what is a socially responsible or ethical investment? when ... · socially responsible investments...
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Socially Responsible Investments
Silvana SignoriUniversity of Bergamo
What is a socially responsible orethical investment?
When an investment is ethical (orsocially responsible)?
Silvana Signori – University of Bergamo 2A.A. 2012-2013
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Terminology
• Ethical
• Socially responsible
• Social
• Green
• Alternative
• Targeted
• … ... investing or investment
Silvana Signori – University of Bergamo 3A.A. 2012-2013
A definition
“Ethical investment” or “sociallyresponsible investment” is broadly definedas the integration of personal values,social considerations and economicfactors into the investment decision”
(Michelson et al., 2004, p. 1)
Silvana Signori – University of Bergamo 4A.A. 2012-2013
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Another definition
In a broad sense ethical investment is ‘‘theexercise of ethical and social criteria in theselection and management of investmentportfolios, generally consisting of companyshares (stocks)’’.
(Cowton, 1994)
Silvana Signori – University of Bergamo 5A.A. 2012-2013
“Ethical investment refer to a set of approacheswhich include social or ethical goals in additionto more conventional financial criteria indecisions over whether to hold a particularinvestment” (Cowton, 1999, p. 99)
“In ethical investment we are interested in how acompany makes its money, not just how much”
(Cowton, 1999, p.99)
A.A. 2012-2013 6Silvana Signori – University of Bergamo
‘‘There’s nothing wrong with making money but it’s how you make the money that counts’’ (Murray, 2003)
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Selection and management
TO HOLD
=
To buy
To sell
To maintain
To manage
…
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Ethical investors
� Individuals - private investors� Groups� Institutions� Public investors� …� Religious organization� Pension funds� University (foundations)� …
� Financial and non financial institutions
� Managing their own or someone else money
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Development of SRI
The prima facie ethical case for SRI is thatinvestment should not be immune fromethical scrutiny, for there is nothing specialabout investment in general that warrantsits exclusion from the ethicalconsiderations that are brought to bear onother areas of life
(Bourke, 1997; Capital: A Moral Instrument?, 1992; Sparkes, 1998 quoted in Sparkes and Cowton, 2004).
Silvana Signori – University of Bergamo 9A.A. 2012-2013
Ethics and investments
Any individual or group which truly caresabout ethical, moral, religious or politicalprinciples should in theory at least want toinvest their money in accordance with theirprinciples’’ (Miller, 1992, p. 248).
→ approving of an immoral action is immoral
→ making profit from it indicate acquiescence …
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A brief history
- Religions (Jewish, Christian and Islamiclaws)
- Social, political and environmentalmovements (e.g.: apartheid in SouthAfrica)
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Two investor motivations
• “Feel good” investors
→ Feel the need to put their money alignedwith their personal values and priorities
• “Social change” investors
→ Feel the need to support and encourageimprovements in quality of life (or incorporate behaviour)
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Three strategies
Screeningis the practice of including or excluding companies (orStates) based on social and/or environmental criteria.
Engagement (or shareholder activism)involves SRI who take an active role as owners(shareholders). These efforts include dialoguing withcompanies, filing, co-filing and voting resolutions.
Community investingprovides capital and other services to communities
underserved by traditional financial services institutions.Silvana Signori – University of Bergamo 13A.A. 2012-2013
Screening
Screening is the practice of excluding orincluding companies from investmentportfolios based on a range of social andenvironmental criteria.
(Michelson et al., 2003)
� Negative screening = “never if”
� Positive screening = “only if”A.A. 2012-2013 14Silvana Signori – University of Bergamo
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Negative screening = avoidance
AVOIDANCE
WHAT ?-Tobacco-Alcohol
-Gambling-Military contracting
-Pornography-GMO
-Etc.
HOW ?- Treatment of employees
- Advertising practices- Environmental concerns
Etc.
WHERE ?
