model used by SRI retail

funds has been to base their ‘‘ethics’’ upon a rela-

tively straightforward and negative approach of

excluding shareholdings in companies judged to be

unethical – an avoidance approach. This is still the

predominant approach in the U.S., according to

Schepers and Sethi (2003). Building on the chur-

ches’ traditional concern over alcohol, tobacco,

gambling and perhaps defence, other issues have

included South African involvement during the

apartheid era, the environment, human rights, por-

nography, and animal welfare issues.An ethical case for avoidance follows naturally

from the prima facie case stated above, that consistent

standards of behaviour should be applied in all areas

of life, including investment. Larmer (1997, p. 400)

contends that holding a share suggests approval, and

‘‘simply approving of an immoral action is im-

moral’’, while Gunnemann (1972, p. 193) argues

that ‘‘simply holding this stock and making a profit

from it indicates some acquiescence, or some sup-

port for a particular activity of the corporation or the

company’’. Mills (1996, p. 2) similarly argues that‘‘the righteousness of any monetary return is con-

ditional on the absence of the exploitation of cus-

tomer, workers, creditors and suppliers’’. In this

strand of argument, integrity or ‘‘moral purity’’

(Simon et al., 1972, p. 25) appear to be the priority.

However, it has been questioned whether purity,

as implied by avoidance, is really a feasible ethical

goal. Simon et al. (1972, p. 26) describe it as

‘‘hopelessly naive’’ because the interconnectedness

of the corporate sector involves the investor in an

endless series of illusions and arbitrary decisions,

while Powers (1971) suggests that the search for

The Maturing of Socially Responsible Investment 47



purity, a concept which tends to be ‘‘absolutist’’ in

moral terms, often leads to moral paralysis in today’s

complex world.In practice, though, mechanistic filter screens are

often established to rule out unacceptable invest-

ments; typically a maximum percentage of a com-

pany’s turnover, perhaps five or ten percent in a

problem area. Thus SRI funds tend to use thresholds

of acceptability rather than ‘‘strictly binary proposi-

tions’’ (Rockness and Williams, 1988, p. 406).

However, whatever the practicalities of the use of

thresholds, it does pose a problem in principle. The

justification of arbitrary cut-off points rather than

absolute avoidance is difficult (Powers, 1971); theuse of thresholds does, after all, explicitly condone

the presence of certain apparently undesirable attri-

butes in the investment portfolio; and sometimes the

amount of business can be substantial. Schepers and

Sethi (2003, p. 17) note that the percentage ap-

proach ‘‘has the effect of bias against smaller com-

panies and favours large companies whose ‘‘socially

undesirable’’ conduct might be much bigger in

absolute terms’’.

Furthermore, some writers are critical of avoid-

ance on its own. There is a danger that investors will

feel that they have fulfilled their moral responsibilityfor the use of their capital (Capital: A Moral

Instrument?, 1992) and it ignores the opportunity to

encourage good products, good companies, good

social conditions and best environmental practice

(Bourke, 1997). Over time some retail SRI funds

have made changes to the basic model, taking into

account positive factors when analysing companies,

such as charitable donations, employment of ethnic

minorities etc. There are various ways to combine

avoidance with more positive criteria, but one of the

problems with this approach is that there is relativelylittle agreement on what such positive issues should

be, nor much data on which to assess them. It is hard

to avoid the conclusion that negative criteria tend to

dominate (Schepers and Sethi, 2003).

Another variant that has been tried by retail funds

with a strong ‘‘green’’ image is a positive approach

with a title such as ‘‘industries of the future’’. This

has a strong appeal to investors whose dominant SRI

concerns lie in the environmental area, as it offers

them the dual benefits of a commitment to sus-

tainability plus the hoped-for financial benefits of

investing in industries with significant long-term

growth prospects. Such funds have therefore con-

centrated their investments in the environmental

technology area, although again they are relativelysmall in number. In general, avoidance remains the

dominant model for SRI retail funds.

