Socially Responsible Investment

The week got off to a good start with news from Oekom, one of the most influential CSR ratings agency in Europe, that SAP has been selected for the Hanover Stock Exchange Global Challenges Index. The index is made up of only fifty constituents from a global pool of companies and the twist is that the company must not only have a prime rating but must also be doing something extra to meet big global challenges such HIV, poverty, corruption etc. For quite a few years SAP has supported anti-corruption efforts including a peer review process set up in Nigeria by Soji Apampa and supporting development of Transparency International Business Principles for Countering Bribery programme. SAP is also listed on the FTSE4Good and Dow Jones Sustainability Index.  

To be really honest, I have mixed feelings about the effectiveness of socially responsible investing alone as an agent for change. I’m still more comfortable with politicians rather than markets making social policy decisions. In the past socially responsible investing (SRI) focused maybe too much on one size fits all thresholds: do you have a code of conduct? Yes. Tick box. When activist SRI investors did engage directly they quickly found themselves at odds with the mainstream crowd. A few years ago I had lunch with the Head of Investor Relations for a well known extractive player with a great reputation for CSR. He told me of a surreal situation at an investor roundtable in NY when one SRI player tried to assert influence saying:

‘I have a €2 bn holding in your company and I am demanding a comprehensive human rights impact statement for your pipeline/plant in development’.

He said he would consider it and on to the next participant for their question:

‘I have a €50 bn holding in your company and I demand that you ignore the points raised in the previous question’.  

Today there seems to be a growing trend towards a more integrated approach of risk analysis focusing on the most material environment, social and governance (ESG) factors. I am a particular fan of the Responsible Engagament Overlay (REO) approach of F&C Asset Management headed up by Karina Litvack. This team is putting out really useful analysis. In July Goldman Sachs launch it’s GS Sustain Index and this lengthy report makes for really interesting reading. The bottom line conclusion is that generalised, unapplied CSR for CSR sake does not add shareholder value. However, if CSR means a better understanding of the material ESG factors and is applied within the context of the corporate strategy towards both risk and opportunity then it certainly does add significant value.  

I welcome this convergence between core corporate governance and social responsibility. Standards such as DJSI, FTSE4Good and Global Challenges represent screens for a small but growing part of the investment market. Their major contribution has been to educate investors and businesses and lead us towards a better understanding of broader governance, risk and compliance responsibilites. A sign of their success is the mainstreaming we are now starting to see.

Now for the light relief. Have a look at this video from the people at Triple Bottom Line. It makes a powerful point for what SRI is all about. You have been warned!  

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2 responses to “Socially Responsible Investment

  1. Your point is amplified in a column in the recent column from Business 2.0 magazine by Jeffrey Pfeffer (http://money.cnn.com/2007/09/04/technology/Corporate_raters.biz2/index.htm?postversion=2007090506) Who is rating the raters and what transparency do they provide on their own qualifications, self-interests and avoidence of conflict in their own activities?

  2. There does seem to be a divergence underway from the more niche/dedicated Socially/Ethically Responsible fund management and analysis over to Sustainable Investing. One of the ultimate questions is, does this naturally lead to two future schools of investing – one based on pure ethics, irregardless of profit/loss vs. a Sustainable approach, embedded in the mainstream, that balances opportunities with risk into all decisions. We seem to be moving in this direction now.

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