Corporate Governance 4e

Christine A. Mallin

Chapter 7
Socially Responsible Investment
 Learning objectives

• To be aware of the origins of socially

responsible investment
• To understand the different approaches that
may be used for socially responsible (ethical)
investment
• To appreciate the role of institutional investors
in socially responsible investment

Mallin: Corporate Governance 4e

 Learning objectives

• To be aware of the different ethical indices

that may be used to assess the performance
of socially responsible funds
• To be aware of the evidence analyzing the
performance of socially responsible
investment funds

Mallin: Corporate Governance 4e

 Socially Responsible Investment

• Involves considering the ethical, social, and

environmental performance of companies
selected for investment, as well as their
financial performance (EIRIS, 2000)
• Value of UK ethical funds increased
substantially in the last decade rising from
£1.465 bn in 1997 to £11.3 bn at end of June
2011 (EIRIS, 2012)

Mallin: Corporate Governance 4e

 Socially Responsible Investment

• Ethical investment is another often-used term

for socially responsible investment

Mallin: Corporate Governance 4e

 OECD (1998)

• In the global economy, sensitivity to the many

societies in which an individual corporation
may operate can pose a challenge.
Increasingly, however, investors in
international capital markets expect
corporations to forego certain activities – such
as use of child or prison labour, bribery,
support of oppressive regimes, and
environmental disruption – even when those
activities may not be expressly prohibited in a
particular jurisdiction in which the corporation
operates
Mallin: Corporate Governance 4e
 Recent UK Legislation

• From 3rd July 2000, pension fund trustees had

to take account of the following in their
Statement of Investment Principles:
• ‘the extent (if at all) to which social,
environmental or ethical considerations are
taken into account in the selection, retention
and realisation of investments’ (amendment
to Pensions Act 1995)

Mallin: Corporate Governance 4e

 Recent UK Legislation

• This means that pension fund trustees are

required to state their policy on social,
environmental, and ethical issues.

Mallin: Corporate Governance 4e

 Institutional investors’ policies

• Friends’ Provident
• Hermes Pensions Management Ltd
• CalPERS
• TIAA-CREF

Mallin: Corporate Governance 4e

 Institutional investor groups’ policies

• NAPF
• ABI
• UKSIF
• UNPRI

Mallin: Corporate Governance 4e

 CSR Indices

• Ethibel Sustainability Index

• Domini Social Index
• FTSE4Good Index
• Dow Jones Sustainability Index
• BiTC

Mallin: Corporate Governance 4e

 Impact on shareholder value

• Does SRI have a beneficial effect on

shareholder value?
• OECD (1998)
• EU Commission (2008) European
Competitiveness Report
• EU ‘A renewed EU strategy 2011-2014 for
Corporate Social Responsibility’
• Academic studies: mixed evidence

Mallin: Corporate Governance 4e

 Conclusions

• SRI is of growing importance

• Government influence
• Institutional investors more active in this area
• Increasing perception that SRI can
maintain/increase shareholder value

Mallin: Corporate Governance 4e