Simon et al. (1972), who are critical of avoidance,

prefer moral effectiveness to moral purity. In other

words, they are more interested in affecting com-

panies’ adoption of CSR than simply keeping an

investment portfolio ‘‘clean’’. However, the prob-

lem of passive investment involving avoidance and,

perhaps, more positive criteria, is that as long as it is

on a small scale it is unlikely to have any impact on

larger, heavily-traded companies because the shareprice will tend to return to a level reflecting financial

fundamentals (Boatright, 1999). This has led some to

suggest that SRI should involve active attempts to

put direct pressure on companies, taking advantage

of shareholder rights. In this shareholders may find

themselves allied with others who are campaigning

for corporate change, some of whom may own a

token shareholding. There have been a few notable

examples of this kind of behaviour in the U.K.

(Mackenzie, 1993), but U.K. SRI investors ‘‘appear

to prefer to conduct business behind closed doors’’

(Friedman and Miles, 2001, p. 536). The practice hasa considerable tradition in the U.S.A., where it is

easier to table critical shareholder resolutions (Graves

et al., 2001; Purcell, 1979), but Schepers and Sethi

(2003) cast doubt on how successful such efforts

have been. Part of the reason has been that institu-

tional investors have often sided with management

and so resolutions have rarely received a large pro-

portion of the votes cast. We return to this issue

below.

When SRI was limited to a few SRI retail funds

of insignificant size, it had minimal ability to assertCSR values on companies. However, in countries

such as the U.K. and Australia, SRI funds have in-

creased significantly in number and size in recent

years (McCann et al., 2003; Solomon et al., 2002;

Sparkes, 2002). Friedman and Miles (2001, p. 526)

refer to a ‘‘staggering’’ 78.6% increase in U.K. SRI

funds between 1997 and 1999 and a perception that

their influence is growing as a result. Nevertheless, if

they remain based upon a passive policy focused on

avoiding investment in companies disapproved of

their impact is likely to remain marginal, at best.

(Such negative avoidance approaches probably also




made it easier for corporate executives and invest-

ment professionals to dismiss SRI as the work of the

‘‘lunatic fringe’’.) Schepers and Sethi (2003, p. 26)suggest that ‘‘SRI funds have very little, if any,

bargaining leverage to influence corporate behaviour

based on its equity holdings’’. However, as Perks

et al. (1992, p. 61) point out, ‘‘an ethical investment

movement ... is potentially a powerful coalition of

interests, particularly if it includes substantial institutional

investors’ (emphasis added) because, as Corbetta

(1994) argues, the large institutional investors in

managerial capitalism have the ability to express

meaningful dissent rather than merely abandon

companies. Their (in)actions are crucial: ‘If CSR isto be encouraged, the role of the institutional

investment community is essential’’ (Solomon et al.,

2002, p. 1). There are signs in recent years that

institutional investors are beginning to take SRI

seriously. This represents the maturing of SRI, its

movement from the margin to the mainstream.

From margin to mainstream

Collier (forthcoming) refers to an ‘‘evolutionaryshift’’ in institutional investment, ‘‘one which has

sharpened the CSR focus of the financial sector’’. It

is now something carried out by major investors

such as some pension funds and insurance compa-

nies. Sparkes (2002) shows that the adoption by

pension funds of SRI policies has occurred on a

significant scale in the U.S., U.K., Canada, and

Australia. Although putting precise figures on the

size of SRI beyond the dedicated SRI retail funds is

difficult, McCann et al. (2003, p. 16) refer to its

‘‘recent and quite sudden growth’’, which accords

with the situation that Sparkes portrays. As McCann

et al. (2003, p. 19) note,

SRI in its current form is very different from earlier

modes of ethical investment. SRI is not restricted to

ethical funds but rather involves a mainstream invest-

ment strategy … which is being adopted increasingly

by the majority of pension funds and large institutional

investors.

The growth in SRI arises from a combination of

legislative compulsion and pressure from actual and

future beneficiaries. Possibly the most rapid growth

has occurred in the U.K., encouraged by govern-

ment legislation. The U.K. Government has not

required pension funds to adopt SRI. However, in July 1998 it did announce plans to require, from July

2000, all trustees of occupational and local govern-

ment pension schemes to state their policy on SRI.

This has been a significant driver in the growth of

SRI, encouraging many trustees to develop SRI

policies (Solomon et al., 2002).

