Socially Responsible Investment in the 21st Century : Does It Make a Difference for Society? 9781783504688, 9781783504671

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SOCIALLY RESPONSIBLE INVESTMENT IN THE 21ST CENTURY: DOES IT MAKE A DIFFERENCE FOR SOCIETY?

CRITICAL STUDIES ON CORPORATE RESPONSIBILITY, GOVERNANCE AND SUSTAINABILITY Series Editor: William Sun Recent Volumes: Volume 1:

Reframing Corporate Social Responsibility: Lessons from the Global Financial Crisis Edited by William Sun, Jim Stewart and David Pollard

Volume 2:

Finance and Sustainability: Towards a New Paradigm? A Post-Crisis Agenda Edited by William Sun, Ce´line Louche and Roland Pe´rez

Volume 3:

Business and Sustainability: Concepts, Strategies and Changes Edited by Gabriel Eweje and Martin Perry

Volume 4:

Corporate Social Irresponsibility: A Challenging Concept Edited by Ralph Tench, William Sun and Brian Jones

Volume 5:

Institutional Investors’ Power to Change Corporate Behavior: International Perspectives Edited by Suzanne Young and Stephen Gates

Volume 6:

Communicating Corporate Social Responsibility: Perspectives and Practice Edited by Ralph Tench, William Sun and Brian Jones

CRITICAL STUDIES ON CORPORATE RESPONSIBILITY, GOVERNANCE AND SUSTAINABILITY VOLUME 7

SOCIALLY RESPONSIBLE INVESTMENT IN THE 21ST CENTURY: DOES IT MAKE A DIFFERENCE FOR SOCIETY? EDITED BY

CE´LINE LOUCHE Audencia Nantes School of Management, France

TESSA HEBB Carleton Centre for Community Innovation, Carleton University, Ottawa, Canada

United Kingdom North America India Malaysia China

Japan

Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2014 Copyright r 2014 Emerald Group Publishing Limited Reprints and permission service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78350-467-1 ISSN: 2043-9059 (Series)

ISOQAR certified Management System, awarded to Emerald for adherence to Environmental standard ISO 14001:2004. Certificate Number 1985 ISO 14001

CONTENTS LIST OF TABLES

ix

LIST OF FIGURES

xi

LIST OF APPENDICES

xiii

LIST OF CONTRIBUTORS

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EDITORIAL ADVISORY AND REVIEW BOARD

xvii

ACKNOWLEDGEMENTS

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PART I: INTRODUCTION EXPLORING THE SOCIETAL IMPACTS OF SRI Tessa Hebb, Ce´line Louche and Heather Hachigian

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PART II: SRI IMPACTS: ENGAGEMENT AND INNOVATION MOBILIZING SRI THROUGH INVESTOR GOVERNANCE NETWORKS: THE POLITICS OF COLLECTIVE INVESTOR ACTION Michael R. MacLeod

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CONTENTS

SHAREHOLDER ENGAGEMENT AND CHEVRON’S POLICY 520 ON HUMAN RIGHTS: THE ROLE PLAYED BY THE UNITED STATES JESUIT CONFERENCE’S “NATIONAL JESUIT COMMITTEE ON INVESTMENT RESPONSIBILITY” Nicholas J. C. Santos, John Sealey and Austin G. C. Onuoha SOCIAL INNOVATION AND INVESTMENT: THE SHOREBANK EXPERIENCE Fiona Wilson, James Post, Ronald Grzywinski and Mary Houghton THE EMERGENCE OF IMPACT INVESTMENTS: THE CASE OF MICROFINANCE Harry Hummels and Marieke de Leede

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PART III: SRI CHALLENGES: LIMITS AND EFFECTIVENESS WHERE DO-GOODERS MEET BOTTOM-LINERS: DISPUTES AND RESOLUTIONS SURROUNDING SOCIALLY RESPONSIBLE INVESTMENT Christel Dumas and Emmanuelle Michotte

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INCREASING THE EFFECTIVENESS OF SRI CORPORATE ENGAGEMENT ON CLIMATE CHANGE THROUGH A RESPONSIVE REGULATION FRAMEWORK Ben Jacobsen

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COMPANY COMMUNITY AGREEMENTS IN THE MINING SECTOR Ben Bradshaw and Caitlin McElroy

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Contents

PART IV: SRI DEVELOPMENTS: VALUES AND GOVERNANCE ETHICS, POLITICS, SUSTAINABILITY AND THE 21ST CENTURY TRUSTEE Steve Lydenberg

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SRI IN SOUTH AFRICA: A MELTING-POT OF LOCAL AND GLOBAL INFLUENCES Stephanie Giamporcaro and Suzette Viviers

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TO GOVERN AND BE GOVERNED: THE GOVERNANCE DIMENSIONS OF SRI’S INFLUENCE Benjamin J. Richardson

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PART V: CONCLUSION SRI IN THE 21ST CENTURY: DOES IT MAKE A DIFFERENCE TO SOCIETY? Ce´line Louche and Tessa Hebb

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ABOUT THE EDITORS

299

ABOUT THE AUTHORS

301

LIST OF TABLES Chapter 6

Chapter 8

Table 1 Worlds Organized Around a Higher Common Principle to Determine What Is Most Worthy.. Table 2 Terminology for Nine Worlds of Worth that Guided the Axial Coding. . . . . . . . . . . . Table 3 Actors Behind the SRI Discourse Vary According to the Press Medium. . . . . . . . . Table 4 Occurrences of Worlds in the Justification Discourse, Including Multiple Worlds in the Discourse. . . . . . . . . . . . . . . . . . . . Table 5 Justification Discourse in the Financial and Non-Financial Press.. . . . . . . . . . . . . . Table 6 How SRI Justifies Itself for 16 Main Disputes..

124 132 134 135 137 138

Table 1 The Degree to which Sustainalytics’ Community Relations Criteria Have Been Met by the Negotiation and/or Content of De Beers Canada’s IBA with the Moose Cree First Nation, and Agnico Eagle Mines’ IIBA with the Kivilliq Inuit Association. . . . . . . . . . . . 184 Table 2 The Degree to which Sustainalytics’ Aboriginal Community Relations Criteria Have Been Met by the Negotiation and/or Content of De Beers Canada’s IBA with the Moose Cree First Nation, and Agnico Eagle Mines’ IIBA with the Kivilliq Inuit Association. . . . . . . . . . . . 185

Chapter 10 Table 1 SRI Strategies Employed in South Africa. . . . Table 2 Main Differences in Motivation, Definition, Actors, Vocabulary and SRI Strategies between the United States, Europe, Japan and South Africa. . . . . . . . . . . . . . . . . . . . . .

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Chapter 11 Table 1 SRI-Related Codes and Standards. . . . . . .

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LIST OF FIGURES 70

Chapter 4

Fig. 1 ShoreBank Corporation 2008. . . . . . . . . . .

Chapter 5

Fig. 1 Distribution of Microfinance Assets. . . . . . . . 100

Chapter 6

Fig. 1 SRI Press Coverage Increases Cyclically Over Time.. . . . . . . . . . . . . . . . . . . . . . . 130

Chapter 7

Fig. 1 The Responsive Regime: A Pyramid of Supports and a Pyramid of Sanctions. . . . . . . . . . . . 163

Chapter 10

Fig. 1 1992 2012: A Decade of SRI Products in South Africa.. . . . . . . . . . . . . . . . . . . 227 Fig. 2 1992 2012: ESG Focus of SRI Funds in South Africa.. . . . . . . . . . . . . . . . . . . 230

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LIST OF APPENDICES Appendix

ShoreBank History and Timeline . . . .

87

Chapter 10 Appendix

Chronology of Key Events Divergence versus Convergence . . . . . . . . . . .

244

Chapter 4

Chapter 12 Appendix A Appendix B

Statements . . . . . . . . . . . . . . . . Participants Lists (Focus Group and Interviews) . . . . . . . . . . . . . . . .

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LIST OF CONTRIBUTORS Ben Bradshaw

University of Guelph, Canada

Marieke de Leede

Kempen Capital Management, Amsterdam, The Netherlands

Christel Dumas

ICHEC Brussels Management School, Belgium

Stephanie Giamporcaro

University of Cape Town, Graduate School of Business, South Africa

Ronald Grzywinski

Co-Founder, ShoreBank Corporation

Heather Hachigian

School of Geography and the Environment, University of Oxford, Oxford, UK

Tessa Hebb

Carleton Centre for Community Innovation, Carleton University, Ottawa, Canada

Mary Houghton

Co-Founder, ShoreBank Corporation

Harry Hummels

University of Maastricht & Managing Director of SNS Impact Investing, The Netherlands

Ben Jacobsen

La Trobe University & James Cook University, Australia

Ce´line Louche

Audencia Nantes School of Management, France

Steve Lydenberg

Domini Social Investments LLC, New York, USA

Michael R. MacLeod

George Fox University, Oregon, USA

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Caitlin McElroy

Smith School of Enterprise and the Environment, University of Oxford, UK

Emmanuelle Michotte

Universite´ Libre de Bruxelles, Belgium

Austin G. C. Onuoha

Africa Center for Corporate Responsibility, Warri, Delta State, Nigeria

James Post

Boston University School of Management, Boston, USA

Benjamin J. Richardson

Canada Research Chair in Environmental Law & Sustainability, University of British Columbia, Canada

Nicholas J. C. Santos

College of Business, Marquette University, Wisconsin, USA

John Sealey

Social and International Ministries, Chicago-Detroit and Wisconsin Provinces of the Society of Jesus, Milwaukee, Wisconsin, USA

Suzette Viviers

Department of Business Management at Stellenbosch University, South Africa

Fiona Wilson

Peter T. Paul College of Business, University of New Hampshire, USA

EDITORIAL ADVISORY AND REVIEW BOARD Fabienne Alvarez Professor of Management, Department of Economics and Business, University of Antilles and Guyane Pointe-a`-Pitre, France

Barry A. Colbert Reader & Director of CMA Center for Business & Sustainability, School of Business & Economics, Wilfrid Laurier University, Canada

Ralph Bathurst Senior Lecturer, School of Management (Albany), Massey University, New Zealand

Alexandre Di Miceli da Silveira Professor, School of Economics, Business and Accounting, University of Sao Paulo (FEA-USP), Brazil

Lawrence Bellamy Professor & Associate Dean, Chester Business School, Chester University, UK

Gabriel Eweje Associate Professor & Director of Sustainability & CSR Research Group, Department of Management & International Business, Massey University, New Zealand

Robert Chia Research Professor of Management, Glasgow University, UK Blanaid Clarke Associate Professor, Law School, University College Dublin, Ireland

Hershey H. Friedman Professor, Department of Economics, Brooklyn College of the City University of New York, USA

Thomas Clarke Professor of Management & Director of the Center for Corporate Governance, University of Technology, Sydney, Australia

Lyn Glanz Dean of Graduate Studies, Glion Institution of Higher Education and Les Roches-Gruye`re University of Applied Sciences, Switzerland

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Adrian Henriques Visiting Professor, Department of Business and Management, Middlesex University, UK

Malcolm McIntosh Professor & Director of Asia Pacific Center for Sustainable Enterprise, Griffith Business School, Griffith University, Australia

Øyvind Ihlen Professor, Department of Media and Communication, University of Oslo, Norway

James McRitchie Publisher of CorpGov.net (Corporate Governance), USA

Lin Jiang Professor of Management, Business School, Renmin University of China, China

Abagail McWilliams Professor, College of Business Administration, University of Illinois at Chicago, USA

Eamonn Judge Professor & Research Director, Polish Open University, Poland

Roland Perez Professor Emeritus, Economics and Management, University Montpellier I, France

Elizabeth C. Kurucz Assistant Professor, College of Management and Economics, University of Guelph, Canada Richard W. Leblanc Associate Professor, School of Administrative Studies, York University, Canada Ce´line Louche Associate Professor, Audencia Nantes School of Management, France Guler Manisali-Darman Principal of the Corporate Governance and Sustainability Center, Turkey

Yvon Pesqueux Chair of the Development of Organization Science, CNAM (Conservatoire National des Arts et Metiers), France; President-elect of International Federation of Scholarly Associations of Management (IFSAM) David Pollard Reader in Technology Transfer and Enterprise, Faculty of Business and Law, Leeds Metropolitan University, UK Lars Rademacher Professor, Department of Media Management, MHMK

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Editorial Advisory and Review Board

(Macromedia University of Applied Sciences), Germany Simon Robinson Professor of Applied and Professional Ethics, Faculty of Business and Law, Leeds Metropolitan University, UK David Russell Head of Department of Accounting & Finance, Leicester Business School, De Montfort University, UK Ian Sanderson Professor Emeritus in Public Governance, Faculty of Business and Law, Leeds Metropolitan University, UK

Jim Stewart Professor of HRD & Leadership, Coventry Business School, Coventry University, UK Peter Stokes Professor of Sustainable Management, Marketing and Tourism, Deputy Dean, Faculty of Business, Enterprise & Lifelong Learning, University of Chester, UK Ralph Tench Professor of Communication, Faculty of Business and Law, Leeds Metropolitan University, UK Christoph Van der Elst Professor of Law, Law School, Tilburg University, The Netherlands

Greg Shailer Reader, School of Accounting and Business Information Systems, College of Business and Economics, the Australian National University, Australia

Wayne Visser Senior Associate, University of Cambridge Programme for Sustainability Leadership, UK; Adjunct Professor, La Trobe University, Australia

John Shields Professor & Associate Dean, Faculty of Economics and Business, the University of Sydney, Australia

Suzanne Young Associate Professor, La Trobe Business School, Faculty of Business, Economics and Law, La Trobe University, Australia

ACKNOWLEDGEMENTS Po flickered. “Thank you?” it repeated. “What is that?” Liesl thought. “It means, You were wonderful,” she said. “It means, I couldn’t have done it without you.” — Lauren Oliver, Liesl & Po

This book is a collective volume, meaning it could not have been produced without the valuable contributions and support of a host of individuals. We would like to thank all the authors who have worked hard and diligently on their chapters, who have been patient and comprehensive throughout the process of producing this book, and who have been supportive and helpful at every stages of the book. We have very special thanks for Heather Hachigian. The range of Heather’s inputs may not necessarily be always visible, but her help and support has been tremendous. She has contributed not only in writing a chapter but also in the small details of the editorial process. Her professionalism and thoroughness have been an invaluable help. Many thanks to our institutions, Audencia School of Management, and the SSHRC-funded Responsible Investing Initiative of the Carleton Centre for Community Innovation, Carleton University and also Vlerick Management School for giving us the opportunity to write the book in the first place. We would like to thank William Sun, the editor of the Emerald series ‘Critical Studies on Corporate Responsibility, Governance and Sustainability’. By bringing back the ‘ethics’ in SRI, by pushing the agenda on the societal impacts of SRI, we knew that our book would not be an easy trajectory and above all would deviate from the mainstream publications on SRI. Thank you for trusting us in bringing together this book. Thank you also for offering us the opportunity to further research on Socially Responsible Investment. Thank you for your support. We would like to thank the Martyn Lawrence at Emerald Group Publishing Limited who has followed us and advised us all along the xxi

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project. We also extend our thanks to the staff at Emerald for their support throughout the editing process. We would like to thank the Principles for Responsible Investment Academic Network for their support and allowing us to hold a workshop at the 2012 PRI-CBERN Academic Conference at York University. We would like to thank the 14 reviewers for providing critical and constructive comments on the chapters. On behalf of all the authors, we would like to thank you. Your comments have helped improving the quality of the book. We are also grateful to many friends and colleagues who have helped us in shaping the book. Their encouragements and suggestions throughout the project have been hugely appreciated. We would like to thank some people individually for their support, insights, challenging questions, and generosity in time and ideas: James Gifford, Jim Hawley, Steve Lydenberg, the participants in our focus group workshop held on October 2013 in Toronto, Canada. Incalculable thanks go to those whose names we’ve forgotten to mention and to the numerous people who have intentionally or unintentionally contributed to the book. Finally a note of thanks to our families, your patience during the many hours spent on this volume enable us to undertake this work we could not do it without your love and support.

PART I INTRODUCTION

EXPLORING THE SOCIETAL IMPACTS OF SRI Tessa Hebb, Ce´line Louche and Heather Hachigian ABSTRACT Purpose The objective of this chapter is twofold. It first introduces the theme of the book. There are many ways of looking at socially responsible investment (SRI). It can be viewed as a financial product where the financial performance is the outmost important aspect and cannot be compromised. Or it can be regarded as a force for change to promote and stimulate a more sustainable development. In this chapter we provide a literature review on SRI especially on the notion of the impact and how it has been addressed so far in the literature. The second objective of the chapter is to provide an overview of the volume by introducing each chapter. Methodology This chapter reviews the literature on SRI as well as the chapters included in this volume. Findings If SRI is about making a change toward sustainability, we ought to study its societal and environmental impacts. Although scholar articles on SRI have gained importance in the two last decades, very little is known on its impact. Research has developed from a narrow concern with negative screening and divestment in isolated cases to

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 3 20 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007001

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a rigorous analysis of its financial performance across a range of ethical and ESG issues. While we have identified some studies that are beginning to explore the potential impact of SRI for society, this remains a crucial area to explore. Originality/value of the chapter The chapter contributes to the debates on the societal impact of SRI, a debate that needs to be continued even if or just because it raises some fundamental questions that are complex and difficult but also necessary to advance SRI. Keywords: Socially Responsible Investment; societal impacts; ethics; future of SRI

INTRODUCTION With this book we address one of the fundamental and basic questions of Socially Responsible Investment (SRI): does it make any difference to society and societal challenges? Socially Responsible Investment has emerged from a strong will to make the world a better place, to promote social justice, and to ensure a sustainable world. But as a mechanism for change, how effective has it been and what is its potential going forward? SRI can be described as a product, a practice, and a process. It is an investment product in the sense that in addition to financial factors, investors acquire, hold, or dispose of companies’ shares on the basis of environmental, societal, governance (ESG), and ethical factors. It is a practice in the sense that SRI is a way to identify companies with strong sustainability records and to engage with companies to encourage improved ESG performance. And SRI is a process through which investors try to influence corporations’ behavior on a range of societal and environmental issues to move toward more sustainable development. Although SRI manifests itself in many ways and goes by many names it has a common purpose: long-term value creation. SRI recognizes that corporate responsibility and societal concerns are valid parts of investment decisions. SRI considers both the investor’s financial needs and an investment’s impact on society. SRI investors encourage corporations to improve their practices on environmental, social, and governance issues. (US SIF, 2011)

Two main ideas are underlying the concept of SRI. First, investing is not a “neutral” activity. Through their investment decisions, investors have

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an impact on society and the environment. SRI is a way to recognize this impact and to minimize negative externalities while maximizing positive ones. Second, investors can play an important role in the major societal and political debates such as globalization, human rights, the relationship between corporation and society as well as the role of the capital market in creating both social and financial value. Therefore and thereby, investors can be a force for change. While literature on SRI has increased tremendously over these last two decades, the literature has mainly focused on the technicalities and the financial implications of SRI. We believe that the time is ripe to (re-)open the fundamental questions of the societal impacts of SRI. One may rightly ask: if SRI doesn’t make any difference, should we continue to promote and practice SRI? If SRI doesn’t make a difference, what could be changed to make sure SRI is not losing its “raison d’eˆtre”? The objective of this book is to explore the societal impacts of SRI. We want to investigate the question of whether or not SRI generates positive societal and environmental results, whether or not SRI has the capacity and ability to participate to a change toward sustainable development.

