Good Honest Dollar $$

The previous post in this series discussed the nature of Socially Responsible Investing (SRI), otherwise known as ethical investing.

Prior to launching into detailed discussion or debate about SRI, I think it is important to step back and first consider the question of whether or not ethical investing is indeed desirable.

Should investors seek to invest their funds in a socially responsible manner? In my view – yes. Nevertheless, I feel that it is important to define and clarify the nature of the benefits of ethical investing, as well giving careful consideration to objections toward SRI.

The objective of today’s discussion is to define and clarify the nature of the benefits of ethical investing. Why should investors seek to be socially responsible? How does SRI help to achieve positive social outcomes?

A range of objections toward ethical investing will be discussed in the next few weeks.

 
Benefits of Socially Responsible Investing

Broadly speaking, there are two mechanisms by which proponents of Socially Responsible Investing argue that SRI helps to generate positive social outcomes. These are as follows:

 
• Allocation of capital resources.

SRI allocates financial resources toward companies and industries whose social, environmental and economic impact is considered to be positive and away from those whose impact is considered to be negative. 

By this mechanism, SRI supplies capital resources to socially benevolent industries, thus helping to stimulate growth, investment and expansion in such industries. This is predominately at the expense of industries whose impact upon society is considered to be particularly harmful.

For example, capital inflows from SRI funds typically help to stimulate growth in industries such as renewable energy and efficiency, healthcare and well-being, efficient transport, infrastructure and communications, waste management, financial services, and knowledge (education and media). These type of industries provide a valuable contribution toward the betterment of society.

On the other hand, capital inflow from SRI will typically be directed away from industries such as alcohol or tobacco manufacturing, adult entertainment, gambling or weapons manufacturing. Whilst such industries may provide some benefits to society, many would not consider growth in such industries to be desirable from a social viewpoint.

In addition, within individual industries, SRI allocates capital resources toward individual firms who adopt best practice in terms of ethical considerations within their industry, and away from firms who fail to adopt best practice.

Again, by this mechanism, SRI helps to stimulate growth of individual firms which adopt best practice at the expense firms which do not.

 
• Encouraging positive corporate behavior.

In addition to stimulating the growth of socially benevolent industries and individual firms, SRI also provides an incentive for industries and individual firms to improve their social and environmental practices.

From the viewpoint of industries and individual firms, there are considerable benefits of attracting the ethical investment dollar. Attracting SRI increases the ability of firms to raise capital and to do so on more favorable terms than would otherwise be possible. It also helps firms to maximize the share price, and in doing so maximize shareholder wealth, reduce the risk of takeover and positively impact the remuneration and continued employment prospects of senior management.

Moreover, given the magnitude of funds flowing into ethical investment, SRI funds now exert considerable influence. In America, SRI funds now account for approximately eleven percent of funds under management (refer PDF report). The equivalent figure for Europe is estimated at between ten and fifteen per cent.

Accordingly, there is now a significant incentive for firms to make efforts to attract the ethical investment dollar. This they can only do by adopting sound practices in terms of social, environmental and other ethical considerations.