The growth in pension funds adopting SRI

techniques and analysis is of the greatest importance

for CSR, as they are the majority owners of most

quoted businesses. As such they have the power to

request, and if necessary instruct, corporate execu-tives to include social and environmental guidelines

in their business objectives. Such growth, both to

date and in the foreseeable future, has a number of

important consequences. It means that, inter alia, SRI

now has a much greater influence on the financial

markets and the economy as a whole. Corporate

executives need to take notice of their most pow-

erful investors, and if those investors are embracing

SRI in some way, social issues will inevitably find a

significant place on the corporate agenda. Such

pressures and incentives have been reinforced by the

phenomenon of ‘‘socially responsible’’ stock indicesbeing produced, such as the FTSE4Good series and

the Dow Jones Sustainability series. It is notable that

some companies (e.g. O2) refer to their presence in

such indices in their own publications. This seems to

have further prompted the launch of an increasing

number of agencies and consultancies seeking to sell

CSR advice to the corporate sector.

Although the introduction of legislation on SRI

disclosure for pension funds built on the precedent

and progress of SRI retail funds over the previous

decade and a half, the core SRI retail fund approachof avoidance of large elements of the stock market

sets considerable practical challenges for institutional

investors. One of the difficulties with the classic

avoidance approach is that it reduces diversification

and misses out on potential growth opportunities.

The evidence suggests that the underlying investors

in SRI retail funds are willing to accept lower

financial returns as a price worth paying in order to

invest in line with their conscience (see Lewis and

Mackenzie, 2000) and theoretically one would ex-

pect, ceteris paribus, that the adoption of SRI con-

straints would lead to lower risk-adjusted financial




returns. However, the research evidence is not clear

on this point, although on balance it suggests that

there need not be any major performance penalty.(Gregory et al. (1997), Guerard (1997a, b) for U.S.

data, Mallin et al. (1995), for U.K. research see

Sparkes (1994)). The subject of absolute and relative

SRI investment returns is summarised in Sparkes

(2002, Chapter 10), which came to three main

conclusions. The first was that SRI exclusions make

an insignificant difference to index returns over any

reasonable time frame. The second was that most

U.K. SRI unit trusts and U.S. SRI mutual funds

have tended to make slightly lower returns than a

peer group of comparable trusts, although this per-formance cost is probably acceptable to the under-

lying investors. The last point was that academic

research on SRI financial returns has been based

upon retail funds whose performance data is widely

available. However, the rapid growth in pension

funds that have adopted socially responsible criteria

means that such research can no longer be regarded

as representative. With such large sums involved,

results might be different, and pension funds – which

operate under the legal obligation of fiduciary duty –

would need to exercise caution in extrapolating

from previous findings.Pension funds which wish to add SRI criteria to

their investment objectives have essentially two ways

forward past this conundrum of financial cost. (Since

the vast majority of pension funds use external

investment managers they will normally take

investment advice from their professional advisers on

this point.) One approach to the problem of

investment performance is to integrate SRI exclu-

sions into portfolio construction in such a way that

the financial risk is minimised. Such ‘‘active risk

minimisation’’ uses internal market correlations tominimise the potential investment penalties of SRI

exclusions. This enables institutional portfolios to be

created that avoid sections of the stock market, but

yet produce a risk/reward performance similar to

that of a benchmark index such as the FTSE All-

Share in the U.K., or the S&P 500 in the U.S. A

classic example would be to offset the risk of not

owning tobacco or alcohol shares in a portfolio by

overweighting the fund’s exposure to food manu-

facturing companies which have similar economic

characteristics. This is the approach adopted by the

Central Finance Board of the Methodist Church in

the U.K., and the Domini Social Index in the U.S.

The evidence suggests that such an approach can

obviate the financial cost of ethical avoidance, andpossibly even be a net positive to returns (for further

details see Sparkes, 2002, Chapter 10).

However, this is very much a minority approach

at present. The risk-optimisation investment ap-

proach naturally goes along with a related invest-

ment philosophy of investing in most sectors of the

stock market, but evaluating potential investments

using both financial and SRI criteria. For example, it

might rank ten potential investments in the U.S.

energy sector, and decide that six of them were

acceptable. This may be described as ‘‘best in class’’investing, which ‘‘means that socially responsible

funds do not exclude whole sectors from their

portfolios but include those companies in previously

excluded sectors that are making the most effort to

improve their social responsibility’’ (Solomon et al.,

2002, p. 3). However, a ‘‘best in class’’ methodology

may also be used on its own. It is best seen in the

growing number of SRI index funds that have few if

any SRI exclusions. The Swiss SAM index series is a

good example of this approach.