WHAT IS SRI? Socially responsible investing or SRI draws on a vast nomenclature. The field is littered with terms and acronyms, each embodying a particular nuanced understanding of this form of investment. Labels such as ethical investing; responsible investing or RI; ESG or environmental, social and governance considerations; SEE or social, environmental, and ethical considerations; themed investing; impact investing; double or triple bottomline investing; ETIs or economically targeted investing; mission investing; and community investing provide us with just some of the vocabulary used to describe the act of bringing considerations beyond simply financial into investment decision-making. For the purposes of this volume, we define socially responsible investing as bringing ethical, environmental, social, and governance factors into investment decision-making. We define responsible investing or RI as taking three of these four considerations into account, environmental, social, and governance. This investment approach is based on the business case for such activity and suggests it can lower investment risk and may generate greater financial value either for individual stocks or for the economy as a whole.

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While SRI includes these three ESG dimensions, it adds a fourth that of ethical considerations. Some ethical considerations reside at the individual investor level, while others are more universal, drawing on broad social norms that effect society as a whole. At their core, such ethical considerations are deeply moral and suggest a set of values to be advanced within society. SRI rests on three pillars. The first is screening stock either positively, that is, selecting stock deemed to be best of class or best of sector, or negatively, that is, removing stocks from an investment portfolio that do not meet the ethical, environmental, social, or governance standards of the investor. The second pillar is shareholder advocacy that is using the rights granted to company shareholders in order to advance ethical, environmental, social, and governance standards within the firm. Shareholder advocacy can range from voting proxies, and engaging directly with company management, to putting forward minority shareholder resolutions, and mounting active shareholder campaigns. The third tool in the SRI toolbox is community investment. Here the investor intentionally invests in opportunities that have positive impact on communities. Such investments can include microfinance, affordable housing, clean technologies, and brown field reclamation. SRI tools and investment approaches have been used since the 1700s (the evolution of SRI will be discussed in greater length later in this chapter). In the past, SRI has been closely associated with the use of negative screening in investment selection. Notably the South Africa investment boycott of the 1980s that helped bring an end to apartheid in that country. Now all three pillars of SRI are widely employed, and positive screening is used as often as negative screens by investors. SRI investors are able to satisfy their twin goals of achieving satisfactory financial returns (Margolis, Elfenbein, & Walsh, 2009) while influencing greater positive benefit for society. But has SRI made a difference to society at large? That is the key question that informs the contributions to this volume. We will explore the questions posed for this volume in greater detail in the next section of this introductory chapter.

UNDERSTANDING SRI’S EVOLVING NATURE From its initial focus on the collective action among investors to bring pressure to bear on corporations operating in apartheid South Africa,

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socially responsible investment (SRI) literature has deepened over the past four decades, reflecting the maturing practice of integrating ethical and ESG considerations into investment decisions and ownership. Several academic disciplines are now engaging with SRI, including law, politics, economics, and even psychology and sociology, reflecting efforts to confront the new and complex challenges related to its growth in practice. Disagreements in the literature over the relevance of ethics for SRI and the competing explanations for its expansion into new geographies and asset classes have attracted criticism in recent years for contributing to the literatures’ lack of consistency (Entine, 2003; Sparkes & Cowton, 2004). Yet others consider this heterogeneity to be a desirable characteristic for the mainstreaming of SRI (Sandberg, Juravle, Hedesstro¨m, & Hamilton, 2009). In practice, Derwall, Koedijk, and Ter Horst (2011) suggest the differing approaches to SRI actually complement each other, at least in the short run. While the literature has approached the topic from a rich diversity of empirical and methodological starting points, it has maintained a narrow focus on the question of SRI’s financial performance. It is perhaps the corresponding neglect for SRI’s broader societal implications where criticism is better placed. To navigate the unfolding story of SRI, we identify the four phases of modern SRI literature: (1) divestment and negative screening in the 1970s 1980s; (2) financial performance of SRI mutual funds in the 1990s early 2000s; (3) mainstreaming SRI in the mid-2000s; and (4) renewed legitimacy of SRI, post-financial crisis. These phases are not intended to be definitive, but rather porous constructs, and it is the spilling over at their margins that permit us to identify conflicts, interdependencies and gaps and predict future trajectories.

DIVESTMENT AND SCREENING: 1970S 1980s The South African apartheid served as an early rallying point for much of SRI literature. Beyond the success attributed to non-state actors for bringing about regime change (e.g., Rodman, 1994), early SRI literature focused on the financial implications for investors of divestment and screening out stocks of companies operating in the region. The South African divestment campaign remains a strong reference point in modern SRI literature (Capelle-Blancard & Monjon, 2012).

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One of the pioneering studies to mark the beginning of the modern SRI literature considers whether socially responsible companies present higher expected returns for investors and consequently provide financial benefits for social investors (Moskowitz, 1972). Instead of following on this line of inquiry by engaging with questions on the potential societal impacts of SRI, the proceeding studies in this early literature have taken a different course, focusing on financial performance. In particular, the literature in this phase is preoccupied with determining whether screening leads to loss of diversification and by extension of the theoretical logic of modern portfolio theory (Markowitz, 1952), a negative impact on financial performance (Grossman & Sharpe, 1986; Rudd, 1979, 1981; Wagner, Emkin, & Dixon, 1984). The studies focus on passive strategies, often taking the form of comparing screened indices to convention indices. For example, Grossman and Sharpe (1986) begin from the premise that screening companies operating in South Africa places a constraint on the options available to investors and thereby this can only have a negative or at best negligible effect on portfolio performance. They find that a portfolio that screens companies operating in South Africa outperforms a conventional index (the NYSE), but they attribute this to the bias in the screened portfolio due to its overweight on small cap companies.

SRI MUTUAL FUNDS AND PERFORMANCE: 1990s 2000s Hamilton, Jo, and Statman (1993) criticize this early literature for its focus on passive SRI strategies because it neglects the emerging reality of actively managed funds. They also emphasize the importance of moving beyond the South African case to consider other ethical screens that were becoming popular in the later 1980s. This second phase of literature is predominantly concerned with the question of performance of SRI funds in comparison with conventional funds. That is, the second phase of SRI literature focuses on determining whether it is possible to do well, while also doing good (Hamilton et al., 1993). The studies look exclusively on equities, leaving community investing outside the realm of most SRI literature (Sparkes, 2001). Data are drawn largely from the United States and to a lesser extent, the United Kingdom. Similar to Hamilton et al. (1993) most studies find a negligible effect of

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social screening on the risk adjusted returns of a fund when compared with a conventional fund (Diltz, 1995; Goldreyer, Ahmed, & Diltz, 1999; Guerard, 1997; Statman, 2000). For example, Goldreyer et al. (1999) compare socially screened mutual funds with a random sample of conventional funds over a 16-year period and find there is no significant difference in performance. Statman (2000) finds socially responsible mutual funds outperform relative to conventional funds, controlling for size, though the difference is not statistically significant. Geczy, Stambaugh, and Levin (2005) find a negative performance for SRI funds, but it is also not statistically significant. However, they do suggest there are costs associated with SRI and they vary depending on investment strategy. For those studies that find a positive performance of SRI portfolios relative to conventional funds (Scholtens, 2005; Statman, 2000) the difference is often attributed to survivorship bias, where funds that failed were excluded from the sample or a small cap bias in the screened funds, identified by Grossman and Sharpe (1986) and in the UK context, by Luther and Matatko (1994). Since Moskowitz (1972), few studies have explored the possibility of doing well because of doing good, or in other words, whether there is value associated with firms that are socially responsible. In their meta-analysis, Orlitzky, Schmidt, and Rynes (2003) suggest there is a virtuous relationship between social responsibility and financial performance, whereby financial performance allows firms to engage in social responsibility initiatives, and similarly, better social performance can improve financial performance. Yet the role of SRI in encouraging firms to increase their concern for social responsibility is only implicitly considered. Taking up this issue, Rivoli (2003) extends financial theories of downward sloping demand curves for equity to suggest that screening under imperfect market conditions will affect the firm’s cash flow, thereby suggesting that firms will be more responsive to SRI under steeper demand curves. Given the challenges with attributing change in behavior to corporate engagement, the paper focuses only on screening. Further, the study is based on theoretical arguments, leaving empirical investigation of its claims to future research.

MAINSTREAMING SRI: MID-2000s Literature on the performance of SRI mutual funds becomes increasingly sophisticated in this third phase, for example, giving consideration to the

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consequences of different types of screens (Kempf & Osthoff, 2007) and the curvilinear relationship associated with multiple screens (Barnett & Salomon, 2006). However, the most important feature of this phase is the mainstreaming of SRI, motivated by the recognition that SRI mutual funds represent an insignificant share of ownership relative to the market and suffer from collective action problems, thereby undermining their capacity to effect change in corporate social responsibility (Johnsen, 2003). Further, since negative externalities are often the consequences of risks endemic in the market rather than risks associated with individual firms, Haigh and Hazelton (2004) have pointed out that targeting individual stocks through activism or screening is unlikely to result in systemic change. Theoretical work on the link between sustainable development and long-term financial performance of institutional investors has also encouraged the uptake of SRI among pension funds (Clark, 2000; Clark & Hebb, 2004; Hawley & Williams, 2000). It is in this context of mainstreaming SRI that the ethical and business cases have fragmented into distinct motivations for integrating extrafinancial considerations into investment decisions. This fragmentation is accompanied by new terminology to reflect the nuances in investment strategies. For example, responsible and sustainable investments are often used to distinguish mainstream SRI from investment strategies with ethical motivations (Sandberg et al., 2009; Woods & Urwin, 2010). In fact, the reference to ethics has dropped significantly from the literature over recent years (Capelle-Blancard & Monjon, 2012). The ambiguous performance of SRI relative to conventional strategies found in previous studies (see Renneboog, Ter Horst, & Zhang, 2008) has spilled over to a spirited debate in the context of public pension funds. For example, Munnell and Sunden (2005) argue that public pension funds cannot engage in SRI because it requires a sacrifice in financial returns and thereby violates trustees’ fiduciary duty. Conversely, Sethi (2005) argues pension funds have no alternative, drawing the link between SRI and sustainable development to suggest that “an exclusive or even primary emphasis on return on capital, which is generally narrowly defined and with a short-term time perspective, would inflict enormous harm on the maintenance of free enterprise system, however imperfect” (p. 8). The literature is also beginning to pay more attention to nationally and culturally distinct varieties of SRI. While it is often assumed that modern SRI originated in the United States during the politically charged Vietnam War era (e.g., Schueth, 2003), consideration for the historical and cultural origins of SRI in other regions has led some to draw distinctions between

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a European and American brand of SRI (Bengtsson, 2008; Louche & Lydenberg, 2006). More recently, consideration for culturally distinct varieties of SRI has been extended to Asian markets (Sakuma & Louche, 2008). Yet this literature has not yet considered the implications of these cultural differences. That is to say, SRI investors are often perceived largely as a homogenous group of investors (Derwall et al., 2011). Paradoxically, the extension of SRI to fiduciary investors that is seen as necessary for having any meaningful impact for society (Johnsen, 2003; Haigh & Hazelton, 2004) can have perverse effects, and some argue that “responsible investing” has become indistinguishable from conventional investing (Eccles, 2010; Richardson, 2009).

RENEWED LEGITIMACY OF SRI: 2009

PRESENT

The current phase of SRI literature is characterized by a renewed legitimacy for SRI in the context of post-financial crisis 2007 2008. Unlike the previous literature, this legitimacy does not depend on the financial performance of SRI, but rather, on the contribution of SRI to long-term economic stability. For example, some recent evidence suggests SRI funds are more resilient to large-scale shocks to the economy (Nakai, Yamaguchi, & Takeuchi, 2011) and socially conscious investors are more loyal to their financial institutions than conventional investors (Bauer & Smeets, 2013; Bollen, 2007; Glac, 2009). Further, in light of the failure of financial regulation, SRI has been cast as a governance mechanism in its own right, not only for corporations, but also for investors themselves (Richardson, 2011). A second important feature of this phase is the extension of SRI literature to sovereign wealth funds (SWFs). Given their long-term investment horizons and lack of formal legal accountability, SWFs are viewed as having a unique capacity for introducing ethical considerations into financial markets (Halvorssen, 2011; Richardson, 2011). Indeed, funds such as the Norwegian Government Pension Fund-Global have attracted significant attention for their ethical screening criteria applied to their investments (Backer, 2009; Clark & Monk, 2010; Halvorssen, 2011; Richardson, 2011). A third feature is the increase in attention to impact investing and the extension of SRI into new asset classes including real estate, private equity, and commodities. This new development has mostly been taken up in the form of industry and SIF annual reports (Eurosif, 2011, 2012;

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Knoepfel, 2011; O’Donohoe, Leijonhufvud, Saltuk, Bugg-Levine, & Brandenbrug, 2010). It is unclear at this stage whether the academic literature following on from these new developments in practice will maintain a similar focus on financial performance, or branch out to consider the societal impacts of SRI in these new areas. In public equities, there is some new work that is beginning to explore the impact of SRI on society. This literature can be divided by its emphasis on screening or engagement. Gifford (2010) considers the attributes that contribute to successful shareholder engagement, finding that investor legitimacy is the most salient factor for changing firm behavior. Extending this work, Hebb, Hachigian, and Allen (2012) and Allen, Letourneau, and Hebb (2012) draw on interviews with both firms and investors to analyze the private dialogue that has previously been regarded as a challenge to investigating the impact of engagement on corporate behavior (Rivoli, 2003). Dimson, Oguzhan, and Xi (2012) find evidence that the success of engagement depends on whether the target firm is concerned about its reputation and whether the target has the capacity to implement the desired CSR changes. With respect to screening, Ghoul, Guedhami, Kwok, and Mishra (2011) find that US firms with high CSR scores experience lower cost of equity, particularly for those firms that score high on employee relations, the environment, and product strategies. They also find that firms involved with tobacco and nuclear power experience higher cost of equity. While the literature is taking a step closer to investigating the relationship between SRI and corporate behavior, such studies still leave open the question of whether the lower cost of equity actually causes less responsible firms to change their behavior.

LITERATURE GAP Modern SRI literature has developed from a narrow concern with negative screening and divestment in isolated cases to a rigorous analysis of its financial performance across a range of ethical and ESG issues. It has moved beyond a concern with screening and divestment to reflect the diversity of approaches used by investors to integrate their concern for ethical and ESG considerations, including shareholder advocacy and targeted community investment. While we have identified some studies that are beginning to explore the potential impact of SRI for society, such as its contribution to market

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governance (Richardson, 2011) and economic stabilization (Nakai et al., 2011); its distinct cultural varieties (Bengtsson, 2008; Louche & Lydenberg, 2006); and the implications of the unique behavioral characteristics of SRI investors (Bollen, 2007; Glac, 2009) these are dwarfed by the energy that is devoted to the question of SRI’s financial impacts for investors. In general, little research has been undertaken on the organizational, behavioral, cultural, societal, environmental, and ethical impacts of SRI. The objective of this book is to explore these impacts. We want to investigate the question of whether or not SRI generates positive societal and environmental results, and whether or not SRI has the potential to participate to a change toward sustainable development.

