Good Honest Dollar $$

Do firms really need ethical investors?

Today I would like to continue the discussion from the previous post in this series about whether or not attracting investment from socially responsible investors is important to companies.

As noted last Tuesday, in order to understand the consequences for companies of attracting the Socially Responsible Investment (SRI) dollar, we need to understand two fundamental issues:

• the nature of those consequences – why SRI is important; and
• the magnitude of such consequences – how much SRI matters.

The previous post dealt with the former issue. Today, I would like to deal with the latter – the magnitude of the consequences of attracting SRI.

  
The key question
As discussed in the previous post, the ability of the firm to attract the SRI dollar has an impact upon its ability to raise capital in primary markets. It also affects a firm’s share price in secondary markets, which in turn has a range of flow on consequences.

All of these consequences occur via capital markets. Therefore the magnitude of the impact of SRI on from the prospective of corporations will be determined by the magnitude of its impact upon financial markets.

Therefore, the question becomes one of whether or not SRI has a significant impact upon financial markets. Can SRI play hard ball?

 
Small, but material impact
The figures suggest that it can. The magnitude of investment dollars which flow through SRI funds is now sufficient that such funds do have a small but nonetheless material impact upon the markets in which they trade.

In Europe, European Social Investment Forum’s (EUROSIF) estimates SRI funds under management accounted for approximately 10-15% of total funds under management as at December 31 2005. (For reference, download relevant report (PDF file) from here)

In the US, the SRI funds accounted for approximately 11% of funds under management as at December 31 2007, according to the Social Investment Forum’s 2007 Report on Socially Responsible Investment Trends in the United States.

To be sure, the bulk of the trade on global financial markets is still made up of investors who operate outside of SRI funds. The majority of the price-setting power lies with such investors.

Nevertheless, the magnitude investment dollars flowing through SRI funds is now sufficient that such funds exert a material, albeit small, impact upon the markets in which they operate.

 
Caution advised
The above figures should be treated with a degree of caution.

Estimates of the size of SRI market differ greatly according to differences in how an SRI fund is defined and classified.

Moreover, the above figures take into account only funds under management. They take no account of other investors, such as government, sovereign funds, other firms, entrepreneurs, wealthy families or other individual investors.

Nevertheless, it is clear that SRI has a material impact upon financial markets, and that the ability or otherwise of firms to attract SRI investors will have a material impact upon their share prices, their ability to raise capital and their ability to maximize shareholder wealth.