The more common approach for institutional

investors is to abandon the SRI avoidance policies of SRI retail funds, so that there should be no invest-

ment penalty. Engagement ‘‘is the preferred invest-

ment approach of institutional investors over

screening’’ (Friedman and Miles, 2001, p. 535).

Thus in this case the socially responsibility concerns

will be implemented not directly in the composition

of the portfolio but by using shareholder ownership

rights to influence corporate behaviour, seeking to

steer it in a more socially responsible direction. How

this might be accomplished is discussed in the next

section, but it should be noted at this point that, as astrand in the corporate governance debate, institu-

tional investors have been encouraged to take a less

passive approach to the management of their share-

holdings.

From SRI to CSR

The attempt by investors to influence companies is

often associated with the term ‘‘shareholder activ-

ism’’. Technically speaking ‘‘shareholder activism’’

simply means the use of voting rights attached to




ordinary shares to assert political, financial, or other

objectives. It occurs when a shareholder group en-

gages in coordinated action to utilise their uniquerights to facilitate change. Such action can take a

number of forms beyond the obvious one of filing a

shareholder resolution at a company’s Annual Gen-

eral Meeting (AGM), such as seeking publicity for

the group’s objectives or dialogue with corporate

executives over the matter in dispute.

Shareholder resolutions on social and environ-

mental issues have become commonplace in the

U.S. over the last thirty years, generally known as

‘‘social proxies’’ to distinguish them from other types

of shareholder activism (Graves et al., 2001). Over time U.S. SRI activism has developed a recognised

code of procedure. It begins with initial dialogue

with corporate executives to inform them of CSR

concerns held by institutional investors, a process

generally known as ‘‘engagement’’ in the U.K. Such

discussions may work well in facilitating the ex-

change of information on sensitive CSR issues be-

tween institutional investors and corporate

executives and may even last for a number of years.

However, if agreement cannot be reached, the social

proxy resolution is then presented to the company’s

AGM for shareholders to vote upon it; though it isnot unknown for the mere threat of filing a social

proxy to be enough to influence corporate behav-

iour in a desired manner. The matter is settled

amicably at this point, with the resolution being

withdrawn by its sponsors before the company’s

AGM. In the 1970s social proxies laid before the

AGM normally received low levels of support, but

by the 1990s it was not unknown for them to re-

ceive the support of 10%–25% of shares cast. Even

though it does not represent a defeat for them, the

existence of such a high level of public support putsgreat pressure on company boards to respond posi-

tively to the CSR concerns expressed in the proxies.

The response to defeated social proxies and the

withdrawal of proxies mean that the success of

shareholder activism cannot be judged simply by the

passing of social proxies at the AGM. As Collier

(forthcoming) comments:

Much of what can be called investor engagement is

low-profile, and frequently remains that way over a

long period of time… [and] although it is easy enough

to theorise the process of engagement, it is less easy to

pronounce on whether or not investor engagement

improves overall CSR.

Even when something appears to happen ‘‘it is dif-

ficult to measure the impact of shareholder activism

on corporate policies and practices because both

sides like to claim credit for progressive results’’

(Purcell, 1979, p. 30). For example, it was reported

in Ethical and Social Investment No. 10 (Winter 1986/

87, p. 5) that, while the Church Commissioners

publicly claimed credit for the decision of BET to

raise its wages in South Africa (thus vindicating the

Commissioners’ policy of influencing companies

rather than selling shares), a spokesman for the

company denied that the role of interested share-

holders was decisive. Part of the reason for this is that

sometimes shareholder activism is just one part of a

wider campaign, which might, for example, include

political lobbying and consumer boycotts led by

NGOs.

At first sight single-issue advocacy campaigns look

very similar to SRI investors asserting social objec-

tives. The two groups may share similar concerns

over a particular social or environmental issue, and

they may often work together to pressurise a certaincompany. However, although the means of NGO

advocacy and SRI activism may be similar, the aims

and objectives of the two groups are in principle

quite different and need to be carefully distin-

guished.

