Good Honest Dollar $$

The previous two posts in this series discussed two categories of common objections toward SRI. These were:

• Objections to SRI based on principle; and
• Objections that SRI compromises investment performance.

Another criticism of SRI is that it is simply not an effective mechanism to produce positive social outcomes, a topic that I wish to discuss today.

The viewpoint that SRI is not an effective way to produce positive social outcomes is not one with which I can agree. Nevertheless, the objection raises an interesting question – can we prove that SRI has a positive social impact?

Proof of SRI’s social impact

As noted in earlier posts, SRI can take on a wide variety of forms. Some types of SRI, including Community Investing, Social Venture Capital and Social Entrepreneurialism have a direct social impact. We can point to real world examples to prove the social value of such activities.

Consider Community Investing. When I was in the Philippines earlier this year, one of my favorite experiences was the motorized ‘tricycle taxis,’ which provide an immensely valuable service to rural communities where few families can afford to own a car.

Men who provide this service are usually too poor to obtain credit from banks. But with the help of community loans from Opportunity International, these men are able to purchase the taxi, pay off the loan, and still earn a sufficient amount to feed their family.

Or consider social entrepreneurialism. A new range of clean burning and biomas based cooking stoves which Envirofit International has introduced to rural homes in India provides an example of the social impact of this type of SRI.

According to a post on Think Change India, these stoves reduce toxic emissions by up to eighty per cent, whilst using fifty per cent less fuel.

Examples like these (and there are many more) provide tangible evidence of the social impact of some forms of SRI.

Overall Impact More Difficult to Measure

As stated above, it is possible to prove the social benefits arising from the forms of SRI which have a direct social impact through tangible evidence. However, it is considerably more difficult to quantify the impact of the most common form of SRI – applying ethical screens to an investment portfolio.

The principle reason for this is that the social benefits arising from this strategy are indirect in nature, thereby making it difficult to quantify such benefits in a reliable fashion. It is also difficult to prove beyond reasonable doubt that any social benefits arising as a result of this strategy are substantial.

The social benefits arising from ethical screening are two-fold. Firstly, the strategy directs SRI funds toward socially benevolent companies and industries, helping to stimulate growth in those industries. Secondly, the strategy provides an incentive for companies to improve corporate behavior in order to attract the SRI dollar.

In relation to improved corporate behavior, how can we determine the extent to which responsible corporate behavior is driven directly by SRI as opposed to other factors, such as ethical consumerism or the desire to avoid government regulation?

In addition, how can we determine the extent to which growth in socially benevolent industries is directly attributable to SRI as opposed to other business environment considerations?

We can’t, and as a result, it is very difficult to quantify the overall social impact resulting from the application of ethical screens to investment portfolios.

Given that such an approach represents the most common method of SRI, it is difficult to quantify (and thus prove) the impact of SRI at an overall level.

Any impact positive

Nevertheless, it is almost certain that any impact which SRI does have upon social well-being is a positive impact. In my view, it is difficult to imaging SRI having either no social impact or a negative social impact.

In addition, given the growth in funds in invested in SRI portfolios (now representing 11% of funds under management in America), I would think that the impact funds invested through SRI portfolios is now a material factor in stimulating growth in socially benevolent industries as well as encouraging positive corporate behavior.

Conclusion

I cannot agree with the viewpoint that SRI does not have a material social impact.

Some forms of SRI have a direct, tangible social impact whilst others do not. Nevertheless, there is good reason to believe that all forms of SRI, if applied in a sensible fashion, contribute toward positive social outcomes.