OVERVIEW OF THE VOLUME We bring together 22 contributors across 12 chapters who were asked whether SRI makes a difference in the 21st century. Each chapter approaches this question through its authors’ unique lens. Some draw on their direct experience in the SRI field. Others provide a more theoretical approach to the question. We have divided these chapters into three sections: SRI impacts, SRI challenges, and SRI developments. We close the volume with some final thoughts on the future of SRI. The first section of the volume deals with SRI impact. How has engagement of SRI investors contributed to delivering positive change for communities? In the chapter “Mobilizing SRI through Investor Governance Networks: The Politics of Collective Investor Action,” Michael R. MacLeod of George Fox University suggests that socially responsible investment is a political as well as economic phenomenon. For him a key aspect of political action is “the power of the collective.” To gain a deeper understanding of this collective action, he explores what he terms investor governance networks (IGNs). For MacLeod, IGNs, while often ignored by scholars, provide a key component for advocating the goals of 21st century socially responsible investment. The chapters “Shareholder Engagement and Chevron’s Policy 520 on Human Rights: The Role Played by the United States Jesuit Conference’s “National Jesuit Committee on Investment Responsibility” and “Social Innovation and Investment: The ShoreBank Experience” of this volume draw on concrete examples of SRI engagement over the past 10 years. In the chapter “Shareholder Engagement and Chevron’s Policy 520 on Human

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Rights: The Role Played by the United States Jesuit Conference’s “National Jesuit Committee on Investment Responsibility”,” Nicholas J. C. Santos, John Sealey, and Austin G. C. Onuoha explore the impact of shareholder engagement on the large multinational Chevron with particular attention paid to the role religious investors played in Chevron’s dealings with communities in Nigeria. The chapter draws on the direct experience in this engagement by two of the author’s. It finds that the engagement was successful and attributes this success to the coalition of shareholders that the proponents, the Society of Jesus (Jesuits), were able to build. This case study also suggests that credibility of shareholder in the engagement was another key factor contributing to this success. The chapter “Social Innovation and Investment: The ShoreBank Experience” provides another case study exploration of the impact of SRI. Four authors contribute to this exploration of ShoreBank’s experience as a leading edge, community development financial institution. Fiona Wilson, James Post, Ronald Grzywinski, and Mary Houghton detail ShoreBank’s experience as an innovative financial institution. They suggest six key lessons learned from this case study. They go on to propose ways in which to apply those lessons to other financial institutions. This chapter benefits from extensive interviews with two of the bank’s founders, Ronald Grzywinski and Mary Houghton, who also served as the bank’s leaders for more than 37 years. This section of the volume traces SRI through coalitions of investors, the engagement of shareholders acting in coalition, and their ability to help corporations address major social issues, through to community-based SRI institutions operating at the community level. The last chapter in this section, “The Emergence of Impact Investments: The Case of Microfinance,” examines the case of microfinance as a key SRI strategy and explores its ability to make a difference for society. Harry Hummels and Marieke de Leede draw on the relatively new terminology of impact investing in which to place microfinance and understand its effectiveness to address issues of poverty around the world. They suggest that “the positive thing about impact investing is often that it opens up opportunities. In terms of microfinance, the most important value is not that it offers borrowers the opportunity to grow out of poverty, but that it improves the control of the borrowers over their own lives.” This chapter looks at microfinance and the new phenomena of impact investing through the lens of SRI and finds it is a valuable tool to advance SRI impact for society. While Part II of this volume provides a positive assessment of SRIs ability to make a positive difference in society, the third section of this

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volume offers up a more critical stance as to the limits and effectiveness of SRI. In their chapter “Where Do-Gooders Meet Bottom-Liners: Disputes and Resolutions Surrounding Socially Responsible Investment,” Christel Dumas and Emmanuelle Michotte ask “what vision of the world and of justice is debated and justified in today’s SRI discourse” in order to better understand whether SRI is able to fulfill its promise of positive change in the current financial system or simply a reinforces the status quo. Their findings suggest that in some disputes, SRI draws on market logic and as a result reinforces conventional finance. This limits SRI’s ability to provide meaningful change in the financial market. Yet, at other times SRI challenges convention offering up alternative discourse that draws on social justice as a framework. This alternative discourse provides a “hybrid” construction that could be useful in advancing SRI’s societal goals. However the authors suggest that to date SRI is often used by the financial market to appease its critics rather than providing vehicle for meaningful positive change of the market itself. Such findings suggest that we must contain our expectations as to what SRI can and cannot deliver. Ben Jacobsen builds on the current limitations to SRI in the next chapter of this volume. He argues that the voluntary nature of companies’ compliance with SRI investor demands limits the effectiveness of SRI to address key pressing global issues such as climate change. He suggests that the effectiveness of SRI corporate engagement on climate change can be increased through a responsive regulation framework. Such a framework contains both steps that provide positive reinforcement for compliance and a corresponding set of mandatory sanctions if corporate changes are not made. Through constructing a responsive regulation framework, SRI can provide the positive approaches needed, while a more robust regulatory environment sets forth the sanctions to be applied in order to address the global challenges we face as a society. In their chapter “Company–Community Agreements in the Mining Sector,” Ben Bradshaw and Caitlin McElroy explore the phenomenon of company community agreements in the mining sector. They argue that assessing the social performance of companies is very often a very difficult task, onerous, and full of uncertainties. Thereby the ability of SRI analyst to assess the social performance of companies when it comes to the company community relations remains very limited. The chapter challenges SRI analyst to rethink their approach to screening and engaging the mining sector in order to advance the interests of Indigenous communities. They propose to use community agreements as a proxy for the “community relations” in the global mining sector, and call upon investors to advocate

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for their further use in order to reduce the riskiness of their investments, address social justice concerns, and assist communities to visualize and realize their goals. Part IV of SRI in the 21st Century details the governance structures needed to deliver SRI results for society at large. In the chapter, “Ethics, Politics, Sustainability and the 21st Century Trustee,” Steve Lydenberg, a noted SRI pioneer and leading expert on the topic, explores investment decisions of financial trustees and finds that trustees must take into account the world in which the beneficiary lives. As a result these fiduciary decisions do not take place in a vacuum and must on occasion consider the ethical dimension and the actions that flow out of such decision-making. Lydenberg argues that while necessary, these considerations “should be commensurate with the levels of concern raised by these issues, should be potentially effective, should not unreasonably affect financial performance, and should not require excessive expenditure of resources.” The chapter “SRI in South Africa: A Melting-Pot of Local and Global Influences” turns the focus of the volume back to South Africa where much of modern SRI was incubated in the 1970s and 1980s antiapartheid era. Stephanie Giamporcaro and Suzette Viviers ask how SRI evolved in South Africa postapartheid. SRI in South Africa has been influenced by both global and local trends. As a result SRI in South Africa has become a “melting pot of societal values anchored in a local transformative and developmental political vision, some local and global Islamic religious values and worldwide SRI and CSR homogenization trends.” The last chapter in this section of the volume, “To Govern and Be Governed: The Governance Dimensions of SRI’s Influence” directly tackles the governance issues in SRI. Benjamin J. Richardson brings his legal scholarship of SRI to bear on the question of social investors’ capacity to “govern” the financial market when their actions are “constrained by gaps and deficiencies in the legal frameworks for the financial economy.” He finds that while SRI investors are starting to broaden their scope of action to include regulatory reforms that remove barriers to shareholder action, to date much of the SRI attention has been focused on its own voluntary codes of conduct including the Principles for Responsible Investment (PRI). As suggested earlier in the chapter titled “Increasing the Effectiveness of SRI Corporate Engagement on Climate Change through a Responsive Regulation Framework”, Richardson suggests that SRI’s impact on society can be more effective when incorporating legal standards into its activities. Simultaneously state regulation may be equally strengthened when operating in tandem with the SRI industry.

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The volume closes with a chapter exploring some of the key questions laid out to inform the volume. The volume editors Ce´line Louche and Tessa Hebb draw on interviews and focus group discussion with key SRI leaders in this examination of SRI. We conclude with some final thoughts on the future of SRI and the challenges it faces going forward.

CONCLUSION Twelve chapters; 12 different perspectives and approaches on the impact of SRI. Together they provide insights enriching and contributing to the discussion on the societal impact of SRI. We do not suggest that this volume covers all aspects and facets of SRI’s impact. More research needs to be done. More questions need to be raised. More debates need to take place. Our objective is to start a dialogue which, from our point of view, has not yet taken place. We would like to thank the contributors of this book for taking the lead in engaging in this discussion and above for starting what we hope will turn into a rich and vigorous debate.

REFERENCES Allen, R., Letourneau, H., & Hebb, T. (2012). Shareholder engagement in the extractive sector. Journal of Sustainable Finance & Investment, 2(1), 3 25. Backer, L. C. (2009). The Norwegian sovereign wealth fund: Between private and public, Georgetown Journal of International Law, 40, 1271 1280. Barnett, M. L., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27, 1101 1122. Bauer, R., & Smeets, P. (2013). Social preferences and investor loyalty. Retrieved from SSRN: http://ssrn.com/abstract=2140856 or http://dx.doi.org/10.2139/ssrn.2140856 Bengtsson, E. (2008). A history of Scandinavian socially responsible investing. Journal of Business Ethics, 82(4), 969 983. Bollen, N. P. (2007). Mutual fund attributes and investor behavior. Journal of Financial and Quantitative Analysis, 42, 683 708. Capelle-Blancard, G., & Monjon, S. (2012). Trends in the literature on socially responsible investment: Looking for the keys under the lamppost. Business Ethics: A European Review, 21(3), 239 250. Clark, G. L. (2000). Pension fund capitalism. Oxford: Oxford University Press. Clark, G. L., & Hebb, T. (2004). Pension fund corporate engagement: The fifth stage of capitalism. Relations Industrielles, 59(1), 142 171.

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Clark, G. L., & Monk, A. (2010). The Norwegian government pension fund: Ethics over efficiency. Rotman International Journal of Pension Management, 3(1), 14 19. Derwall, J., Koedijk, K., & Ter Horst, J. (2011). A tale of values-driven and profit-seeking social investors. Journal of Banking & Finance, 35(8), 2137 2147. Diltz, J. D. (1995). Does social screening affect portfolio performance? Journal of Investing, 4, 64 69. Dimson, E., Oguzhan, K., & Xi, L. (2012, September 30). Active ownership. SSRN eLibrary. Eccles, N. S. (2010). UN principles for responsible investment signatories and the antiapartheid SRI movement: A thought experiment. Journal of Business Ethics, 95(3), 415 424. Entine, J. (2003). The myth of social investing: A critique of its practice and consequences for corporate social performance research. Organization & Environment, 16(3), 352 368. Eurosif. (2011). European SRI study 2010. Retrieved from http://www.eurosif.org/images/ stories/pdf/Research/Eurosif_2010_SRI_Study.pdf. Accessed February 15, 2011. Paris: Eurosif. Eurosif. (2012). European SRI study 2012. Retrieved from http://eurosif.org/images/stories/ pdf/1/eurosif%20sri%20study_low-res%20v1.1.pdf. Belgium: Eurosif. Geczy, C., Stambaugh, R. F., & Levin, D. (2005). Investing in socially responsible mutual funds. Retrieved from SSRN: http://ssrn.com/abstract 416380 or http://dx.doi.org/ 10.2139/ssrn.416380 Gifford, J. (2010). Effective shareholder engagement: Factors that contribute to shareholder salience. Journal of Business Ethics, 92(1), 79 97. Glac, K. (2009). Understanding socially responsible investing: The effect of decision frames and trade-off options. Journal of Business Ethics, 87(Suppl. 1), 41 55. Ghoul, E. S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35(9), 2388 2406. Goldreyer, E. F., Ahmed, P., & Diltz, J. D. (1999). The performance of socially responsible mutual funds: Incorporating sociopolititcal information in portfolio selection. Managerial Finance, 25(1), 23 36. Grossman, B. R., & Sharpe, W. F. (1986). Financial implications of South African divestment. Financial Analysts Journal, 42, 15 29. Guerard, J. (1997). Is there a cost to being socially responsible in investing? Journal of Investing, 6(2), 11 18. Haigh, M., & Hazelton, J. (2004). Financial markets: A tool for social responsibility? Journal of Business Ethics, 52(1), 59 71. Halvorssen, M. (2011). Using the Norwegian sovereign wealth fund’s ethical guidelines as a model for investors, be they private or government-owned, European Company Law, 8(2/3), 88 93. Hebb, T., Hachigian, H., & Allen, R. (2012). Measuring the impact of corporate engagement in Canada. In Hebb, T. (Ed.). The next generation of responsible investing (pp. 258). Netherlands: Springer Publishing. ISBN: 978-94-007-2347-4. Hamilton, S., Jo, H., & Statman, M. (1993). Doing well while doing good? The investment performance of socially responsible mutual funds. Financial Analysts Journal, 49, 62 66. Hawley, J. P., & Williams, A. T. (2000). The rise of fiduciary capitalism: How institutional investors can make corporate American more democratic. Philadelphia, PA: University of Pennsylvania Press. Johnsen, D. B. (2003). Socially responsible investing: A critical appraisal. Journal of Business Ethics, 43(3), 219 222.

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Kempf, A., & Osthoff, P. (2007). The effect of socially responsible investing on portfolio performance. European Financial Management, 13(5), 908 922. Knoepfel, I. (2011). Responsible investment in commodities: The issues at stake and a potential role for institutional investors. Zurich: Values Investment Strategies and Research. Retrieved from http://www.unpri.org/files/RI_commodities_Jan2011.pdf Louche, C., & Lydenberg, S. (2006). Socially responsible investment: Differences between Europe and United States. Working Paper No. 2006-22. Belgium: Vlerick Leuven Gent Management School. Luther, R. G., & Matatko, J. (1994). The performance of ethical unit trusts: Choosing an appropriate benchmark. British Accounting Review, 26, 77 89. Margolis, J. D., Elfenbein, H. A., & Walsh, J. P. (2009, March 1). Does it pay to be good … and does it matter? A meta-analysis of the relationship between corporate social and financial performance. Retrieved from http://ssrn.com/abstract = 1866371 or http://dx.doi.org/10. 2139/ssrn.1866371 Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77 96. Moskowitz, M. R. (1972). Choosing socially responsible stock. Business and Society Review, 1, 71 75. Munnell, A. H., & Sunde´n, A. (2005). Social investing: Pension plans should just say no. In J. Entine (Ed.), Pension fund politics: The dangers of social investing. Washington, DC: AEI Press. Nakai, M., Yamaguchi, K., & Takeuchi, K. (2011). Are SRI funds more resilient towards the global financial crisis? Discussion Paper No. 1018. Graduate School of Economics, Kobe University, Kobe, Japan. O’Donohoe, N., Leijonhufvud, C., Saltuk, Y., Bugg-Levine, A., & Brandenbrug, M. (2010). Impact investments: An amerging asset class. New York: J.P. Morgan Global Research and The Rockefeller Foundation. Retrieved from www.rockefellerfoundation.org/whatwe-do/current-work/harnessing-power-impact-investing/ Orlitzky, M., Schmidt, F. L., & Rynes, S. L. (2003). Corporate social and financial performance: A meta-analysis. Organization Studies, 24(3), 403 441. Renneboog, L., Ter Horst, J., & Zhang, C. (2008). The price of ethics and stakeholder governance: The performance of socially responsible mutual funds. Journal of Corporate Finance, 14, 302 328. Richardson, B. J. (2009). Can socially responsible investment provide a means of environmental regulation? Monash University Law Review, 35(2), 262 295. Richardson, B. (2011). Sovereign wealth funds and the quest for sustainability: Insights from Norway and New Zealand. Nordic Journal of Commercial Law, 2, 1 27. Richardson, B. J. (2011). From fiduciary duties to fiduciary relationships for socially responsible investing: Responding to the will of beneficiaries. Journal of Sustainable Finance & Investment, 1(1), 5 19. Rivoli, P. (2003). Making a difference or making a statement? Finance research and socially responsible investment. Business Ethics Quarterly, 13, 271 287. Rodman, K. A. (1994). Public and private sanctions against South Africa. Political Science Quarterly, 109(2), 313 334. Rudd, A. (1979). Divestment of South African equities. The Journal of Portfolio Management, 5(3), 5 10. Rudd, A. (1981). Social responsibility and portfolio performance. California Management Review, 23(4), 55 61.

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Sakuma, K., & Louche, C. (2008). Socially responsible investment in Japan: Its mechanism and drivers. Journal of Business Ethics, 82(2), 425 448. Sandberg, J., Juravle, C., Hedesstro¨m, T. M., & Hamilton, I. (2009). The heterogeneity of socially responsible investment. Journal of Business Ethics, 87(4), 519 533. Scholtens, B. (2005). Style and performance of Dutch socially responsible investment funds. The Journal of Investing, 14(1), 63 72. Schueth, S. (2003). Socially responsible investing in the United States. Journal of Business Ethics, 43(3), 189 194. Sethi, S. (2005). Investing in socially responsible companies is a must for public pension funds, because there is no alternative. Journal of Business Ethics, 56, 99 129. Sparkes, R. (2001). Ethical investment: Whose ethics, which investment? Business Ethics: A European Review, 10, 194 205. Sparkes, R., & Cowton, C. J. (2004). The maturing of socially responsible investment: A review of the developing link with corporate social responsibility. Journal of Business Ethics, 52(1), 45 57. Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 56, 30 39. US SIF. (2011). The Forum for sustainable and responsible investment website. Retrieved from www.ussif.org. Accessed on July 15, 2011. Wagner, W. H., Emkin, A., & Dixon, R. L. (1984). South African divestment: The investment issues. Financial Analysts Journal, 40(6) 14 22. Woods, C., & Urwin, R. (2010). Putting sustainable investing into practice: A governance framework for pension funds. Journal of Business Ethics, 90, 1 19.