NGOs are normally based upon a narrowly de-

fined agenda that is perceived to be of overwhelm-

ing importance to their members. It seems fair to

state that they do not seem interested in general

shareholder democracy issues. Indeed, their advo-

cacy campaigns may use (critics might say abuse)

shareholder rights to attend a company’s annual

general meeting simply in order to complain in a

public forum about a company’s activities. For

example:

Each year Partizans, a tiny but dogged London-based

campaigning group, has launched a campaign on

RTZ, the world’s largest mining company. Partizans

wants RTZ to act in a more environmentally

responsible way, and to treat indigenous people with

more respect. Partizans does not table resolutions, in-

stead it asks difficult questions and seeks to attract press

publicity for the causes it represents. Occasionally it




has stormed the podium in an effort to make the

company and the press listen (Mackenzie, 1997).

For campaigning NGOs, maintaining the value of

the shares they have bought, normally for only a

small sum, is not an object of concern. It seems quite

legitimate for them to want to cause financial harm

to a company, perhaps by encouraging consumer

boycotts, if that is seen as the most effective way to

achieve their aims and it is done in a non-violent

way in accordance with the law. On the other hand

it is hard to conceive of any circumstance in which

SRI investors would actually want to see a decline in

the value of the shares they hold. Indeed, to do so

would seem to go against their legal fiduciary obli-

gations (Solomon et al., 2002). Socially responsible

investors want a financial return from their invest-

ments, whereas this is immaterial for advocacy

campaigns. The ultimate objective of SRI share-

holder activism is to improve corporate behaviour,

whereas NGO advocacy campaigns may even seek

to close down a particular company on the basis that

its whole basis of operation is immoral, e.g. nuclear

power (British Energy), mining (Rio Tinto), or

tobacco (Philip Morris). Confrontation and publicity

are also standard tools of campaigning groups,whereas private dialogue or engagement with cor-

porate executives is more characteristic of SRI, as

described earlier.

However, it seems fair to note that many NGOs,

particularly larger ones, have realised that the tre-

mendous growth in SRI across retail funds and espe-

cially institutional investors provides an opportunity

to gain influential allies. SRI investors would be re-

pelled by the older ‘‘confrontational’’ approach, and

some NGOs have recently adopted a more pragmatic

stance that fits in well with SRI. Such approaches arecovered in depth in Hildyard and Mansley (2002). For

example, they describe the campaign led by Friends of

the Earth which persuaded the U.K. company Balfour

Beatty not to construct a dam at Ilisu in Turkey. This

campaign actively courted the support of socially

responsible investors, and seems a good example of the

pragmatic approach.

Nevertheless, although SRI activism by institu-

tional investors might focus on similar issues to

NGO campaigners, it is probably more appropriate

to draw parallels with shareholder activism as a tool

for overtly increasing shareholder value. Public

recognition of shareholder activism as a valid

investment tool probably dates back to April 1989

when U.S. shareholder activist Bob Monks informedthe board of Honeywell Inc, a large U.S. computer

and defence company, that proposals to limit

shareholder powers were unacceptable. Monks

formed a shareholder action group to oppose the

board’s proposals, and a fierce proxy battle began.

The board’s proposals were subsequently defeated,

and three months later Honeywell announced a

major restructuring resulting in a 22% increase in its

share price. Monks (1990) commented:

We do not claim to be responsible for all of the gain ...perhaps Honeywell management would have an-

nounced a restructuring even without external pres-

sure. But we believe that our demonstration of

shareholder concern – and power – played a substantial

part in the gains realised.

The 1989 Honeywell proxy battle was historic for a

number of reasons. Of particular relevance to the

concerns of this paper, it was the first time that insti-

tutional shareholders joined forces with private

investors for a proxy initiative to defeat a corporation’s

anti-takeover proposals. It was also the first timeshareholder activism by institutional shareholders, and

against the will of an incumbent management team,

clearly demonstrated a substantial improvement in the

target company’s share price.Monks went on to found

a company, Lens Inc., an investment management

firm specialising in shareholder activism with the

objective of making financial gains. One of Lens’s

most celebrated cases was a two year battle in 1990–

1992 with the giant U.S. retail chain Sears Roebuck,

where Monks even stood as an independent director.