Common negative screens � Armaments and nuclear weapons� Alcohol� Hazardous substances (such as pesticides,chlorine)� Environmentally damaging practices� Poor employment practices� Animal exploitation (e.g. fur industry, factory farming)� Activities, processes or products that have a major impact on climate
change (e.g. automobile, oil and gas industry, road building, etc.)� Ozone-depleting substances� Nuclear energy� Gambling� Animal testing� Genetic engineering� Tobacco� Oppressive regimes� Pornography� …
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Positive screening = supporting
SUPPORTING
WHAT ?-Healthy food-Green energy
-Organic producing-Pollution control equipment
-Etc.
HOW ?- Treatment of employees
- Advertising practices- Environmental concerns
-Etc.
→ Stakeholder analysis
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Common positive screens (1)
HumanResources
Integration of human resources issues intocorporate strategy,Promotion of labour relations,Encouraging employee participation,Career development,Training and development,Quality of remuneration systems,Improvement of health and safetyconditions,Respect and management of working hrs.
Source: Vigeo
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Environment
Environmental strategy and eco-design,
Pollution prevention and control (soil, accident),
Development of "green" products and services,
Protection of biodiversity,
Protection of water resources,
Minimising environmental impacts from energy use,
Management of atmospheric emissions,
Waste management,
Management of local pollution,
Management of environmental impacts fromtransportation,
Management of environmental impacts from the useand disposal of products/services.
Source: VigeoA.A. 2012-2013 19Silvana Signori – University of Bergamo
Customersand Suppliers
Product safety,
Information to customers,
Responsible Contractual Agreement,
Sustainable Relationships with suppliers,
Integration of environmental criteria inthe purchasing process,
Integration of social criteria in thepurchasing process,
Prevention of corruption,
Prevention of anti-competitive practices.
Source: Vigeo
A.A. 2012-2013 20Silvana Signori – University of Bergamo
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HumanRights
Communityinvolvement
Respect for human rights standards andprevention of violations,Respect for freedom of association andthe right to collective bargaining,Elimination of child labour and abolition offorced labour,Non-discrimination.
Promotion of social and economicdevelopment,Societal impacts of company's productsand services,Contribution to general interest causes.
Source: VigeoA.A. 2012-2013 21Silvana Signori – University of Bergamo
CorporateGovernance
Board of Directors,
Audit & Internal Controls,
Shareholders’ rights,
Directors & Key Executives
remuneration.
Source: Vigeo
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Negative and positive screening
1) Negative + positive selection
2) Trade off between good and bad features
Silvana Signori – University of Bergamo 23A.A. 2012-2013
Bad performance
Good performance
The application of screening
� Not static
� Extension
� Primary and secondary involvement
� Significance/thresold
� Best-in-class or best-in-industry approach
Silvana Signori – University of Bergamo 24A.A. 2012-2013
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Best-in-class approach
A best-in-class or best-in-industry approachallows to compare companies within thesame industry sector (usually a “critical”sector) and ranked against each other, notagainst those outside the industry.
� To seek good financial returns
� To improve the overall social performance of firms in particular sectors (chimical, mining, automobile, etc.)
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The question of information
Information is vital for the successfulimplementation of ethical investment criteria.
Sources: corporate annual reports (financialand ethical/social reporting), press releases,newspaper articles, statistics, etc.
- Reliability, availability and cost
→ social rating agencies
Silvana Signori – University of Bergamo 26A.A. 2012-2013
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The need of transparency
Ethical investment as a process…
The identity of specific criteria might becomeless important than ‘‘… the way in whichissues are identified and considered, thedegree of information obtained, (and) theaction that is taken in response’’ (Taylor,2001, p. 59 quoted in Michelson et al.,2004, p. 4).
A.A. 2012-2013 27Silvana Signori – University of Bergamo
Engagement or shareholder activism
Engagement can be defined as“influencing corporate policy by virtue ofthe position as investor and the associatedrights”
(Hummels et al., 2004)
� Exit vs voice (Hirschman, 1970)
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How do you do it?