PART II SRI IMPACTS: ENGAGEMENT AND INNOVATION

MOBILIZING SRI THROUGH INVESTOR GOVERNANCE NETWORKS: THE POLITICS OF COLLECTIVE INVESTOR ACTION Michael R. MacLeod ABSTRACT Purpose This purpose of this chapter is to explore the political significance of modern socially responsible investing, specifically the emergence of investor governance networks (IGNs) and the collective activism of investors. Design/methodology/approach The research for this analysis is based upon insights and methodologies from political science, specifically within international relations and the constructivist theoretical approach. Investor networks are explored as social phenomena, an expression of changing values, and the contested realm of contrasting norms within the financial sector. Findings The chapter shows that the development of investor networks have followed a three-stage historical progression of emergence, transformation, and expansion. The increasing collective action by investors

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 23 42 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007000

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manifest in the creation of IGNs reflects the political nature of socially responsible investment in a world where governments are reluctant to lead and act on issues of importance to all citizens, not just investors. As such, these networks are part of the emerging global public domain, a transnational arena of discourse, contestation, and action where investors play a crucial role in articulating what is acceptable behavior by corporations. Originality The research in this chapter explores a particular aspect of socially responsible investment the mobilization of collective action by investors as a political phenomena, not just as an economic one, that has evolved over time. Very little research into SRI has been done from a political science perspective, contextualizing the rise of such investment as the confluence of collective action by increasingly powerful political actors in society. As such, the chapter has value to both scholars and observers of SRI because it emphasizes that the mobilization of investor networks results from broader societal dynamics that should not be underestimated by financial specialists and citizens alike. Keywords: Investor networks; financial activism; global governance; globalization; ICCR; CERES

MOBILIZING SRI THROUGH INVESTOR GOVERNANCE NETWORKS At its heart, socially responsible investment is as much a political phenomenon as it is an economic one. SRI is about the utilization of power to, in the words of a pioneer in the field, create “positive social change” in an increasingly complex and interconnected world (Domini, 2001). For political scientists, effecting such change is central to the very definition of politics; simply put, political power is the ability that actor “A” has to get actor “B” to do something it would rather not do. Since the early 1970s, socially responsible investors have been exerting their power and influence to get corporations to behave in a more responsible manner toward the societies in which they operate, and in so doing address concerns businesses would rather, on the whole, ignore. From a wider political perspective, SRI is central to the global movement toward greater corporate social responsibility, what Levy and Kaplan (2008) assert is one of the more striking

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developments of the past several decades in the global political economy. Karl Polanyi famously predicted that when the externalities of capitalism its social and environmental costs are perceived to have gone too far, people (whether through governments or social movements) attempt to “re-embed” the market economy back into society, to devise new rules, customs, and even institutions in order to sustain the market itself (Polanyi, 1944). One of these new institutions (governance mechanisms) is the result of increasing collective action by investors, starting in the United States and spreading globally. The institutionalization of this collective activism in a variety of forms including formal, investor-only organizations to informal alliances led by investors to multi-actor initiatives has been quite recent and rapid. While the oldest go back to the earlier days of modern socially responsible investing (the Interfaith Center on Corporate Responsibility (ICCR), created in 1971, and the Coalition for Environmentally Responsible Economies, created in 1989, now known simply as CERES), the vast majority are only a decade or so old and largely unfamiliar to the vast majority of citizens (among them: the Carbon Disclosure Project (CDP), the Investor Network on Climate Risk (INCR), the Investor Environmental Health Network (IEHN), the Church Investors Group, the Responsible Endowments Coalition, the Conflict Risk Network (CRN), the UN Principles for Responsible Investment, among others). Such “investor governance networks” (IGNs) represent the collective interests of trillions of dollars of investment capital, so their potential financial interests would be hard to overstate. These networks range from alliances of large asset owners and managers who work together on a variety of issues to arrangements of smaller groups of investors who focus on more specialized areas of common concern. They also vary in the extent to which non-investors civil society organizations and activists are involved in the IGN; some networks incorporate nongovernmental organizations (NGOs) directly or indirectly into their activities although most have an investor-only membership. Finally, the actual function of IGNs varies from extensive shareholder activism (through filing of shareholder resolutions or direct corporate engagement) to more modest attempts at collective action and shareholder advocacy such as information sharing and producing reports on specific issues of concern. How did these IGNs dedicated to responsible investment emerge? What is their political significance? How should we understand and explain their political power, that is, their ability to influence change in society as a whole and in the corporate world in particular? What is surprising is that this

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phenomenon of investor collective action is not particularly well-appreciated or even directly addressed in the increasingly voluminous literature on SRI.1 Within business management literature, until recently very few scholarly explorations of SRI explicitly tackle the rise of investor networks, and when they do, it is usually done on an ad hoc basis, assessing a specific organization’s mandate and impact.2 From a political science perspective the theoretical framework for this chapter these networks have also been essentially ignored as a force in the larger global political economy. But precisely because IGNs represent an instrument for social and political change, their development and impact are clearly worth understanding and explaining. The analysis here examines the emergence and evolution of investor collective action and their promotion of responsible investing by assessing the rise of IGNs chronologically and explaining their political significance in their development.3 Following and amending Louche and Lydenberg (2011) on responsible investment, it is argued that we can see three distinct phases in investor collective activism and the formation of IGNs: emergence, transformation, and expansion. In the first phase (early 1970s to late 1980s), we see the birth of the original IGN in the United States, the Interfaith Center on Corporate Responsibility (matched by similar attempts outside the United States), primarily motivated by faith-based, moral concerns over business behavior, which helped promote the modern shareholder activist movement through protest and confrontation. In the second phase (late 1980s to late 1990s), investor collective activism transforms from a confrontational approach to a more pragmatic one designed to influence and engage corporations, promulgating the benefits of coordinated action, specifically concerning the environment. Here we see the creation of the seminal CERES investor network, an innovative governance mechanism designed to persuade investors (and corporations) of the business case for environmental responsibility. In the last phase (early 2000s to the present), we see a great expansion in both the numbers and focus of IGNs, with a degree of sophistication and professionalization by investors and investor activists that seems to be leading to a consolidation of IGNs as legitimate and influential influences. The explanatory framework for the rise and power of IGNs utilizes insights from political studies, specifically from international relations theorizing. Precisely because these organizations and alliances attempt to steer the behavior of corporations in specific directions, we argue these networks are a form of global governance, a critical component of what John Ruggie calls the emerging “global public domain” a transnational arena of

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discourse, contestation, and action organized around the production of global public goods in which private, non-state actors (including investors) are playing an increasingly important role (Ruggie, 2004). As instruments of governance, IGNs are attempts to steer and reorient the behavior of business by holding corporations more accountable through improved information sharing, monitoring, and disclosure of business activities, and direct engagement on specific issues of interest to investors. In this way, IGNs operate in ways similar to what some international relations scholars describe as “transnational advocacy networks” (TANs) in their role as vehicles of principled persuasion, but differ from these in seeking to maximize profits in addition to the dissemination of values. The networks described here, in other words, both reflect the dictates of the market (the essential private institution) yet seek to transform it by using the power of socialization to challenge and change the ideas underpinning the global economy. Using the insights of constructivist theory in international relations, we can also see how IGNs are attempting to define a new global “norm” defined as standards of behavior for actors with a given identity (Finnemore & Sikkink, 1999) of responsible investment, through their work as “norm entrepreneurs” to facilitate this new norm’s emergence, cascade, and internationalization.

PHASE ONE: EMERGENCE (1970s 1980s) A definitive and comprehensive history of the early modern socially responsible investment movement has probably yet to be written.4 In the United States, it is commonly accepted that the turmoil over the Vietnam War and growing environmentalism in the 1960s after the publication of Rachel Carson’s famous Silent Spring are two of the key influences that helped propel the rise of corporate responsibility as a budding social movement. But what propelled some involved in investor activism to take a more collaborative approach was the intersection of a growing concern with corporate power and the mobilization of religious, faith-based shareholders. The US-based National Council of Churches of Christ (NCC) created a “Corporate Information Center” in 1969 to monitor and issue reports on specific corporate behavior on issues such as military arms production and sales, environmental pollution, and problems in developing countries. Its 1972 report, “Church Investments, Technological Warfare and the MilitaryIndustrial Complex” was notable for its specifying that “investment

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decisions are now deeply significant moral and social acts” (cited in Robinson, 2002). Director of the CIC Frank White said in 1973 that the churches’ challenge to corporations “was to bring some input into the business world about its concerns, basically moral and ethical, about how corporate decision affect people [and as a result corporations] now are very much aware that the church is there and is beginning to move.”5 In 1974, the CIC officially merged with another NCC-based entity, the Interfaith Committee on Social Responsibility in Investments, to create the new “Interfaith Center on Corporate Responsibility.” As Robinson (2002) describes, the ICCR blended the original six Protestant organizations with new members representing a variety of Catholic interests, including select dioceses, religious orders, and Catholic hospitals. From the start, the ICCR clearly had a political as well as economic agenda, particularly the power of multinational corporations and their global influence. The organization helped file the first religiously inspired, internationally focused shareholder resolution when the Bishop of the Episcopal Church stood at the annual meeting of General Motors and argued the company should withdraw its operations from South Africa because of the country’s apartheid political system (which later became a global divestment campaign in the 1980s). The ICCR’s impact on the evolution of modern socially responsible investment is difficult to understate and emblematic of this first, early emergent stage of collective investor activism. Such collaborations (from the late 1960s to the late 1980s) were more often than not motivated by the impetus of deep moral outrage (largely but not exclusively inspired by religious faith) at the actions of government and corporations in a time of societal transformation. In this sense, such activism was clearly normative based premised on a belief that there were unequivocal, morally unacceptable reasons to not invest in specific businesses or industries or countries (or to divest from them). Not only did the ICCR become a longstanding and highly active collaboration of investors, the organization also took serious the idea of working with outside groups (both domestic and international/foreign-based NGOs) in its activities. Working with other organizations, it led campaigns against companies doing business in South Africa, including Mobil and Citibank. Later on, ICCR began working with key NGO allies such as Oxfam on influencing pharmaceutical corporations to give better access to medicine in developing countries while maintaining their intellectual property rights (Baue & Rheannon, 2008). To this day, the organization’s activities are significantly influenced and aided by noninvestors, and by non-faith-based persons or entities where appropriate and useful.

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As the “original” IGN, the ICCR emerged in a time of deep politicization over many controversial issues. In a time when religion was more influential and respected than it is now, prominent churches and their leaders took initiative and created an innovative institution, a governance mechanism of investor collaboration with worldwide ramifications, not just for the United States. This IGN represented and reflected what modern SRI essentially was for much of the 1960s, 1970s, and 1980s: a niche-based financial instrument by which morally motivated investors could refuse to participate in businesses (or countries, as was the case of South Africa) who were perceived to be ignoring or breaking social conventions. While not all SRI proponents were not religious, of course, it is interesting to note that the only wide-scale, comprehensive action taken by investors to pool their collective interests and power was by this pioneering interfaith coalition. Compared to the 1970s, the ICCR now downplays the faith-based aspect of its political power. But the related imagery is certainly still useful in its campaigns even today; “you haven’t seen shareholder activism until you see a nun battling it out with CEOs. They can be devastating” (cited in Frel, 2005). Although American society is on the whole less religious than it was forty years ago, the organization’s leaders still see the mandate of the ICCR as being still driven by the moral demands of faith. The current Executive Director Laura Berry asserts that members are “guided by the prophetic voice of faith” whereby corporate behavior is seen “through eyes that are guided first by notions of justice and sustainability” (Baue & Rheannon, 2008). We can understand the political significance of the ICCR as the first IGN, and its political power through the use of both moral suasion, through the concept of “TANs” first utilized by Keck and Sikkink (1998). They described TANs as including those actors working internationally on specific issues, bound together by shared values, a common discourse, and dense exchanges of information and service. Such networks are marked by the centrality of values or principled ideas, the belief that individuals can make a difference, the creative use of information, and the use of sophisticated strategies in their campaigns, which are most often in the areas of the environment and human rights. Keck and Sikkink argue that TANs are “simultaneously principled and strategic actors, they ‘frame’ issues to make them comprehensible to target audiences, to attract attention and encourage action … they also promote norm implementation, by pressuring target actors to adopt new policies, and by monitoring compliance with international standards.”6

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The ICCR has clear parallels to this type of network. It has a highly institutionalized network of information sharing among its members and uses shareholder proxy resolutions to persuade corporations (and other investors) of the legitimacy of the issue at hand. Beyond the noted work in pressuring corporations over South Africa in the 1970s and 1980s, the organization became noted for its engagement in a high-profile battle with multinational corporations and their marketing of infant formula to mothers in developing countries, which led to significant exposure at the international level and changed behavior by businesses (Ermann & Clements, 1984). In the 1980s, the organization drew attention to the dangers of irradiated food and toxic waste. Through these notable cases, the ICCR served to draw attention to morally problematic business activities, especially in framing “apartheid” and “infant formula marketing” as incompatible with modern business, that is, as “inappropriate behavior.” In this way, following Finnemore and Sikkink (1999), we can argue that the ICCR emerged (and has continued to act as) as a “norm entrepreneur,” agents who advocate different ideas about appropriate behavior for a given actor. The organization has clearly attempted to define a new norm concerning the responsibilities of corporations in modern society, and thus redefine the identity of what being a “corporation” is in the global economy. At the very least, it is clear that ICCR has been at the forefront of helping to (re)shape the identity of financial investors themselves through its promotion of socially responsible investing, especially so during the critical decades of the 1970s and 1980s.

PHASE TWO: TRANSFORMATION (1990s) By the late 1980s, socially responsible investing overall had become more complex and multidimensional, broadening itself considerably from what it had been in the early days of the late 1960s. Increasing numbers of investment professionals in that decade had increasingly utilized their skills to portray SRI as a viable financial alternative, not merely one only dedicated to the moral imperative of doing right irrespective of the financial cost. By the time the Exxon Valdez oil tanker crashed off the coast of Alaska in March 1989, it set in motion a series of events, including a new movement dedicated to environmental sustainability that persists to this day, and, critically, spurring a new wave of collective investor activism that institutionalized collaboration in newly innovative ways.

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Although environmental groups were immediately critical of both the Exxon corporation and of the lack of governmental regulation in preventing the disaster, it was the action of some of the shareholders of Exxon that precipitated a new form of collective action by societal stakeholders. Investors faced significant losses resulting from a clear case of corporate malfeasance and their pressure on Exxon was the result of a newly organized collective effort among various interests. In the months after the event, leading investors, environmental groups, religious organizations, public pension trustees, and public interest groups gathered to form the CERES. In part because the US government under the George HW Bush administration was reluctant to enact new legislation to prevent future oil spills, the original members of CERES sought an alternative method to create new levels of corporate environmental responsibility by instead using the direct leverage of investment capital. The Valdez Principles, a voluntary standard of environmental conduct, was proposed by CERES, asking corporations to agree to adhere and report on list of 10 environmental sustainability principles. As Domini (2001) argues, this idea (later to be called the CERES Principles to broaden the message away from an oil spill to a more general call for environmental sustainability) was largely the result of efforts by investors (socially responsible investment funds and religious investors), brought together by Joan Bavaria, a leader in the SRI industry. Environmental groups were initially reluctant to be involved, having little awareness or background in shareholder activism. Eventually, however, environmentalists were persuaded of the benefits of collective action with investors and contributed to crafting the code and the organization engaged in a concerted effort of dialogue with corporations and the use of shareholder resolutions in an effort to persuade corporations to sign on to the Principles and its requirement for annual environmental audits. As an IGN that brought together a variety of stakeholders on environmental issues, CERES quickly evolved beyond its original emphasis. To start, in the mid-1990s, CERES actively promoted globalizing a model of corporate environmental reporting with the successful establishment of the Global Reporting Initiative (GRI) in 1997, which is now the de facto international standard used by over 1,300 companies for corporate reporting on environmental, social, and economic performance. While the Principles and the GRI are still the most visible component (and legacy) of the CERES organization, operationally the emphasis has steadily expanded further, using its widening network of coalition members to produce and disseminate information on a variety of specific environmental issues, especially climate change (from the late 1990s to the present). Its annual conference

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draws most of the major socially responsible investors asset owners and managers as well as government agencies and civil society activists in the United States and globally. It produces numerous reports on a variety of environmental issues. And similar to the ICCR, it has become a nexus for coordinating investor corporate engagement, including the organizing of shareholder resolutions. Because of the extensiveness of its activities and its unique position of incorporating investors, civil society, and corporations, CERES is often referred to as a leading proponent of socially responsible investment in the United States and worldwide. Unlike ICCR and its primary emphasis of morality and the faith-based nature of its activism, the creation of CERES was a blend of happenstance a well-publicized disaster and lack of appropriate government and industry response and the growing belief within the SRI community that collaboration on a specific issue of relevance to the long-term sustainability of business would be of great benefit to all investors. Thus, CERES was critical in the transformation of SRI that happened in the 1990s (what others refer to as the “transition” phase of responsible investment) and its strong growth in environmental concerns. CERES thus represents a second phase in the history of investor collective action, one that narrowed the focus from the broader set of issues raised by the faithbased ICCR in this case, to environmental sustainability but broadened the types of actors involved. Although NGOs played a not insignificant role behind the scenes with the ICCR, the CERES experiment went far beyond this, formally institutionalizing the active participation of non-investors alongside investors in the organization. Through its work on environmental sustainability, CERES has helped to change the definition of what it means to be a responsible investor and to integrate the environment as a strategic corporate concern in the business community. Similar to ICCR, CERES resembles a TAN in that it includes a variety of actors bound together by shared environmental values, a common discourse, and dense exchanges of information and services. It has worked to transform the identities of investors and corporations, showing that it has a measure of power to persuade and “socialize” the corporate sector on the environment, even as it seeks to do so within the confines of material considerations and not (as was the original impetus with the ICCR) on moral ones (Pattberg, 2005). One example of CERES’ success has been its long effort to convince the US Securities and Exchange Commission (SEC) to adopt global warming as a material risk factor that must be reported by companies to investors, which was accomplished in 2010.

