Socially Responsible Investment (SRI)

Socially Responsible Investment (SRI)

DOI: 10.4018/978-1-5225-7619-8.ch003

Abstract

The most common forms to align financial investments with ethical, moral, and social considerations are screenings, shareholder advocacy, community investing, and social venture capital funding. Screenings integrate the evaluation of corporate financial and social performances into portfolio selections. Positive screenings target corporations with sound social and environmental responsibility. Negative screenings exclude entities featuring morally and ethically irresponsible corporate conduct. Shareholder advocacy is the active engagement of shareholders in the corporate management by voting, activism, and dialogue. The majority of shareholders exercise their voting rights by proxy resolutions, in which a third party has the right to advocate for the shareholders before the corporate board. Negative shareholder activism comprises political lobbying, consumer boycotts, stakeholder confrontation, and negative publicity. Community investing describe ear-marks of investment funds for community development, but also features access to financial products and services to un(der)served communities. Social venture capital supports pro-social start-ups and social entrepreneurs for the greater goal of increasing the social impact of financial markets. This chapter explores socially responsible investment.
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Introduction

SRI features various forms and foci to align financial considerations with ethical, moral and social endeavors. The most common are socially responsible screenings, shareholder advocacy, community investing and social venture capital funding (Steurer et al., 2008).

Socially responsible screenings are ‘double bottom line analyses’ of corporate economic performance and social responsibility. In screenings financial market options are evaluated based on economic fundamentals as well as social features and corporate conduct externalities (Schueth, 2003). In addition to the traditional scanning of expected utility and volatility, screenings include qualitative examinations of intra- (e.g., corporate policies and practices, employee relations) and extra-organizational (e.g., externalities on current and future constituents) features of corporate conduct (Schueth, 2003). In general screenings are based on corporate track records of societal impacts, environmental performance, human rights attribution and fair workplace policies as well as health and safety standards outlined in CSR reports. Consequentially screening leads to the in- or exclusion of corporations from portfolios based on social, environmental and political criteria.

Positive screenings feature the selection of corporations with sound social and environmental records and socially responsible corporate governance (Renneboog et al., 2007). Areas of positive corporate conduct are human rights, the environment, health, safety and labor standards as well as customer and stakeholder relations. Corporations that pass positive screenings meet value requirements expressed in their social standards, environmental policies, labor relations and community-related corporate governance.

Negative screenings exclude corporations that engage in morally, ethically and socially irresponsible activities. Pro-active negative screenings refrain from entities with corporate conduct counter-parting from international legal standards and/or implying negative social externalities (Renneboog et al., 2007). Negative screenings may address addictive products (e.g., liquor, tobacco, gambling), defense (e.g., weapons, firearms), environmentally hazardous production (e.g., pollution, nuclear power production), but also social, political and humanitarian deficiencies (e.g., minority discrimination, human rights violations). Specialty screens feature extraordinary executive compensations, abortion, birth control, animal testing and international labor standard infringements (Dupré et al., 2008). In 2005 the most common screenings in the US targeted at tobacco (US $ 159 billion in total net assets; approximately 28%); liquor (US $ 134 billion; 25%); gambling (US $ 41 billion; 7%); defense/weapons (US $ 34 billion; 6%); community impact (US $ 32 billion; 5%); labor concerns (US $ 31 billion; 5%); environmental issues (US $ 31 billion; 5%); consumer safety (US $ 28 billion; 5%); workplace diversity and equal employment opportunity (US $ 27 billion; 5%); faith-based objections (US $ 12 billion; 2%); adult entertainment (US $ 12 billion; 2%); human rights (US $ 11 billion; 2%); animal testing (US $ 10 billion; 2%); abortion, healthcare, biotechnology, medical ethics, youth concerns, anti-family entertainment and excessive executive compensation (US $ 5 billion; 1%). The proportions of screening techniques are outlined by Figure 1 (Social Investment Forum Report, 2006).

Figure 1.

Distribution of SRI screening topics in the US in 2005

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