He was not elected, but the company was eventuallyforced into a major restructuring plan which involved

selling off its financial operations to concentrate on

retailing. Over this period Sears’ share price almost

doubled from $24.75 to $44.75. Shareholder activism

is not the only means of influencing companies –

regulation and consumer power are other obvious

vehicles, among many – nor is it necessarily the best

one, but these cases show that it can be effective in

changing corporate behaviour. Institutional share-

holders have expressed their financial concerns

through activism in the past, but equally, they can

express social and ethical concerns, particularly now




that they are adopting SRI policies. The Balfour Be-

atty case was mentioned earlier; Collier (forthcoming)

cites the unfolding case of a major U.K. asset man-agement company putting pressure on BP over safety

in its Alaskan operations.

It should be acknowledged that the U.S. is a

particularly favourable context in which shareholder

activism can flourish. American shareholders benefit

from the closely defined legal rights to file share-

holder resolutions issued by the Securities and Ex-

change Commission (SEC). Primary sponsors of a

resolution must own a minimum of $2000 worth of

stock in the corporation (a threshold increased from

$1000 in 1992) and they must have held this for atleast a year. To be resubmitted a resolution must

receive at least 3% of the votes in year one, 6% in

year two, and 10% subsequently. Compared to many

other countries, these requirements are not partic-

ularly onerous.

Until recently, overt shareholder activism has

been rare outside the U.S., but public policy mea-

sures in many Anglo-Saxon countries aim to make it

more widespread. The U.K. pension legislation to

encourage SRI and shareholder voting was noted

earlier. Canada and Australia can be cited as two

further examples. Attempts to file U.S.-style socialproxy resolutions in Canada were made illegal by a

court decision in 1987 over a shareholder resolution

criticising the tractor company Massey–Ferguson for

its involvement in South Africa. The court upheld a

legal challenge by the company that this contravened

the Canada Business Corporations Act (CBCA).

However, in November 2001 the Canadian Federal

Government responded to growing public criticism

of this legal prohibition by issuing new regulations

amending the CBCA that make the Canadian rules

on shareholder resolutions similar to those in theU.S.

In March 2002 a major reform of financial ser-

vices in Australia came into effect. The new rules put

an obligation on all Australian pension funds to

disclose their compliance with the SRI regulations

shown below, and upon the Australian Securities

and Investment Commission (ASIC) to monitor

compliance:

(a) Any seller or issuer of investment products

must disclose to investors the extent (if at all)

to which labour standards or environmental,

social or ethical considerations are taken into

account in the selection, retention, and reali-

sation of the investments.(b) ASIC may develop guidelines that must be

complied with where a product disclosure

statement makes any claim that labour stan-

dards or environment, social, or ethical con-

siderations are taken into account in the

selection, retention or realisation of the

investment.

In the U.K. and Australia, where social resolu-

tions are relatively new, company executives fre-

quently exhibit an antagonistic reaction, probablyregarding them as an unwarranted interference in a

company’s affairs. Such suspicions may be justified

when they are filed by a single-issue campaigning

group. However, SRI resolutions can have a positive

function as a feedback mechanism that alerts the

board of directors to potential problems lying ahead.

Such a function is perhaps one of the most clear cut

illustrations of the linkages between SRI and CSR.

When U.S. institutions started filing social proxies in

the early 1970s, the atmosphere was often highly

charged and adversarial. The pioneers in this respect

were church investors coordinated by the InterfaithCenter on Corporate Responsibility (ICCR), who

are still playing a leading role thirty years later. Of

the 261 shareholder resolutions filed in 2001, nearly

half, 135 in total, were filed by ICCR. However, in

recent years relations between corporate executives

and social proxy filers have changed through what

Tim Smith, the former head of ICCR, called ‘‘a

process of maturation’’. In other words each side of

the process recognises that the other has something

of value to offer and that the objective of the exer-

cise is to benefit the corporation by improving itsbehaviour; it is not aimed at damaging it. In Smith’s

words:

Today a generation of parties to these negotiations has

become accustomed to the idea that the interests in-

volved are not mutually exclusive but are often com-

plementary. In fact, this is what the corporate social

responsibility movement has contended from the

beginning. A ‘‘maturation’’ process is taking place on

both sides. Increasingly investors are recognising and

affirming the constructive role of social investors such

as the churches to raise and work though issues that

must be of concern to the corporation. (Smith, 1992)




Thus shareholder ownership rights, or ‘‘shareholder

activism’’, may be used for CSR motives or to

produce financial gain – or both. The growing SRIretail funds might have some influence, particularly

on smaller listed companies (Friedman and Miles,

2001). However, it is institutional investors, which

are both becoming more active as shareholders as a

result of the governance debate and now taking into

account SRI concerns, that are most likely to pro-

vide leverage on companies to improve their per-

formance with respect to CSR.