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PHASE THREE: EXPANSION (2000 PRESENT) The relative success of the ICCR and CERES in organizing the collective activities of socially responsible investors no doubt presented potential models to emulate. But it does not address the question of why we have seen a dramatic increase in the collective mobilization of all sorts of investors. To understand this, it may be useful to examine the historical political economic context as the 20th century ended. By the late 1990s, almost two decades of steadily rising globalization had been facilitated by a neoliberal policy environment in which privatization and deregulation had become de rigueur. The creation of a more friendly environment for global business indisputably led to more opportunities for corporate investment and profits and, although often debated, a rise in living standards in many parts of the world. Regional and global institutions were created or reformed that reflected and facilitated this change, including a new trading regime (the World Trade Organization, in 1995) and regional arrangements such as the new North American Free Trade Agreement in 1994 and the transformed and reconstituted European Union in 1992, among many others. But the new empowerment of multinational corporations (which grew in number from about 10,000 in 1990 to about 70,000 by 2005) was not without critics or response. The failure of a proposed “Multilateral Agreement on Investment” (MAI) in 1997 that would codify international investment rules and processes was due in large part from a backlash among civil society groups and developing countries. And in 1999, the antiglobalization protests at the WTO meetings in Seattle indicated reinforced the growing criticisms and beliefs that corporations had gained much advantage in the new global economy without addressing pressing societal needs. Not all activists and NGOs were interested in attacking globalization and corporate power through these kinds of mobilizations, however. Following the example set by CERES earlier in the decade, the Corporate Sunshine Working Group was formed in 1998 as an alliance of investors, environmental organizations (such as Friends of the Earth and the World Resources Institute), unions (including the AFL-CIO), and public interest groups (such as the Good Neighbor Project) working to enforce and expand the US Securities and Exchange Commission’s (SEC) corporate social and environmental disclosure requirements (Baue, 2003). The group was short-lived but highlighted the newly evolving dynamics of corporate engagement that began to emerge in the late 1990s. Starting in the year 2000, a new series of IGNs began to emerge that were designed to

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specifically utilize the growing financial power of institutional investors in unprecedented ways, and, critically, took on issues that governmental policy largely resisted in the face of corporate pressure. Moreover, increasing numbers of these were initiated outside the United States. By far, most of these new IGNs have been created with a focus on environmental issues, which is not surprising given the power of environmentalism as an ideological force in Western culture since the 1970s. On the whole, advocating for changed corporate behavior on the environment was likely to be less controversial than getting corporations to agree on contentious issues such as human rights or other issues (although some IGNs did emerge concerning the latter, as discussed below). Perhaps the most compelling reason for environmentally oriented investor networks simply comes down to the growing recognition in all societies that environmental externalities should be dealt with as part of the globalization process, and if governments were reluctant to do so through regulation, an alternative, self-regulatory mechanism could be developed within the business community. So, over the past decade we have seen the emergence of such IGNs as the CDP, the Institutional Investors Group on Climate Change (IIGCC), the Investor Group on Climate Change (IGCC), and the aforementioned INCR. All of these IGNs are obviously focused on one specific environmental issue the growing problem of climate change. The fact that all were created in the past decade during a time when intergovernmental action on climate change essentially stalled because of the intransigence of the US government and the reluctance of developing countries to bear the costs of carbon reduction during a time of rapid industrialization for them is not a coincidence. The best known and earliest of these is the CDP, launched in 2000 as a collaborative effort among institutional investors to put pressure on the largest corporations in the world to change their behavior on the issue of greenhouse gas emissions. The organization began as a result of the joint efforts of investor and social activists and key government officials in the United Kingdom but has grown to become the most visible and most globally oriented IGN existing today. The CDP’s members (which now number over 600 investors representing $78 trillion in assets, up from an original 35 members representing US$4.5 trillion) annually collectively sign a global request to the world’s largest companies to disclose information on their emissions and policies on climate change, the responses described and assessed in an annual report and displayed on the CDP website. Thus far, the CDP has been judged as a partial success (in that it has drawn into itself the vast majority of the world’s investors, and produced a great amount of carbon disclosure information) but also a partial failure (in that

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the hopes that its information might be utilized by investors and non-investors have not been realized). Some assessments argue that it has provided a significant boost for some industries in specific countries (e.g., Andrew & Cortese, 2011) while other assessments argue that the CDP is beginning to falter because it is not living up to its expectations of value to external stakeholders (e.g., Knox-Hayes & Levy, 2011). Nevertheless, even critics note that CDP has shown “strategic skill in presenting the project … building broad legitimacy” and “helping to become an importance institution of governance” by opening up political spaces where they had been very little movement (ibid.). The CDP is clearly an instrument of power being wielded by a group of financial actors institutional investors to leverage a response and commitment from corporations over a subject that is still seen as very politically charged by some. Other investor networks concerned with climate change have not been as ambitious but nonetheless serve as important facilitators of the same logic that underlay the CDP. The Europe-based IIGCC (formed in 2001) and Australia New Zealand-based IGCC (created in 2005) are collaborations between pension funds and other institutional investors to promote better understanding of the implications of climate change to participating members, and to encourage companies and markets to address the material risks and opportunities associated with the issue, which they argue is one of the most significant environmental threats to investors, business, and society. The IIGCC makes a specific appeal to the benefits of collective action by institutional investors, stating that its collective influence can send a “common message to policymakers” and “strengthen the role of private finance in solving the climate challenge.”7 The US-based INCR is an alliance of pension funds, asset managers, foundations, and other institutional investors that, like its counterparts in Europe and the South Pacific, is focused exclusively on making the business case for addressing climate change. Unlike the other IGNs noted above, however, this network’s mandate has involved more specific pressures on governments. In addition to mobilizing investors through periodic “investor summits on climate risk” at the United Nations headquarters, the INCR has spearheaded efforts to get US and Canadian securities regulators to issue formal guidance on climate change-related disclosure that companies must provide to investors in their financial filings. It has also gone beyond the direct issue of climate change by engaging investors with major oil and gas companies to strengthen risk oversight measures for deep water oil drilling, natural gas “fracking,” and oil sands production. The INCR’s more expansive mission and capabilities is in large part due to its connection with CERES, as noted above. The network claims it has

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persuaded more than two dozen Fortune 500 companies to improve their climate policies, practices, and disclosure, including leading oil, auto, and insurance companies. Thus far, there has been no extensive scholarly study of the INCR’s precise effects on corporate behavior, but we do know that policymakers in North America have changed policies on carbon disclosure in no small part due to the activities of this IGN (and others). In addition to climate change, IGNs have emerged in the past decade to focus on a variety of other environmental and social issues. For example, the IEHN (formed in 2004) describes itself as a “collaborative partnership of investment managers, advised by nongovernmental organizations, concerned about the financial and public health risks associated with corporate toxic chemicals policies.”8 The network’s members principle collaboration concerns strategies and corporate engagement on the use of toxic chemicals, framed as a financial risk as chemical companies face increasing lawsuits.9 In its early years, the IEHN operated similarly to the ICCR and CERES, helping to coordinate shareholder resolutions corporate annual meetings (about 50 votes were filed between 2006 and 2008 on toxic chemicals), and producing reports that provided specific advice and arguments on the link between shareholder value and safer chemicals, such as the risks associated with the use of BPA (bisphenol A, a chemical used in plastics in consumer products), despite official US government rulings that BPA levels are safe (until 2010, when the Food and Drug Administration changed its position). More recently, the IEHN has coordinated with the ICCR network concerning the issue of “fracking” (hydraulic fracturing), a contentious and politically charged issue in the United States. While the economic upside of fracking has been greatly lauded, the environmental risks are such that investor groups are warning of the economic and political implications of ignoring these risks (ICCR/IEHN, 2012). Accordingly, over the past three years, over 30 shareholder resolutions have been filed associated with fracking, with the IEHN playing an increasingly important role in coordinating these. Beyond environmental issues, IGNs have been created with a variety of interests and functions. For example, some are focused on specific industries. PharmaFutures and Pharmaceutical Shareowners Forum (PSF) were created by investors to pressure corporations in this industry on the politically contentious issue of fair access to medication. The former emerged in 2004, formed by some of the world’s largest pension funds to convince investors and pharma businesses that ongoing profitability was possible while simultaneously meeting growing societal expectations that some medicines should be widely available to people on limited incomes in all markets.10 The PSF

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had a less formalized structure than PharmaFutures but a similar interest in addressing the challenges related to the public health crisis in emerging markets and the impact of this issue on long-term shareholder value. Other IGNs focused on specific countries of especially critical interest to select groups of investors for economic and political reasons. For example, the Institutional Investor Group on Myanmar (Burma) was formed in 2001 by eight institutional investors to pressure companies with business activities in that country because of concerns over human rights. Another IGN began with a focus on one country (Sudan) that evolved into a broader effort. The Sudan Divestment Task Force formed in 2006 and was instrumental in organizing shareholder engagement and divestment away from companies operating in Sudan (or supporting other corporations involved in the country) because of the current regime’s genocidal actions against the civilian population in the Darfur region of the country. It resulted in a shareholder campaign that ultimately led to legislation and initiatives by the majority of US states and numerous universities and colleges.11 More recently, the campaign has morphed into a new and broader-based IGN, the CRN. The CRN is a network of 100 institutional investors, financial service providers, and related stakeholders calling on corporate actors to fulfill their responsibility to respect human rights and to take steps that support peace and stability in areas affected by genocide and mass atrocities. It is perhaps the mostly overtly political of all the investor networks described here, and because it only began operations in 2009, its impacts are as yet undetermined. Finally, IGNs can reflect the collective interests of a particular societal institution. In the United Kingdom, religious groups formed the Church Investors Group in 2005 with a less ambitious mandate than the US-based ICCR, but one that focuses similarly on the political, moral, and ethical dimensions of investor relations with corporations. In the United States, the Responsible Endowments Coalition was founded in 2005 by social activists (mainly university students, faculty, and alumni) and related individual investors interested in convincing university and college endowments to foster social and environmental changes by incorporating socially responsible investment principles. In 2007, it coproduced (along with Amnesty International) a handbook for colleges and universities on why and how endowments should adopt shareholder advocacy that integrates social and environmental factors into their investments.12 Thus, this last, most recent phase of collective investor activism has seen a large expansion in collaborations in various forms. The focus of many IGNs has become even more narrowly focused in the present expansionary

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phase, with an agenda that reflects the growing consensus among many in the investment community that fiduciary duty encompasses a proper inclusion of nontraditional criteria in evaluations of financial risks to investors (and corporations). It reflects both the professionalization and the legitimization of responsible investment within the investment community as a whole. Yet latest wave has also seen some examples of a broadening of the agenda (much as the ICCR had in its beginning) to include issues beyond the dominant environmental focus, such as human rights, even as these are seen as much more contentious and problematic for investors as a whole. It is clear that the newly created IGNs of the past decade or so continue what the ICCR and CERES were successful at: actively persuading, coercing, and socializing other investors and corporations into new norms of corporate behavior. The collaborative efforts of investors through IGNs resembles the work of TANs in which coalitions of social activists, professional experts, and others coalesce around issues of common interest to persuade, coerce, and socialize other actors to change their behavior. Similar to such TANs, investor network activities focus on generating and sharing information and on framing discourse over issues of common interest. The more established IGNs such as the ICCR and CERES exemplify efforts to influence perceptions of social and environmental issues, and have been joined by several similar coalitions of investors, most of them more focused in their efforts, but all intent on making the same arguments as to the necessity of an expanded responsibility on the part of corporations. The present phase of expansion can lead us to speculate whether we are seeing a “tipping point” in creating a “cascade” whereby a new norm of responsible investment has been reached within the investment industry, at least enough to push forth new forms of institutionalized behavior designed to address specific problems of global governance. At the very least, the role of collective action by investors has been greatly expanded and made the question a more interesting and complicated one to answer.

CONCLUSION Investors have long played a role in framing what is acceptable behavior by corporations in society but their recent tendency seems to be to join forces en masse to articulate common interests and create (or reinforce) a narrative concerning corporate social responsibility. Since the 1970s, the world has seen at least three landmark phases in the evolution of collective investor action emphasizing the principles underlying socially responsible investment: emergence, transformation, and expansion.

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In the emergence period, religious-based investors collaborated to form the Interfaith Center on Corporate Responsibility, the first IGN, in the early 1970s as a response to concerns with growing corporate power and specific issues of interest to not only churches and society in general, including global issues such as apartheid in South Africa or the marketing of infant formula in the developing world. The ICCR became a key instrument of investor collective action in the United States, pioneering the use of shareholder resolutions as a way to “politicize” issues of concern to investors and citizens that corporations were largely ignoring as having either economic or political consequences. The transformation of investor collective activism began with the creation of the Coalition of Environmentally Responsible Economies organization in 1989. This substantially altered the political landscape associated with environmental issues as investors collectively conspired (along with civil society groups) to create a voluntary code of conduct for corporations (the GRI), and then to develop more comprehensive campaigns devoted to specific concerns. CERES led the efforts by investors in the 1990s to draw attention to the environment specifically as an economic and political issue for investors at a time when governments and corporations resisted policy changes. Since 2000, several new networks have emerged to coordinate and collectivize the power of investors, resulting in a great expansionary phase. Many formal arrangements have been created surrounding climate change, with the globally focused CDP the most notable and the most ambitious, followed by mostly regional attempts at investor collaborations in Europe, North America, and the South Pacific. Another environmentally based IGN, the IEHN, was created to exercise investor power on toxic chemicals and more recently has mobilized on the politically sensitive issue of fracking in energy production. Investor networks outside of the environmental issue arena are less common but nevertheless have also been formed to influence the pharmaceutical industry on access to medicine, corporations doing business in Myanmar, universities with capital endowments, and to prevent genocides in various zones of conflict around the world. The economic and financial repercussions of these IGNs and their increased shareholder activism is still the subject of ongoing debate within the business world and the scholarly community. Much of this is tied to the larger debate over the impact of socially responsible investment that has been transpiring for decades: does SRI add “value” to investors and corporations? Is SRI a viable economic strategy in a competitive market economy? What gets missed, however, in these types of questions is that SRI is not simply an economic phenomenon to be assessed for its financial

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implications. From the beginning, the political dimensions of making investment more responsive to the social and political dynamics of an evolving global economy have played a significant role. The increasing collective action by investors manifest in the creation of numerous IGNs reflects the political nature of socially responsible investment in a world where governments are reluctant to lead and act on issues of importance to all citizens, not just investors. As such, these networks are part of the emerging global public domain, a transnational arena of discourse, contestation and action where investors play a crucial role in articulating what is acceptable behavior by corporations. Investor-driven governance networks share some characteristics of “TANs,” including the centrality of information, the shared discourse on a particular issue, and their emphasis on implementing new norms of behavior among both investors and corporations. In addition, IGNs (like TANs) act to transform actor identities, including both corporations and capital markets. The significant difference between TANs and IGNs is that investor networks are ostensibly together primarily for material reasons. They are nominally operating according to a “logic of consequences” that responsible investing is actually rational, “responsible” investing because it takes into account factors that will ultimately improve the corporate bottom line and, hence, represents a fiduciary duty. They do not overtly appeal to international moral standards or norms a “logic of appropriateness” as do TANs or traditional value-based responsible investing. While IGNs operate ostensibly under the auspices of fiduciary responsibility because they have to do so by law, they also reflect the power of persuasion and socialization of profit-based actors as instruments of global governance. IGNs emerge from the confluence of rational concerns of the sustainability of capitalism, and are composed of highly motivated, socially oriented individuals, many of whom are dedicated to alleviating social and environmental problems because it is the appropriate thing to do, not just to save capitalism from itself. They are in effect institutionalized agents norm entrepreneurs for a wide range of social and environmental issues specifically and of the idea of responsible investment in general. Despite their importance as political and not just economic actors, the presence of increasing numbers of IGNs does not necessarily mean that they will be more successful in substantial changing corporate behavior. While the past record of groups such as the ICCR and CERES can give us hope that collective action by investors can alter the landscape of business activity, it is by no means certain that the IGNs noted here will “win” the contested battles of the 21st century. However, to this point we have not yet paid sufficient

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attention to what extensive investor collaborations have done already, let alone what they might be able to do in the future. Future research should play closer attention to the dynamics of investor collective action and how IGNs emerge and influence the business and political communities.

