Socially Responsible Investing: Why So May Critics? the Frequent Criticism of the Socially Responsible Investment Industry Is Misguided, Argue Michael Hardiman and Faye Harrison. (Responsible Investing)(Cover Story)
Hardiman, Michael, Harrison, Faye, Journal of Banking and Financial Services
The emergence of socially responsible investment (SRI) funds in the Australian market over the past several years has highlighted a number of issues.
Firstly, it has shown that a significant number of investors want to include long-term sustainability in their investment rationale. For such investors, short-term profitability is not acceptable if it means a company is using negative social or environmental practices. It has also shown that some critics of SRI are very difficult to please.
The material to date on SRI funds shows a wide variety of findings and therefore tends to support any view on the topic. For instance, some studies confirm that SRI funds underperform in the wider market while plenty of others conclude the opposite.
However, some Australian studies have produced consistent findings which are overwhelmingly negative. Surprisingly, these studies are usually produced by groups that seemingly would stand to benefit much from the growth of the SRI market.
For all their differences, environment groups share the common agenda of protecting nature. It is, of course, a worthwhile cause. Who wants to live in a polluted world surrounded with rapidly disappearing wildlife?
So presumably funds managed with the specific goal of directing capital towards companies with reduced environmental and social impacts would be favourably received by these groups. Right? Wrong!
Over the past several years, a number of mainstream fund managers have launched products onto the SRI market. These include AMP, ING, Perpetual, Rothschild and Westpac. Others have integrated assessment of social and environmental aspects of company operations with traditional financial analysis to obtain a more rounded picture of the investment merits of a company.
However, it is these very funds which have been exposed to the criticisms and derision of numerous environmental groups. Why are SRI funds criticised when funds that do not even attempt to place a value on the environmental impacts of business are not?
The moral high ground
The origins of social responsible investing provide a clue to this apparent anomaly in the expected support of SRI funds. The term "socially responsible" (or increasingly, "sustainable") investing has arisen from "ethical" investment.
In its earliest incarnation, the investment style that aimed not to invest in companies involved in activities perceived as harmful was primarily concerned with aligning investment practices with personal codes of morality.
Church groups were instrumental in establishing this style of investing. Thus, any producer of a product not meeting church approval would be ineligible as an investment target for a church-based ethical fund.
In recent years, the emphasis on this style of investing has shifted somewhat, to remove the notion of ethics and replace this instead with the notion of long-term sustainability. This encompasses both financial and social aspects, with social aspects intrinsically linked to environmental aspects.
This shift in definition has removed the contentious argument of morality and ethics. SRI funds are increasingly looking at how companies operate to assess how sustainable investing in that company would be, rather than looking at whether company activities meet the personal standards of an individual, (and morally superior) investor.
SRI fund philosophy has changed, what else should?
What implications does this change have on companies and SRI? For companies, this shift in investment parameters by SRI fund managers theoretically should have little impact on their activities. After all, management should always focus on maintaining the long-term sustainability of earnings.
Strategic decisions based on factors beyond purely financial ones should be part of this. In other words, businesses are always best advised to account for environmental impacts, and to value strong links in the wider community. …