Discussion

The preceding sections have argued that socially

responsible investment has developed significantly in

several ways. As other writers have also noted, it has

grown in size, most obviously in the establishment

and advance of SRI retail funds but, we would ar-

gue, more importantly in the recent past through its

adoption by some major institutional investors. The

adoption of SRI by powerful mainstream investors

could in itself be seen as a sign of maturity, but we

would argue that the field has matured in other ways

too. For example, we now have SRI stock marketindices and there are several different approaches to

the practice of SRI in addition to the core avoidance

approach of SRI retail funds, including SRI risk

optimisation and engagement/activism. The latter

are better suited to institutional investors.

There has also been increased complexity in SRI

in ethical terms. As we noted earlier, the prima facie

ethical case for SRI is that investment should not be

immune from the ethical considerations that are

brought to bear in other areas of life. When church

investors started ‘ethical investment’ they did so asrelatively homogeneous institutions, based upon a

relatively well-defined set of beliefs, and possessing a

system of authority which enabled disputed ques-

tions to be tackled. In other words, each church

investment fund may be regarded as a single fund

with an explicit set of beliefs and some form of

advisory body to advise on the practical implemen-

tation of these beliefs.

Ethical complexity increased once retail SRI retail

funds were launched. They enable individuals with

differing social and environmental concerns (see

Anand and Cowton, 1993; Cowton, 1999) to par-

ticipate in financial products which avoid investing

in particular areas of concern. In a pluralistic society

there is no definitive set of beliefs among suchinvestors, and it seems likely that few of them find

any one fund’s exclusion criteria exactly meets their

requirements. It may not be economic for invest-

ment management companies to launch a series of

niche funds tailored to each market segment of

investors, so the underlying investors have to make

do with funds where their particular concerns are

probably but a subset of the SRI criteria being fol-

lowed. However, it should be noted that where the

policy is primarily one of avoidance or exclusion,

this may not be a major problem, for as long as theindividual investor does not have a positive desire to

invest in any of the areas avoided, the product at least

meets his or her own particular negative concerns.3

The ethical complexity deepened once govern-

ment action and the pressure of public opinion pu-

shed large institutional investors into adopting social

responsibility criteria. For reasons already explained,

a passive approach focused on simple avoidance is an

impractical approach for them; engagement/activism

are more attractive options. Given their economic

significance, this is likely to prove the most powerful

way in which SRI will influence corporate execu-tives to engage in corporate social responsibility. If it

does, it will meet the concerns of critics who have

complained that basic forms of SRI, especially

avoidance, are ethically inadequate because they are

not designed, or at least not able, to bring about

change in companies’ behaviour. Yet there is an

irony here, for it is highly unlikely that the disclosure

of institutional investors’ SRI policies would have

appeared on the political agenda in the U.K. without

the successful establishment of SRI retail funds and

the infrastructure of information and expertise whichthey helped to build up. If that is the case and the

adoption of SRI by institutional investors does have

an impact on CSR, it will represent an indirect

vindication of SRI retail funds beyond their ability

to satisfy the scruples of individual investors.

However, there are some concerns about insti-

tutional investors’ influencing of companies, partic-

ularly if it is limited to ‘‘behind the scenes’’ dialogue.

It has been condemned by campaigning NGOs as an

essentially futile exercise, particularly if – as appears

to have often been the case in the U.K. – it is treated

as a discrete activity in itself rather than as a possible




prelude to more public activism such as the filing of

a shareholder resolution. Friends of the Earth, for

example, have condemned it as ‘‘greenwash’’(McRae, 2001). However, as explained earlier, it is

difficult to judge the effectiveness of such discreet

interactions. More might be happening than meets

the eye; but then that leaves the activity open to a

charge of lack of transparency, which does not seem

to fit well with SRI and CSR.

There would therefore seem to be several ethical

advantages of following the shareholder activism

route, perhaps with some limited opening dialogue,

rather than relying solely on ‘‘engagement’’. Firstly,

shareholder resolutions are public documents and anexercise in shareholder democracy, so there is greater

transparency and disclosure. Secondly, this follows

well established procedures of corporate governance.