NOTES 1. One exception is Jemel, Louche, and Bourghelle (2011). The potential for collective action by pension funds is also part of the logic and responsibilities of “universal ownership” (Hawley & Williams, 2005). A related argument can be found in Amalric’s (2006) discussion of the “civic investor.” 2. For example, see Matisoff, Noonan, and O’Brien (2013) and Kolk, Levy, and Pinkse (2008) on the Carbon Disclosure Project. 3. The analysis here is based on historical documentation and interviews done with members of different investor organizations as well as investor and other activists, 2007 2011. 4. Sparkes (2002) is perhaps one of the best treatments. 5. Cited in the digital archive: http://archive.org/stream/together176unse/together 176unse_djvu.txt 6. Keck and Sikkink (1998, p. 26). 7. See http://www.iigcc.org/about-us 8. See http://www.iehn.org 9. See http://lawandenvironment.typepad.com/law_and_the_environment/2007/ 04/another_environ.html 10. See http://archives.who.int/prioritymeds/report/PharmaFuturesWeb.pdf 11. See http://africanarguments.org/2009/05/03/corporate-responsibility-and-thegoals-and-tactics-of-the-sudan-divestment-campaign/ 12. See Integrating Environmental, Social and Governance Issues into Institutional Investment: A Handbook for Colleges and Universities (2007), available at http:// www.endowmentethics.org

REFERENCES Amalric, F. (2006). Pension funds, corporate responsibility and sustainability. Ecological Economics, 59, 440 450. Andrew, J., & Cortese, C. (2011). Carbon disclosures: Comparability, the carbon disclosure project and the greenhouse gas protocol. Australasian Accounting Business and Finance Journal, 5, 5 18. Baue, B. (2003). Members of congress consider social and environmental disclosure in SEC filings. Social Funds. Retrieved from http://www.socialfunds.com/news/article.cgi/1170. html Baue, B., & Rheannon, F. (2008). ICCR defines the past, present and future of shareowner activism. Social Funds. Retrieved from http://www.socialfunds.com/news/article.cgi/ 2487.html

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Domini, A. (2001). Socially responsible investment: Making a difference and making money. Chicago, IL: Dearborn Trade. Ermann, D., & Clements, W. (1984). The interfaith center on corporate responsibility and its campaign against marketing infant formula in the third world. Social Problems, 32, 185 196. Finnemore, M., & Sikkink, K. (1999). International norm dynamics and political change. In P. Katzenstein, R. Keohane, & S. Krasner (Eds.), Exploration and contestation in the study of world politics (pp. 247 277). Cambridge, MA: MIT Press. Frel, J. (2005). Tis the season for shareholder activism. CorpWatch. Retrieved from http:// www.corpwatch.org/article.php?id = 12195 Hawley, J., & Williams, A. (2005). Shifting ground: Emerging global corporate governance standards and the rise of fiduciary capitalism. Environment and Planning A, 37, 1995 2013. ICCR/IEHN. (2012). Extracting the facts: An investor guide to disclosing risks associated with hydraulic fracturing. Retrieved from http://www.iehn.org/publications.reports.php Jemel, H., Louche, C., & Bourghelle, D. (2011). Changing the dominant convention: The role of emerging initiatives. In W. Sun, C. Louche, & R. Perez (Eds.), Finance and sustainability (pp. 85 117). Bingley, UK: Emerald Group Publishing. Keck, M., & Sikkink, K. (1998). Activists beyond borders: Advocacy networks in international politics. Ithaca, NY: Cornell University Press. Knox-Hayes, J., & Levy, D. (2011). The politics of carbon disclosure as climate governance. Strategic Organization, 9, 1 9. Kolk, A., Levy, D., & Pinkse, J. (2008). Corporate responses in an emerging climate regime: The institutionalization and commensuration of carbon disclosure. European Accounting Review, 17, 719 745. Levy, D., & Kaplan, R. (2008). Corporate social responsibility and theories of global governance: Strategic contestation in global issue areas. In A. Crane, A. McWilliams, D. Matten, J. Moon, & D. Siegel (Eds.), The Oxford handbook of corporate social responsibility (pp. 432–451). Oxford: Oxford University Press. Louche, C., & Lydenberg, S. (2011). Dilemmas in responsible investment. London: Greenleaf. Matisoff, D. C., Noonan, D. S., & O’Brien, J. J. (2013). Convergence in environmental reporting: Assessing the carbon disclosure project. Business Strategy and the Environment, 22(5), 285 305. Pattberg, P. (2005). The Institutionalization of private governance: How business and nonprofits agree on transnational rules. Governance, 18, 589 610. Polanyi, K. (1944/2001). The great transformation: The political and economic origins of our time. Boston, MA: Beacon Press. Robinson, L. D. (2002). Doing good and doing well: Shareholder activism, responsible investment, and mainline protestantism. In R. Wuthnow & J. H. Evans (Eds.), The quiet hand of god: Faith-based activism and the public role of mainline protestantism (pp. 343 363). Berkeley, CA: University of California Press. Ruggie, J. (2004). Reconstituting the global public domain Issues, actors and practices. European Journal of International Relations, 10, 499 531. Sparkes, R. (2002). Socially responsible investment: A global revolution. Chichester, UK: Wiley.

SHAREHOLDER ENGAGEMENT AND CHEVRON’S POLICY 520 ON HUMAN RIGHTS: THE ROLE PLAYED BY THE UNITED STATES JESUIT CONFERENCE’S “NATIONAL JESUIT COMMITTEE ON INVESTMENT RESPONSIBILITY” Nicholas J. C. Santos, John Sealey and Austin G. C. Onuoha ABSTRACT Purpose To demonstrate how the Society of Jesus (Jesuits) in the United States through the “National Jesuit Committee on Investment Responsibility” played a significant role as a socially conscious institutional and religious investor in influencing Chevron’s Human Rights

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 43 63 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007002

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Policy 520 and to analyze the factors that contributed to a successful shareholder engagement with the company. Methodology/approach

Case study based on firsthand information.

Findings 1. Our conclusion offers support for Allen et al.’s (2012) conclusion of legitimacy (credibility) being the dominant force in a successful engagement. 2. We found that coalition-building is a significant moderating variable in increasing shareholder salience. This finding contradicts the study by Gifford (2010). Originality/value of chapter The chapter is based on the actual process of shareholder engagement with Chevron Corporation that led to the human rights policy and is written mainly based on firsthand information. Keywords: Society of Jesus; shareholder advocacy; community engagement; religious investors; Interfaith Center on Corporate Responsibility; human rights

INTRODUCTION In 2012, about $3.74 trillion out of $33.3 trillion in total assets under professional management in the United States was invested in socially responsible investing (SRI) strategies (Forum for Sustainable and Responsible Investment, 2012). This indicates a 486% increase from $639 million invested in 1995. In comparison, the broader universe of assets under professional management has grown just 376% in that same period (Forum for Sustainable and Responsible Investment, 2012). SRI strategies include Environmental, Social, and Governance (ESG) incorporation, Shareholder Advocacy, and Community Investing. With regard to shareholder advocacy, from 2010 to 2012 about 176 institutional investors with $1.28 trillion in assets filed or co-filed proposals (Forum for Sustainable and Responsible Investment, 2012). These institutional investors include public funds, religious investors, labor funds, foundations, and endowments. The involvement of religious investors in SRI should come as no surprise as the roots of social investing can be traced back to the Quakers and

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Mennonites and perhaps to John Wesley, the founder of the Methodists, who advocated the proper use of money (Callahan, 2002; Schueth, 2003). In the latter half of the twentieth century, the involvement of religious institutional investors in SRI was spurred on by the founding of the Interfaith Center on Corporate Responsibility (ICCR) in 1971 (Smith & Wolf, 2002). The center was founded largely in response to the growing concern over American involvement during the Vietnam War and the issue of apartheid in South Africa. The center’s first social policy resolution was filed in 1971 with General Motors calling for GM to withdraw from South Africa (Smith & Wolf, 2002). By 1975, ICCR had about 12 Protestant church agencies and 28 Roman Catholic organizations in their membership. In 2002 the membership had grown to 275 Protestant, Catholic, and Jewish institutional investors (Smith & Wolf, 2002). Included in the Roman Catholic membership from the early years of ICCR was the U.S. Jesuit Conference representing a religious order of men known as the Society of Jesus or more commonly as the Jesuits (Callahan, 2002). A major reason for the involvement of religious institutional investors in SRI is that of “bringing forth God’s reign of justice on earth” (Smith & Wolf, 2002, p. 6). These investors see SRI as a work of structural justice (Jesuit Conference, 2013). A central question of this volume is whether SRI strategies make any difference to society. The growing number of religious institutional investors that are engaged in shareholder advocacy is itself a testimony to the value that these investors perceive in engaging corporations on a variety of issues that affect the economy, community, and environment. It is likely that this group of investors might persist with their SRI investments in anticipation of future impact, even if current evidence is either lacking or not sufficiently convincing. As is pointed out in ICCR’s Social Sustainability Resource Guide, religious institutional investors play a dual role as “investors and as community participants” and are placed “in a unique position to address the relationship between corporate operations and their social impacts on communities” (Interfaith Center for Corporate Responsibility, 2011, p. 7). In this chapter we focus on one such shareholder advocacy effort, namely that of the Jesuits with Chevron Corporation, on the issue of human rights. This chapter is laid out in the following manner. We begin with a brief background of the Jesuits and their involvement with SRI in the United States. This effort, particularly over the last decade, has involved dialogue with a number of large corporations such as Chevron on specific issues. Mobilizing shareholders and engaging a company as large as Chevron are

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not easy tasks and are detailed in the next section of the chapter. Further, much of the dialogue took place in North America, where the company is headquartered while many of the human rights issues being discussed were occurring in the developing world in regions such as the Niger Delta. The section on “Engagement of the local community” shares the collaboration with the Center for Social and Corporate Responsibility (CSCR) and then later with the Africa Center for Corporate Responsibility (ACCR) that helped in bringing awareness of on-the-ground realities in the Niger Delta. We then analyze the case from the perspective of stakeholder salience (Allen, Letourneau, & Hebb, 2012; Gifford, 2010; Mitchell, Agle, & Wood, 1997). Finally, we highlight some of the key lessons learned and suggest areas for further research.

THE JESUITS AND SOCIALLY RESPONSIBLE INVESTING The Society of Jesus (Jesuits) is an international Roman Catholic Religious order founded in 1540. The Jesuits are organized into geographic areas called provinces that are governed by a provincial superior who is appointed by and reports directly to the superior general who resides in Rome. The provinces are grouped into nine regional assistancies. These are: Africa, Asia Pacific, Central and Eastern Europe, North Latin America, South Asia, South Europe, South Latin America, the United States, and West Europe (Society of Jesus, 2012b). The Wisconsin Province is one of the provinces of the U.S. Assistancy (Jesuit Conference, 2012a). The Jesuits are best known for their work in education. Worldwide the Jesuits are engaged in over 3,700 educational institutions educating over 2.5 million students (Jesuit Conference, 2012b). In the United States there are 28 Jesuit universities in 19 states (Association of Jesuit Colleges and Universities, 2012). In addition to education the Jesuits are also known for their spiritual and pastoral work. However, education, spiritual, and pastoral ministries are not the only works that the Jesuits engage in. Jesuits and their collaborators worldwide are also actively engaged in the area of social and environmental justice (Society of Jesus, 2012c). The Jesuit involvement in socially responsible investing in the United States can be traced back to the formation of the Jesuit Advisory Committee on Investment Responsibility (JACIR) by the U.S. Jesuit Conference in 1974 (Dister, 2002). A few years prior to this, in 1971, the

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Episcopal Church and some other Christian denomination groups had started the ICCR (Callahan, 2002). JACIR and ICCR began largely as an expression of civil uneasiness with the Vietnam war and the system of apartheid in South Africa (Smith & Wolf, 2002). At the time of the formation of JACIR, another Jesuit Conference group called the National Office of Jesuit Social Ministries was already in operation (Dister, 2002). This group attended shareholders’ meetings and proposed resolutions often taking a more activist approach toward corporate change. Such an approach resulted in some tension between this group and JACIR which tended to vote proxies with company management (Dister, 2002). What transpired eventually was that JACIR was dissolved in 1984 paving the way for the formation of the National Jesuit Committee on Investment Responsibility (NJCIR) (Dister, 2002). Each U.S. Jesuit province now has a provincial representative and sometimes a committee for investor responsibility. The motivation for the Jesuit provinces to get involved in SRI ensued from a growing awareness of the potential of SRI to contribute to the common good. Representatives from each province form NJCIR. The mission of NJCIR is to advocate for “corporate behavior consistent with Catholic Social teaching through dialogues with corporations, shareholder resolutions, and proxy voting” (Jesuit Conference, 2012c). NJCIR identifies social and economic justice priorities in light of Jesuit apostolic preferences and collaborates with other religious institutional investors to influence corporate policy decisions in these areas. NJCIR has also encouraged and consulted with a number of Jesuit institutions (particularly higher education and secondary education) to participate in province-led shareholder filings and engagement. As of 2012, the two shareholder advocacy priorities were water sustainability and promoting human rights (Society of Jesus, 2012a). Over the last decade, NJCIR has successfully engaged a number of large corporations in the areas of water sustainability and human rights (National Jesuit Committee on Investment Responsibility, 2011). One successful engagement in the area of human rights was with Occidental Petroleum (Oxy) and was led by the California Province of the NJCIR. In 2003, NJCIR had contacted Oxy to convey concerns that the Jesuits in Columbia had about human rights abuses in the Arauca region of Columbia where the company had oil pipeline operations. Working closely with NJCIR, Oxy formally adopted a Human Rights Policy in December 2004 (GlobeNewswire, 2004). NJCIR continued to be engaged with the company through 2010. Dialogue topics for this engagement “included human rights training, impact assessments to determine human rights risk,

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integrating the policy throughout Company operations, protocols for use of armed security, social and economic aspects of community engagement, and transparency and reporting of human rights performance, including the need for independent verification of results” (National Jesuit Committee on Investment Responsibility, 2011, p. 9). NJCIR’s engagement with Oxy achieved not just social goals but also a significant return on investment. From September 2003 when the NJCIR first contacted Oxy to September 2010, investments increased by 496% not calculating reinvested dividends (National Jesuit Committee on Investment Responsibility, 2011, p. 10). The engagement with Oxy is only one of NJCIR’s engagements. Since October 2007, NJCIR has also engaged the OM Group, a metal-based specialty chemical company, to develop indicators for a human rights policy. This issue arose out of safety concerns of small-scale miners, including children around the company’s cobalt smelter in Lubumbashi in the Democratic Republic of the Congo (DRC) (National Jesuit Committee on Investment Responsibility, 2009, p. 7). At the OM Group annual meeting in May 2011, the Jesuit-led stockholder proposal received 28.47% of the votes as well as the support of proxy advisory service, Institutional Shareholder Services, who endorsed the resolution from a cost/benefit business perspective. The strong vote led to the development of an OM Group human rights policy the following year (OM Group, 2012). NJCIR has also worked with the Monsanto Company to implement and monitor a human rights policy. For six years NJCIR worked with Monsanto “to embed human rights due diligence into its global operations by training employees, using human rights impact assessments, monitoring and auditing results” (National Jesuit Committee on Investment Responsibility, 2011, p. 6). The company had been very responsive to eradicating child labor among its contract growers and had also agreed to expand the dialogue and engagement with NJCIR to include the right to food, especially seed saving rights for farmers and the right to water. In line with one of NJCIR’s advocacy priorities on water sustainability, it has been engaging some companies around this issue. One company that NJCIR has engaged is Bunge Limited. Bunge is one of the world’s larger agribusiness companies. The Jesuit-led investor coalition has encouraged Bunge to be more proactive in its reporting of water use and the impact of water risks on not just its supply chain but also on the local communities (National Jesuit Committee on Investment Responsibility, 2011, p. 4). Another company that NJCIR has decided to engage with on the issue of water sustainability is Corn Products International (renamed “Ingredion” in 2012). NJCIR voted for this engagement in September 2010 as Corn

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Products was one of the world’s largest corn refiners with water being an intrinsic resource in its operations in about 20 countries (National Jesuit Committee on Investment Responsibility, 2011, p. 5). Through this engagement NJCIR hoped to push Corn Products toward more meaningful data reporting on water consumption and liquid and solid waste as well as to have explicit goals to reduce resource consumption (National Jesuit Committee on Investment Responsibility, 2011, p. 5). According to the NJCIR, faith-informed socially responsible investment is a work of structural justice (Jesuit Conference, 2012c). In the United States this effort involved using the investment portfolios of the U.S. Jesuit provinces to influence corporate policy decisions. As the preceding paragraphs demonstrate such an effort has borne tremendous fruit. Besides NJCIR, other religious investors have also been engaging corporations with notable success. Jones (2012, pp. 5 6) notes the success that faith investors have had with regard to the human right to water. For instance through engagement with faith investors, PepsiCo adopted the first corporate human right to water policy in 2009 (Kropp, 2009). This action was followed by Intel, Proctor and Gamble, and Connecticut Water (Jones, 2012, p. 6). In the following sections we discuss more elaborately NJCIR’s engagement with Chevron Corporation on the issue of human rights. We first begin with elaborating on Chevron’s engagement with the local community in the Niger Delta.

ENGAGEMENT OF THE LOCAL COMMUNITY IN THE NIGER DELTA In 2004, Chevron Nigeria started a process of engagement with people of the Niger Delta of Nigeria. Chevron operates in five states of the Niger Delta and they are Bayelsa, Delta, Imo, Ondo, and Rivers. This area has experienced escalated violence and uprising since the “judicial murder” of Ogoni environmentalist Ken Saro-Wiwa and eight others (BBC, 1995). In 2009, Royal Dutch Shell agreed to a $15.5 million settlement in a case accusing it of involvement in human rights abuses in the Niger Delta in the early 1990s (Mouawad, 2009). It should be recalled that after the death of Saro-Wiwa and his colleagues, there was international outrage and focus on the operations of corporations generally. Parts of this were aimed at addressing Chevron’s observation that their community engagement strategy had been “inadequate, expensive and divisive” (BBC News, 2005).

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Before this time most oil companies including Chevron engaged each community individually with the concept of host community. Host community refers to the locations where Chevron has a facility such as hospital, office complex, well-head, flow station, export terminals, or tank farm. This strategy of dealing only with the host community unfortunately alienated all other communities. Such a strategy played into the interethnic rivalry which erupted in the Warri area in 2003, 2007, etc. (Imobighe, Bassey, & Asuni, 2002). The above situation led to a rethinking in Chevron’s board that gave rise to the introduction of the Global Memorandum of Understanding (GMOU) in 2004. The GMOU is a process that clustered several communities together under what is known as the Regional Development Committee (RDC). Each community nominated, appointed, or elected their representatives into the RDC. The RDC members elected from among themselves officials such as the chairperson, secretary, treasurer, publicity secretary, etc. These officials managed the RDC on a day-to-day basis with some salaried employees. There are eight RDCs scattered in five states of the Niger Delta of Nigeria. And the GMOU is renegotiated after every three years of operation. Items that are negotiated after every three years include the project fund, employment, contracts, and other benefits. Chevron provided some initial annual seed grant for the RDCs to carry out development projects in their areas. The unique feature here is that community members managed the fund through their elected representatives. It also provides the opportunity for the communities to raise independent funding from sundry sources for their development. One key ingredient of this process was the sustainable livelihood assessment (SLA). It was from the SLA process that community needs were identified and community development plans (CDP) were also derived. The importance of this is that communities decided their development priorities, decided who will execute the contract, where it will be located, etc. There were also other governance models that were part of the GMOU; they include the Community Engagement Management Board (CEMB), Project Review Committee (PRC), Accounts and Audit Committee (AAC), etc. All the above are structures that are embedded in the GMOU to support service delivery and community development. The GMOU clearly provides for the functions of each structure. For instance, the PRC is responsible for the review of contract bidding process, it also opens the bids and selects the winner. During project execution it also monitors progress

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on project sites. This model has been copied and duplicated by many other oil companies and corporations in different industry sectors. In the words of Dr. I. C. Tolar, the pioneer chairman of Egbema/Gbaramatu RDC, “The GMOU has been a worthwhile experience.” It was put together by those who understand what a united front is and what it means to speak with one voice. There is prudent management of resources that accrue to the council, even though it is meager, but it has been regular. In comparison to the Local Government Authority, the Council has succeeded more and the success could be measured by far against the administration of the LG. Within the three-year period, the Council has put in place infrastructure in the communities, which have been nonexistent since the inception of oil exploration, for example, the Council has executed and is executing 24 projects within the length and breadth of EGCDC. It has spent over 650 million Naira (about $5m) on these projects, with some of them either completed or near completion. The Council has also given scholarships (council scholarships) in addition to CNL scholarships. The Council has also awarded contracts to contractors in the communities, which is a kind of local economic empowerment. Contracts are not awarded to outsiders but to indigenes after a competitive bidding. Examining the human rights implications of the GMOU, there are two key elements of human rights choice and respect for the human person (Steiner & Alston, 2000). The first human rights implication of the GMOU is that it gave the people the right to choose what they consider to be development and execute the same according to their specification. For instance, one of the first projects that one of the communities in the RDC system selected was the building of a mortuary. This is because, due to the terrain of the area, the people can only bury their dead in the last two months of the year when there is dry season. Without the GMOU, no one including company officials would have thought of building a mortuary for the people. Second, one of the key issues that has given vent to the violence in the Niger Delta is the perception by the people that they are not recognized as the owners of the natural resources in the area. The GMOU is a tacit recognition of the communities as hosts of these resources. Third, the GMOU is more broad-based in its definition of communities to engage. For instance, it recognizes host, access, and impacted communities. This broadened understanding has to a large extent minimized the targeting of infrastructure during conflicts (Faleti, n.d.). This perspective has also given the people a voice in deciding how their affairs are managed. It has also provided some kind of predictability in their relationship with Chevron.