Private methods
■ Raising questions or discussionof social issues in routinemeetings between institutionalinvestors and companymanagement.■ Writing to companymanagement about issues ofconcern.■ Arranging special meetings todiscuss such matters.■ Writing to other shareholders toexpress concerns.■ Joining with other like-mindedinvestors to undertake some or allof the above.■ Informing other investors on thedialogue as to build up pressure.
More public mechanisms
■ Attendance at annual generalmeetings to ask questions.■ Proposing shareholderresolutions.■ Exercising voting rights, e.g. onthe adoption of the report andaccounts or the re-election ofdirectors.■ Calling an extraordinary generalmeeting.■ Issuing press briefings.
Source: Just Pensions, a guide for trustees and fund managers, May 2001
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Soft and hard engagement
Dialoguing
Filing resolution
Voting
Comunication
Exit
Support
Soft engagement
Hard engagement
Shareholder activism
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Shareholder resolutions
Shareholders in a publicly traded company mayintroduce shareholder resolutions, or proposals, tothe company management to be voted on in thenext annual proxy vote. These resolutions maypertain to company policies and procedures,issues of corporate governance, or other issues ofsocial responsibility or environmental concern.Shareholder resolutions are a powerful way forshareowners to encourage corporate responsibilityand discourage company practices that areunsustainable or unethical. (www.ussif.org)
A.A. 2012-2013 31Silvana Signori – University of Bergamo
Who may file a resolution?
The U.S. Securities and Exchange Commission (SEC)recognizes that generally any shareowner holding atleast $2,000 in stock, for a minimum of one year priorto the company’s annual submission deadline, mayintroduce a shareholder resolution. However, formaximum efficacy it is recommended that individualscome together to form a shareholder coalition in orderto increase the impact of their proposal. Often, ashareholder resolution will fail to win a majority ofvotes, but still succeed in persuading managementdecisions because the resolution was favored by asignificant number of shareholders. (www.ussif.org)
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What is a Proxy Voting?
Shareholders, as owners of a publicly tradedcompany, have the right to weigh in on importantissues by participating in proxy voting.Shareholders affect change in management’spolicies and procedures through participation inthe company's annual general meeting either inperson, or more commonly, by proxy votingremotely, via mail, phone, or online. Proxy votingis the primary means by which shareholders areable to direct company management to act in asocially responsible manner. (www.ussif.org)
A.A. 2012-2013 33Silvana Signori – University of Bergamo
Proxy Voting (2)
Prior to the annual meeting, every shareholderin a company receives proxy resolutions (orproxy statements) and voting materials, via mailor email. These materials inform investors ofissues for consideration at the annual meetingeach year. It is important to review all materials,read the resolutions presented by othershareholders, and vote your proxy ballots inaccordance with your values and what youbelieve will improve the company's bottom line.
(www.ussif.org)
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Shareholder resolution process
Source: O’Rourke, 2002
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Focus on …
� Shareholder activism vs shareholderadvocacy (advocacy campaigns)
� Coalitions (e.g.: ICCR – the InterfaithCenter for Corporate Responsibility)
� Transparency
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Silvana Signori – University of Bergamo 37A.A. 2012-2013
SRI strategies in the lifetime of an investment process
Combined strategies
Voting
Engagement
Positive screening
Negative screening
DivestmentPost-investmentPre-investment
Source: EUROSIF
Community investing
Community Investing consists on providingcapital and other services to communities(but also sectors, people, etc.) that areunderserved by traditional financialservices institutions.
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How does community investing work?
Community investing institutions useinvestor capital to finance or guaranteeloans to individuals and organizations thathave historically been denied access tocapital by traditional financial institutions.
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…. follows
The community investing institutiontypically provides training and other typesof support and expertise to ensure thesuccess of the loan and its returns forinvestors.
(www.ussif.org)
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What does community investing do?