Finally, this supports the aims of public authorities in

most Anglo-Saxon countries that institutional

investors should make greater use of the voting

rights attached to their shares. However, whatever

happens, if SRI is to bring about greater CSR,

institutional investors’ policies will have to have real

content, and companies will have to be persuaded

that a constructive response to those policies is in

their shareholders’ best interests. If the pressure iscoming from their largest shareholders, who bear a

fiduciary responsibility, it will not be easy for com-

panies to prove otherwise unless they engage in

serious dialogue.

With the above in mind, it is clear that research

will be important to track and understand what is

happening as we enter this mature phase of SRI,

perhaps building on earlier research into dedicated

SRI retail funds (e.g. Harte et al., 1991; Rockness

and Williams, 1988; Schepers and Sethi, 2003).

Questions to address might include:

• How many institutional investors have formal

SRI policies and what are the differences be-

tween adopters and non-adopters?

• What are the components of those policies and

how do institutional investors seek to have

them implemented by the companies in which

they are invested?

• How were the policies established and what

processes are in place to review them?

• What response do institutional investors receive

when they raise CSR concerns with companies

and how does the relationship develop over

time?

• How do their activities relate to campaigns byNGOs?

Such questions, and no doubt many others, will need

to be addressed by a variety of research methods,

including questionnaire surveys and interviews. Case

studies would be particularly informative. They

could focus on a particular institutional investor’s

approach to SRI, a particular company’s dealings

with institutional investors over SRI, a particular

issue across a range of investors and companies or

even a particular episode. All could provide valuabledetail to enrich our understanding of the issues

which matter and the processes at work. Hopefully

good research data would be accessible; it would be

disappointing, and somewhat ironic, if our ability to

know and understand what is happening in this

important area were inhibited by a lack of co-

operation by the parties involved.

Conclusion

This paper has provided a review of developments in

socially responsible investment. The aim has not

been to look in detail at the issues and policies

pursued but rather to highlight important recent

trends which, we believe, mark a ‘‘step change’’ in

SRI and its connection with the practice of corpo-

rate social responsibility by major companies. The

‘‘mainstreaming’’ of SRI as it is adopted by institu-

tional investors (not just by charities and other val-

ues-based organisations or in dedicated SRI retail

funds) is a major step in the maturing of SRI whichoffers the prospect of putting significant pressure on

companies to adopt CSR. If successful, it will meet

some of the criticisms levelled against earlier forms of

SRI from which it can be regarded as having

developed. Citing support from other literature, this

paper has explored how the process of influence

might take place. Shareholder resolutions will con-

tinue to have a part to play in the U.S. and will

become more common than they have been hith-

erto in other countries, but their use will need to be

viewed in the context of other engagement mech-

anisms, especially dialogue between institutional




investors and companies. Although in practice the

SRI activities of institutional investors might be

aligned with NGO lobbying activity from time totime, it is important to distinguish between the two,

for their goals are ultimately different.

Although we have produced some support for it,

it should be acknowledged that such an argument is

to some extent speculative and also needs to have

the details ‘filled in’. Some research has been con-

ducted on dedicated SRI funds and bodies such as

churches over the years, and also on shareholder

resolution campaigns in the U.S. The challenge now

is to build on the limited available evidence, much

of it anecdotal, regarding institutional investors andthus to understand what happens when they adopt

SRI.

Notes

1 Note that this is not true in Australia, which has

generally kept the older usage. Hence one finds that

Australian pension (superannuation) funds which

adopt SRI constraints are described as ‘‘ethical su-

pers’’, a term unknown elsewhere.2 This was the view of one of the referees of the

original version of this paper.3 This is a possible explanation for the focus on

avoidance by SRI retail funds, for the same logic

does not apply to positive criteria. It should also be

noted that the ‘‘ethics’’ belong to the underlying

investors, whereas the investment managers who

meet their needs do so for standard commercial

reasons

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Russel SparkesSenior Fund Manager,

Central Finance Board,

Methodist Church,

UK

Christopher J. Cowton

Professor,

Huddersfield University Business School,

Queensgate,

Huddersfield HD1 3DH,

U.K.

E-mail: [email protected]


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The Maturing of Socially Responsible Investment - A Review of the Developing Link With Corporate Social Responsibility