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This point was noted in the UN Guiding Principles on Human Rights and Business (United Nations, 2011). Another human rights implication is the existence of different structures for engaging community members. These include the annual general meetings of the RDC, the community outreach by RDC members, the newsletter of almost all the RDCs, the meetings of the various committees, and the regular interface with Chevron lead persons. Moreover, it has also brought on board other development agencies in their attempt to provide development infrastructure to the communities. According to the evaluation carried out of the GMOU in 2008 it was found that since inception of the GMOU in 2004, there have been no single incident of any abandoned community development project and that projects are executed at a lower rate and delivered on time.1 In conclusion, no community engagement strategy is without some drawbacks especially when they are new and in a new environment. One of the main criticisms of the GMOU is that the criteria for the allocation of project funds are not clear and transparent. The point that this issue is being discussed now, is an improvement in the former process because, then, Chevron simply decided the project, where it would be located, who would execute it, and how much it would cost. The process can still be worked upon, but as was observed during the evaluation, the issue is no longer to discard the GMOU but to keep improving upon it. Moreover since the UNDP declared development as a human right in 1986, the GMOU process is a clear testimony that development can be achieved if properly managed. The greatest contribution of the GMOU process may be that it has reduced to the barest minimum the incident of communityinduced production disruption. It has also laid out an in-built framework for addressing human rights abuses that arise out of the company operations. In the preceding paragraphs we have laid out Chevron’s engagement with the local community in the Niger Delta. While Chevron had been operating in Nigeria since 1913 (Chevron Corporation, 2013), it was only recently that it embarked on a process of greater engagement with the local community. There was a shift in understanding its role from an operator of major oil and gas capital projects to that of being a member of the local community. It could be suggested that such a shift owed in no small measure to the dialogue and conversation with the shareholder coalition. In the following sections we analyze, in greater detail, the process of shareholder engagement with Chevron and the role that the shareholder coalition played.

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PROCESS OF SHAREHOLDER ENGAGEMENT WITH CHEVRON NJCIR’s engagement with Chevron on the issue of human rights corresponded with the Jesuits’ apostolic concern for Africa and for indigenous people. It was felt that “a fuller human rights policy would simultaneously serve Chevron’s long-term interest to be a partner of choice and also improve the livelihood of host communities in areas of economic, environmental and social development” (National Jesuit Committee on Investment Responsibility, 2009, p. 5). Further, it was felt that stronger human rights protections by Chevron would also encourage other companies in the extractive industry to follow suit. We begin with a brief background of Chevron and then elaborate on the process of engagement. Chevron is one of the world’s leading integrated energy companies with operations worldwide. It is one of the world’s six super-major oil companies and was ranked the third largest U.S. company in the Fortune 500 rankings for 2012 (CNN Money, 2012) It is involved in nearly every facet of the energy industry (Chevron Corporation, 2011). At the end of 2011, Chevron’s workforce consisted of about 57,000 employees and 3,800 service station employees (Chevron Corporation, 2012). Chevron’s history goes back to the Pacific Coast Oil Co in the late nineteenth century which then became Standard Oil Co. of California and includes acquisitions and mergers such as Gulf Oil, Texaco, and Unocal (Chevron Corporation, 2012). The decision to engage Chevron was taken by the NJCIR in 2004. On September 8 of that year, a conference call was initiated among some Chevron investors to assess the relationship and issues with the company. In November 2004, a placeholder resolution2 was filed by investors with the Wisconsin Province of NJCIR as the lead. This resolution urged the company to adopt a comprehensive, transparent, and verifiable human rights policy noting that “transnational corporations operating in countries with repressive governments, ethnic conflict, weak rule of law, endemic corruption, or poor labor and environmental standards face serious risks to their reputation and share value if they are seen as responsible for, or complicit in, human rights violations.” The resolution was withdrawn in February 2005 when the company agreed to future human rights dialogues and a meeting between Chevron Nigeria Limited (CNL), the local communities in the Niger Delta, and the CSCR. CSCR was founded by Father Kevin O’Hara in 2001 as a means of supporting the “most vulnerable people in the Niger Delta by responding to the conflicts triggered by poor

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management of the extraction of oil and gas” (Bamat, Chassy, & Warne, 2011, p. 86). CSCR produced a number of video documentaries as an advocacy tool to increase international awareness about the situation in the Niger Delta (Bamat et al., 2011, p. 95).3 In the fall of 2005 NJCIR in partnership with CSCR and Catholic Relief Services organized the Africa Oil and Poverty speaking tour visiting U.S. universities (Interfaith Center for Corporate Responsibility, 2005). The purpose of the tour was to draw greater attention to the situation in the oil producing countries of Africa, which experience the natural resource curse, the phenomenon whereby the citizens of resource-rich countries often experience repression and a lower standard of living. In essence the communities living near mineral resources receive very little benefit but rather bear the environmental and social costs associated with resource extraction. The Nigerian Catholic Bishops document this legacy in their 200-page document, The Travesty of Oil and Gas Wealth. In November 2005, NJCIR filed the human rights resolution at Chevron with the Wisconsin Province once again as the lead. At the annual meeting of Chevron in April 2006, the human rights resolution received 23.93% of the shares voted as well as the endorsement of two of the three major proxy advisory services, namely, Institutional Shareholder Services and Proxy Governance (Africa Faith & Justice Network, 2007). Such an endorsement contrasts with the findings of Rojas et al. (2009, p. 240) which held that “religious investors were responsible for almost half (47.8%) of resolutions that failed to gather enough vote turnover for resubmission.” In the months following the annual meeting, the investor coalition conveyed to Chevron representatives its dissatisfaction at the company’s progress of the development of the human rights policy. The following year (November 2006), the investor coalition once again filed the human rights resolution with 22 co-filers. At the annual meeting in April 2007, the human rights resolution received 26.94% of the shares voted (Africa Faith & Justice Network, 2007). The growth of co-filers and the shareholder vote was encouraging and regular dialogues continued with the company. While Chevron adopted a one-page human rights statement in 2006, shareholders deemed this insufficient to satisfy the goal of a fuller and more explicit policy. In November 2007, the human rights resolution was filed again, this time with 30 co-filers. In December 2007, a follow-up letter was sent by Rev. Tom Krettek, provincial of the Wisconsin Province of the Society of Jesus to David O’Reilly, CEO of Chevron, establishing the business case that the development of a policy would protect shareholder value and enhance Chevron’s competitive advantage as a partner of

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choice (Securities and Exchange Commission, 2008, Exhibit-A). In the following month, Chevron challenged the human rights resolution that was filed by the investor coalition with the Securities and Exchange Commission (SEC) claiming that the resolution had already been substantially implemented. The investor coalition approached Paul Neuhauser, an attorney closely associated with ICCR, to represent them to the SEC. In his defense to the SEC dated February 24, 2008, Mr. Neuhauser laid out the investor coalition’s position that the substance of the human rights resolution was far from implemented. In his letter, Mr. Neuhauser also showed the number of not-free and/or high conflict zones where Chevron operated (Securities and Exchange Commission, 2008, Exhibit-H). In March 2008, the SEC ruled in favor of the investor coalition and stated that the human rights resolution must appear on the proxy (Securities and Exchange Commission, 2008). In December 2008, the human rights resolution was filed again with 36 co-filers. At the annual meeting in May 2009, the human rights resolution received 29.14% of the shares voted (National Jesuit Committee on Investment Responsibility, 2009, p. 3). In July 2009, Chevron communicated to the investor coalition that they were working on a human rights policy. After consultation with the co-filers, Rev. Tom Krettek, provincial of the Wisconsin province wrote to then Vice-Chair and future CEO John Watson specifying the conditions that the investor coalition needed to see in order to hold off filing a resolution. As these conditions were still lacking as of early December 2009, the investor coalition went ahead and filed the human rights resolution on December 1 with 42 co-filers. At the end of January 2010, Chevron communicated to the investor coalition that it had adopted Human Rights Policy 520 and shared the same with the 42 filers of the resolution. In March 2010, satisfied with the actions taken by Chevron, the investor coalition withdrew the resolution (Securities and Exchange Commission, 2010). In April 2010, Chevron publicly announced the development of Policy 520 on their website and NJCIR issued a press release the following day. The Jesuit Conference of the United States said that it was encouraged by Chevron’s new Policy 520 on human rights and the Very Rev. G. Thomas Krettek, Provincial of the Wisconsin Province of the Society of Jesus was quoted as saying “we remain committed to ongoing dialogue with Chevron regarding implementation, monitoring, reporting, and incentivizing the policy, as well as identifying potential areas where Policy 520 might be strengthened” (PRWeb, 2010). While the preceding paragraphs provide a historical sketch of the progression toward a human rights policy during the period of 2004 2009,

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it should be noted that there were many other forces at work. For one, the investor coalition was able to draw from on-the-ground realities provided by the close collaboration with the CSCR, the ACCR, and the Catholic Bishops Conference of Nigeria. It should also be noted that the NJCIR coalition was able to progressively increase its co-filer base and the annual supporting votes for the resolution at each annual interval. Over time, this shareholder engagement grew into ICCR’s largest action (measured by co-filers) and it attracted a diverse array of institutional investors including international Jesuit provinces and a growing number of Jesuit universities and high schools. Additionally, the shareholder engagement was helped by support from two large proxy advisory services: Institutional Shareholder Services and Proxy Governance. While faith-based health care networks have long engaged shareholder advocacy, this was a new area for educational institutions and many are now poised to continue this advocacy. NJCIR strives for respectful and well-informed dialogues and while the attainment of the policy took many years, we believe this tone yields a better outcome than a more adversarial approach. Finally, it should be noted that Chevron displayed a willingness to engage the investor group as well as thought leaders in the rapidly changing area of business/human rights and perhaps most importantly they consulted local communities. We highlight this latter aspect in the following section.

CASE ANALYSIS THROUGH THE LENS OF SHAREHOLDER SALIENCE Mitchell et al. (1997, p. 854) offer a descriptive model of stakeholder salience and propose three attributes of stakeholders that managers need to pay attention to. These attributes are: “(1) the stakeholder’s power to influence the firm, (2) the legitimacy of the stakeholder’s relationship with the firm, and (3) the urgency of the stakeholder’s claim on the firm.” Mitchell et al. (1997, p. 879, emphasis added) “predict that the salience of a particular stakeholder to the firm’s management is low if only one attribute is present, moderate if two attributes are present, and high if all three attributes are present.” A later study by Gifford (2010) with regard to shareholder engagement confirms that shareholders are most salient when all three attributes are present. However, Gifford’s study also concludes that all three attributes need not be present to achieve high levels of salience.

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Gifford (2010, p. 97) instead argues that “the business case and the values of the target company managers are the two most important factors contributing to salience.” We examine this claim in the light of our experience with Chevron in the following paragraphs. From the very beginning of the engagement with Chevron, NJCIR made the business case, namely, that a comprehensive human rights policy would help in mitigating the risks associated with human rights abuses in countries with weak rule of law and would contribute to long-term increase in shareholder value. However, we cannot conclude with any degree of certainty that the business case was an important contributing factor to shareholder salience. This uncertainty is despite the fact that the supporting statement for the resolution filed in 2009 specifically mentioned that the “policy will help avoid human rights violations and associated shareholder risks, thereby preserving and enhancing share value” (Jesuit Conference, 2009). Instead, from our experience “coalition-building among the shareholders” and “credibility” were the two key factors that contributed to shareholder salience in the case of the engagement with Chevron. We elaborate on both these below. While Gifford’s study identified “coalition-building” as a moderating variable he held that it was not a major contributing factor to shareholder salience. Our experience with Chevron indicates that “coalition-building” did play a major role in the advocacy efforts. Chevron’s willingness to engage increased as the shareholder votes supporting the resolution increased. From an impressive 24% of the vote when the resolution was first voted on at the annual meeting in 2006 to over 29% at the meeting in 2009, the shareholder resolution kept gaining momentum. We doubt that the company would have engaged us if the shareholder vote was in the single digits. In fact, because the initial vote was 24% we were able to secure an audience with Mr. Peter Robertson, the Vice-Chair of the Board in June 2006. A study by Allen et al. (2012) found that legitimacy (credibility) was the dominant force in a successful engagement. Our engagement with Chevron supports this conclusion. Credibility is built through fostering an enduring and constructive relationship with the company. It requires the shareholder group to have the willingness to engage in open and constructive dialogue. Not to be judges but to offer perspectives and to be willing to listen. These were some of the points that Ms. Silvia Garrigo, the former Manager of Global Issues and Policy at Chevron, raised at the 2009 SRI in the Rockies Conference (Garrigo, 2009). We elaborate on this point in further detail in the next section where we discuss some of the key lessons learned.

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KEY LESSONS LEARNED AND FUTURE RESEARCH The Jesuit-led coalition had more than just a series of engagements with Chevron over time. Instead, they fostered an enduring constructive relationship and dialogue. An important reason for this was that from the outset, the Jesuit-led coalition were not judgmental but offered their views and were willing to listen. Despite frustrations, the dialogue was not used as a means to “name and shame” the company, its actions, or lack thereof. This attitude helped create the trust to develop an enduring relationship. Some of the key lessons are briefly elaborated below. The first lesson is the importance of framing the issue. While the topic of human rights is an important apostolic priority for the Jesuits, it was important to frame the discussion around human rights in a way that was directly relevant to the company’s risks and operations, and to offer positions and tools that were tailored to the relative significance of related issues and that were doable given the size and complexity of the company. During the dialogue, it was important to discern whether: (i) the issue touched the company’s operations but had wider implications and required other or multiple actors to work together; (ii) the issue was emerging with no clear standard or best practice to follow and therefore required continuous dialogue; (iii) the issue was driven by a perception which was subject to change through a deeper understanding of the company’s culture, policies, performance standards, management systems, and their real time application in the field; (iv) the issue was outside the company’s control or was solely in the realm of “guilt by association”; or (v) a common ground was shared on the issue, but for good reasons, the company and the shareholder coalition were on a different path toward a solution. The second lesson is that the dialogue or engagement should focus on obtaining a deeper understanding of the company over time. Lack of understanding the complexities of the company and its operations could likely result in increased suspicion and lack of trust. Credibility in our engagement with Chevron was developed in many ways by our willingness to try to understand the company. And, it was helped by the subsequent willingness of the company to try to understand us. The third lesson is that of coalition-building. One of the lessons learned from the dialogue process was the importance of soliciting support from other like-minded investors. Being a member of the ICCR coalition, NJCIR was able to leverage the ICCR membership in addition to its own. The support of other Jesuit institutions helped increase the pressure on the company to develop a comprehensive human rights policy. Additionally, the support

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from Institutional Shareholder Services, and Proxy Governance, two large proxy advisory services helped. The fourth lesson is that of making the business case. From the very beginning, NJCIR made the business case for adopting a comprehensive human rights policy. NJCIR’s position was that such a policy would help Chevron in its global operations and ultimately add to shareholder and investor value. As a shareholder coalition it was important to make such a case even if, as we pointed out earlier, it did not contribute significantly to shareholder salience. The fifth lesson is that of persistence. Shareholder advocacy is a long route and can be sometimes painfully slow. It took a number of years before Chevron adopted a comprehensive human rights policy and at any stage during those years, the shareholder coalition could have given up. But remaining engaged and soliciting greater support from a wider investor base helped. The sixth lesson is that of the importance of tapping into Jesuit higher education institutions not only for their shareholder co-filings/votes but also for participation and expertise at dialogues and annual meetings. There were a number of professors at Jesuit universities who presented statements at annual meetings or who offered consultation on various occasions. Drawing on this intellectual capital is crucial. It should be noted that the engagement with Chevron on the issue of human rights was concurrent with the work of then UN Special Representative for Business and Human Rights, Professor John Ruggie. Professor Ruggie’s multiyear consultation led to the release of a framework in 2011 titled “Guiding Principles for the Implementation of the UN ‘Protect, Respect and Remedy’ Framework.” While Chevron has adopted Policy 520, it remains to be seen what impact this policy will have on their operations and ultimately on host communities. On its part, Chevron has expressed a commitment to implementing this policy over a four-year period. However, future research can evaluate the extent the company was able to embed the policy in its operations, develop accountability metrics, independently verify human rights performance, and forthrightly engage and involve local communities in project development.