Community Investing projects are smalland local, and work by lending individualsand local groups the capital they need toimprove their own communities in a sociallypositive and environmentally sustainableway. They focus on affordable housing,small business creation, development ofcommunity facilities, and the empowermentof women and minorities. (www.ussif.org)
Silvana Signori – University of Bergamo 41A.A. 2012-2013
Does ethical investment hurt/pay
financially?
Silvana Signori – University of Bergamo 42A.A. 2012-2013
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Silvana Signori – University of Bergamo 43A.A. 2012-2013
source: Kurtz, 2000
Markowitz Right
Markets are pretty efficient, and
investors owning a subset of the
market portfolio must therefore
incur a diversification cost.
Markowitz Wrong
Investors owning a subset of the
market portfolio do not necessarily
incur a diversification cost.
Moskowitz Right
A portfolio of socially
responsible
companies should
outperform a portfolio
of less-responsible
firms.
No Contradiction: Financial
markets are efficient enough that
SRI portfolios incur a diversification
cost, but inefficient enough for this
cost to be offset by an SRI
anomaly.
Contradiction: The fact that SRI
portfolios do not appear to
outperform market benchmarks
remains unexplained.
Moskowitz Wrong
A firm’s social record
has no bearing on its
stock performance.
Contradiction: The fact that SRI
portfolios do not appear to
underperform market benchmarks
remains unexplained.
No Contradiction: SRI portfolios
have the same performance as
unscreened portfolios because
screening introduces no
unaddressable diversification costs
and there are no tradeable
information effects.
Effects due to managerial criteria
PERFORMANCE
Geographic and/or
sectorial diversification
Diversification
Information costs
Forecast
Small cap
growth
Segmentation Markets and/or
investment sectors
Fund Management
ability
Information
Timing
Learning
Fund dimension
Risk adjustment
Effects due to the investor’s ethical selection
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Ethical or traditional benchmark?
One major challenge is to choose an appropriate'benchmark' portfolio against which to judgeperformance. A general stock market indexmight seem to be a good yardstick, but ethicalfunds tend not to be invested in many of thelarger companies because they are likely tocontravene at least one negative criterion.
(Cowton 1991)
Silvana Signori – University of Bergamo 45A.A. 2012-2013
low
high
low
high
Ren
dim
en
tR
en
dim
en
t
I II
IIIIV
Ethics Ethics
Silvana Signori – University of Bergamo 46A.A. 2012-2013
Trade-off ethics/profit
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Ethical complexity
- Lack of homogeneity- Pluralistic society
- In criteria adopted by SRI
- In the application of the criteria
- The need for transparency
- Eurosif transparency guidelines
- etc.
Silvana Signori – University of Bergamo 47A.A. 2012-2013
From margin to mainstream?
- Institutional investors’ economic and socialpower
- Government legislation
- Ethical indexes (Dow Jones sustainabilityindexes, FTSE4Good, Ethibel, etc.)
Silvana Signori – University of Bergamo 48A.A. 2012-2013
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Bibliography
- Cowton C.J. (1999), “Accounting and financial ethics: from
margin to mainstream?”, Business Ethics: A European Review,Vol. 8 n. 2, p. 99-107
- Schueth S. (2003), “Socially Responsible Investing in the
United States”, Journal of Business Ethics, Vol. 43, p. 189-194
- Michelson G. et al. (2004), “Ethical Investment Processes and
Outcomes”, Journal of Business Ethics, Vol. 52, p. 1-10
- Sparkes R., Cowton C.J. (2004), “The Maturing of Socially
Responsible Investment: A Review of the Developing Link With
Corporate Social Responsibility”, Journal of Business Ethics,Vol. 52, p. 45-57.
Silvana Signori – University of Bergamo 49A.A. 2012-2013
To know more…
Websites suggested:
- www.ussif.org - The Forum for Sustainableand Responsible Investing
- www.eurosif.org
- www.iccr.org
- …
Silvana Signori – University of Bergamo 50A.A. 2012-2013