CONCLUSION Notwithstanding the fact that this research focuses on a single case and the fact that the co-authors were involved directly in the process of

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engagement, there are a few key findings. For one, our study supports the finding of Allen et al. (2012) that legitimacy (credibility) is the dominant force in bringing about successful engagement. This credibility was brought about by the willingness to engage in a constructive and open dialogue and to obtain a deeper understanding of the company. Second, our analysis, in a way, calls into question Gifford’s (2010) conclusion that coalitionbuilding is not a significant moderating variable for shareholder salience. We hold that it is and that it played an important role in our process of engagement with Chevron. This claim would have to be validated or contradicted by future research. Finally, with regard to the key question of this volume on whether SRI makes a difference to society, we hold that it does. Companies do not operate in a vacuum. They impact society by their operations. And for a large part, these operations are governed by company policies. Being a signatory to the UN declaration of Human Rights is quite different from having a policy that demonstrates a commitment to human rights. It is the expectation that Policy 520 will enable Chevron to demonstrate leadership in the area of corporate commitment to human rights. However, we should not lose sight of the fact that many policies sit on the shelf and gather dust. Therefore, it is imperative that future research investigate the degree to which Policy 520 did impact society.

NOTES 1. The monitors that carried out the evaluation include Consensus-Building Institute, Research Triangle International, Search for Common Ground, and Africa Center for Corporate Responsibility. 2. A placeholder resolution is a proposal sent by shareholders to the management for inclusion in the proxy statement, a booklet that contains governance and financial information and that is sent to all shareholders before the annual meeting. 3. These documentaries include Goat in the Flow Station, Batan Oil Spill, Fence Too High, Neighborhood Water Scheme in Gbarain, and Oil Extraction and Challenges of Sustainable Community Development in Oloibiri.

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Securities and Exchange Commission. (2010, April 1). Correspondence with Chevron regard human rights policy resolution. Retrieved from http://www.sec.gov/divisions/corpfin/ cf-noaction/14a-8/2010/wisconsinprovince040110-14a8.pdf. Accessed on February 5, 2014. Smith, T., & Wolf, P. (2002). The evolution of a movement: From fringe to credibility. In All Things (Fall/Winter), 4 6. Retrieved from http://www.jesuit.org/jesuits/wp-content/ uploads/IAT2002winter.pdf Society of Jesus. (2012a). Advocacy priorities. Retrieved from http://www.jesuit.org/world wide/social-justice/issues/socially-responsible-investing/advocacy-priorities/. Accessed on November 8, 2012. Society of Jesus. (2012b). Provinces and assistancies. Retrieved from http://www.sjweb.info/ resources/locatio.cfm. Accessed on November 8, 2012. Society of Jesus. (2012c). Social justice and ecology secretariat. Retrieved from http://www. sjweb.info/sjs/. Accessed on September 19, 2012. Steiner, H., & Alston, P. (2000). International human rights in context: Law, politics, morals. New York, NY: Oxford University Press. United Nations. (2011). Guiding principles on business and human rights: Implementing the United Nations “Protect, Respect and Remedy” framework. Retrieved from http://www. ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf. Accessed on February 6, 2014.

SOCIAL INNOVATION AND INVESTMENT: THE SHOREBANK EXPERIENCE Fiona Wilson, James Post, Ronald Grzywinski and Mary Houghton ABSTRACT Purpose This chapter discusses how one bank, committed to social innovation and investment in low-income communities, evolved into a model of socially responsible banking and exemplary community development financial institution. The authors draw lessons from this experience and propose ways to apply those lessons to other financial institutions. Methodology/approach The chapter is based on an in-depth case study of ShoreBank. It includes extensive interviews with two of the bank’s cofounders, who served as the bank’s leaders for more than 37 years. Findings The case study has identified six key enabling factors for social innovation: (1) a social purpose that is deeply, and effectively, embedded in the organization’s mission, strategy, and operations;

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 65 89 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007003

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(2) an ownership structure to support the social mission and a structure (e.g., bank holding company) that facilitates social innovation; (3) capital capacity that is, ability to create credit through leverage; (4) a deep level of knowledge about the business, the clientele, and the operating environment; (5) talented people who bring both skill and passion for the mission to the institution-building process; and (6) the discipline to continuously innovate, at a scale appropriate to the problem, with resources that are adequate to the challenge. Limitations This work has several limitations including a focus on one U.S. bank holding company, and based on interviews with that bank’s cofounders. Social implications The chapter provides a rich description of how social innovation through social investment created a meaningful social impact. Important lessons and useful recommendations are drawn for social enterprises that are committed to social innovation in the financial services industry. Originality The chapter provides insights into the ShoreBank case based on a unique set of data. It offers useful recommendations for social enterprises. Keywords: Social innovation; social investment; ShoreBank; social corporate responsibility; social banking; enabling factors for social innovation

INTRODUCTION Much of the world’s population has insufficient resources to meet its basic economic needs. Without access to credit, for example, large segments of the population are effectively shut out of modern economic activity. Banks and the banking industry have traditionally helped to solve these issues. As historian Niall Ferguson has written in The Ascent of Money (2008), the most important innovation in the history of money is the creation of credit by banks. He argues, Poverty has to do with the lack of financial institutions, with the absence of banks, not their presence (Ferguson, 2008, p. 13). This chapter recognizes the need for a responsive financial system and focuses on how banks can play a role in creating access to appropriate types of

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affordable, productive investment credit which can play a positive role in economic development, and ultimately, in facilitating permanent social change. We focus in this chapter on how banks can provide credit for productive social purposes. Banking can be a powerful mechanism of social change because access to credit can help families and communities build the businesses and infrastructure necessary for permanent financial selfsufficiency. The United Nations Development Program (UNDP) notes in a recent report that Global capital markets (amounting to more than $178 trillion) have the size and the depth to step up to the challenge (UNDP, 2011, p. 90). But this does not happen automatically. Aggregated capital must be disaggregated many times to create portfolios of loans to specific borrowers in local communities. This process requires many decisions in various financial institutions. In our view, innovation is required at the local community level in order to create the conditions under which a banking institution can make loans in ways that help achieve specific social goals. In other words, the “regular” banking institution must be “reengineered” to allow for social (and not just financial) value creation. The focus of this chapter is on learning how one bank became a platform for innovation in meeting the productive credit needs of disadvantaged communities. This chapter is based on an in-depth case study of ShoreBank Corporation, a 40-year pioneer in harnessing the power of a mainstream financial institution to address social issues. We have conducted more than 25 hours of in-depth interviews with ShoreBank founders (and coauthors) Ron Grzywinski and Mary Houghton in 2008, 2010, and 2012. These data, plus extensive primary and secondary source materials, have enabled us to publish two previous papers about the history and practices of ShoreBank (Post & Wilson, 2011; Wilson and Post, in Spitzeck, Pirson, & Dierksmeier, 2012). This chapter draws on those prior works with a refined focus on lessons learned that bear on social innovation and investment. We use these data to help the reader understand some of the socially productive innovations that ShoreBank pioneered; the conditions required for these types of innovations to occur; and the enabling factors that encourage such innovation. We conclude with a number of lessons learned about the potential for banking institutions to develop innovative ways of engaging with communities and fostering social change. One of the salient findings from the ShoreBank experience is the way a “virtuous circle” can be created wherein successive social investments flow naturally from and into socially innovative courses of action.

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SHOREBANK: FOUR DECADES OF SOCIAL INVESTMENT, SOCIAL INNOVATION, AND SOCIAL IMPACT Innovation implies change, but it does not necessarily imply progress or social well-being. For example, Paul Volcker, former head of the United States’ Federal Reserve Bank, has said the only useful banking innovation in the past 30 years is the ATM machine. Indeed, many of the innovations in the financial services sector during recent decades have produced social harm and injury, especially those that preyed on the poor. ShoreBank’s innovations were different: they were of the kind that helped address some of the community’s toughest social problems. ShoreBank was born in the early 1970s out of the shared values, experiences, and knowledge of a group of four banking colleagues: Ron Grzywinski, Mary Houghton, Milton Davis, and Jim Fletcher, who lived in the Chicago area. The radical decline in economic prosperity that happened in inner city neighborhoods when African Americans became the majority of residents shocked and saddened the group, but they realized that nonprofit organizations alone did not have the resources to solve the problem. The solution to discrimination and disinvestment was equal opportunity and sound investment in the community. These views led them to strategize about ways to reverse the situation in Chicago. Their professional experience as bankers and community activists led them to believe that the “credibility and the seriousness of a bank as an agent of change” could help reverse the urban poverty they encountered. They developed a radical idea: a for-profit bank that would act as a “permanent local institution” that could bring about social change by combining sound banking practice with sound community development support. This was theory in search of a practical application; ShoreBank would become the test case. With $800,000 in capital and a $2.4 million loan from American National Bank, the founders led a group that purchased South Shore National Bank, whose owners were trying to relocate out of the South Side of Chicago to a more prosperous downtown location. Instead, they sold the bank to Grzywinski, Houghton, and their investors who eventually changed the name to ShoreBank. The new owners assumed control and began operations in August 1973. The business model was sound and ShoreBank was profitable within two years. From the outset, ShoreBank functioned as a bank holding company with a lead commercial bank. The vision was of a holding company, which

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would contain both the commercial bank and related affiliate organizations which could supplement and support the core banking activities where necessary. Specifically, the founders believed that successful community development would require not only focused commercial lending by their lead bank, but also affiliates who could provide higher risk funding, and/or who could provide partially subsidized management and marketing assistance to clients. While ShoreBank Corporation focused on a single African American neighborhood on the South Side of Chicago for its first 15 years, it later enjoyed significant expansion: ShoreBank moved into other Chicago neighborhoods and, beginning in 1986, replicated its banking approach in Cleveland and Detroit, and in the Upper Peninsula of Michigan created two nonbank companies to support small businesses, one in partnership with Northern Michigan University. In time it developed a bank in the Pacific Northwest which became the first bank in the United States created to address environmental issues, when it partnered with Ecotrust, an environmental organization, and an affiliated nonprofit to provide complementary lending and strategic consulting skills. ShoreBank Corporation at the end of 35 years can perhaps be best described and understood as a sophisticated organization consisting of three circles of activity. The center circle ShoreBank, the for-profit, federally regulated banking business made a variety of market-rate community-focused loans. The second circle included the nonprofit organizations that provided complementary financial and management services to banking and nonbanking clients. Finally, a third circle was composed of the contractual and consulting services that enabled ShoreBank Corporation to assist other mission-driven organizations in the United States and abroad (see Fig. 1 Shorebank Organizational Chart) (Post & Wilson, 2011). The importance of this pivotal innovation, the holding company structure of ShoreBank, on the company’s social impact is discussed in greater detail in a later section entitled “Enabling Factors,” in section “Structural Innovations.” In summary, ShoreBank was both similar to and different from traditional banks. Like a traditional bank, ShoreBank was privately capitalized but publicly regulated. It converted market-rate deposits into credit, to those wishing to grow a business, refurbish or construct a building for housing, or build nonprofit facilities. The key difference at ShoreBank was its focus on bringing much-needed bank credit to markets that had been traditionally underserved by conventional banks.

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Fig. 1.

ShoreBank Corporation 2008.

Over four decades, ShoreBank grew to become the United States’ leading social enterprise of its kind. Its for-profit bank subsidiary was the largest certified Community Development Financial Institution (CDFI) in the nation. Cumulatively, ShoreBank deployed more than $4.1 billion in mission investments, helping finance more than 59,000 units of affordable housing. In 2008, ShoreBank had more than $2.4 billion in assets and earned $4.2 million in net income. Perhaps its largest legacy is in the national movement of community development financial institutions and its support of federal community investment legislation (Community Reinvestment Act or CRA and the Community Development Financial Institutions Act). The company has been influential abroad, as well, overseeing social and economic development projects in more than 60 countries and working with social entrepreneurs, including, among others, Muhammad Yunus and Sir Fazle Abed to capitalize Grameen Bank and BRAC Bank, respectively. ShoreBank’s innovative banking continued until 2010 when the bank was closed in the wake of the nation’s financial crisis. The financial crisis

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that began when Lehman Brothers and AGI collapsed set off a great recession that took a heavy toll on community banks, including ShoreBank. The carnage was so great that the U.S. government bailed out the nation’s largest banks (“Too Big to Fail”) under the TARP program, while hundreds of smaller banks were shut down. On August 20, 2010, the Illinois Department of Finance and Professional Regulation appointed the Federal Deposit Insurance Corporation (FDIC) to serve as receiver of ShoreBank. Details of ShoreBank’s closing are discussed in Post and Wilson (2011), and toward the end of this chapter. The assets of the Midwestern bank subsidiary were taken over by a newly incorporated bank, the Urban Partnership Bank, operating under state and federal regulatory permission. Ten of the 11 ShoreBank subsidiaries and nonprofit affiliates continued their mission as independent entities serving communities in the United States or banks in developing countries. The largest of these are the nonprofit Center for Financial Services Innovation (CFSI) that advises banks nationally; Craft3, an organization that delivers conservation-oriented credit and management assistance in the Pacific NW; and Enclude (previously “ShoreBank International”), a consulting company working on financial and information services in developing economies. And the senior management team, including cofounders Grzywinski and Houghton, have continued to encourage, advise, and urge other entrepreneurs to pursue social innovation in financial services, applying lessons learned at ShoreBank. (The appendix provides a chronological timeline of key developments throughout ShoreBank’s history.)

ENABLING FACTORS We believe the ShoreBank experience suggests that successful social innovation depends on several enabling factors. We discuss each factor below. Social Purpose Embedded in Organizational Mission Although much has changed in the 40 years since ShoreBank was founded, the ultimate purpose of its socially innovative financial services remains the same: To ignite community economic development by meeting the needs of underbanked people who can, and do, responsibly use financial services to create good local jobs, affordable, quality housing, and other important community services and infrastructure.

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The ShoreBank vision spread beyond its initial location because the founders aspired to create a model that was replicable, either by themselves or others. Mary Houghton has said that the group was trying to proselytize for the model of a bank holding company that could do this kind of work at greater scale than a not-for-profit could. Cofounder Grzywinski explained that the intention was to use all of the bank’s resources to bring about redevelopment in an almost totally minority neighborhood all of the symptoms of deterioration. As ShoreBank’s 2007 annual report stated: ShoreBank’s credits are intended to fuel economic opportunity that ultimately benefits the owner, the employee, or (in the case of housing) the tenant, as well as enhance economic development and prevent physical deterioration of the community. ShoreBank illustrates that a bank is more likely to leverage its financial capital for good when that purpose is embedded in its organizational DNA. We believe that a bank’s stated mission fundamentally affects its “will” to focus on innovations that can benefit the poor. ShoreBank’s experience is supported by evidence from a recent book on the banking industry, which presents a number of case studies of banks that are able to act with “integrity” rather than opportunistic self-interest because of their clear mission geared toward societal value creation. As the authors explain: the humanistic approach of these banks is codified in their mission statements answering the question ‘why do you exist and why does society need you? ’ (Spitzeck et al., 2012, p. 196). The 2007 Annual Report described ShoreBank’s hybrid social-financial mission: to build wealth in communities that have been historically underinvested and to operate profitably. Cofounder, Houghton, described the piercing clarity that the organization has to survive in order to implement a mission, and so in her words, it is never making a tradeoff that has to do with really subnormal financial performance (emphasis in original). She also characterized the situation as understanding at many points along the way that we prefer a moderate return to a maximum return because … (t)he purpose of the place is to produce mission results. From its inception, ShoreBank was closely held by approximately 70 shareholders, including charitable foundations, religious organizations, nonprofits, community organizations, as well as insurance companies, banks, and other corporations and individuals. Grzywinski described the critical importance of this approach: All the investors in ShoreBank to date have invested with the understanding that the primary purpose of their investment is to do development, and not maximize return on capital.

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Mary Houghton explained there was a clear realization about a constant trade-off between mission and financial returns, but this did not pose a conflict: Our board has always been highly mission focused … there are not people on the board who pound on the table and say you can’t do that because you’re sacrificing a financial return. The board always wants to make the choice which is the mission choice. And the same thing is true in the management groups, nobody really argues for the conservative choice. There’s just a supreme realization that one is making a tradeoff.

Two banks with which ShoreBank collaborated have created descriptions of their goals that have extended this concept of “trade-offs” into a triple bottom-line concept. Triodos Bank in the Netherlands and Vancity Credit Union in Vancouver, British Columbia aspire to create social and environmental returns, not only financial returns, in the belief that this creation of social and environmental value is as important, or more important than financial value creation alone. To succeed, banks like ShoreBank, Triodos, and Vancity owe the public (depositors, lenders, investors, local community members, and other stakeholders) accountability on financial and mission performance. It requires spending the necessary resources to meticulously measure a handful of credible proxies for social and environmental outcomes and, ideally, commission external validation. The alignment of ownership interests evident with the social mission at ShoreBank is an important enabling condition to ensure ongoing social innovation. Without alignment, the innovation will break down, leading to a pitting of social mission against financial results. This view is also supported by Spitzeck et al. (2012) who recognize that adequate profitability, while vital to the functioning of a financial services institution, is a “necessary but not sufficient” outcome. The authors suggest that the positive examples, including ShoreBank, are effective because they have organizational missions in which value creation to society is deeply embedded in their DNA. The cases highlight banks, like ShoreBank, who aim to be of service to society (Spitzeck et al., 2012, p. 196), a concept with deep roots in the history of the American model of corporate responsibility (Carroll, Lipartito, Post, Werhane, & Goodpaster, 2012).

Structural Innovations It is axiomatic that “structure follows strategy” and that ownership structure is an important enabling factor for social enterprises. ShoreBank was

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always clear that it needed to create a sophisticated holding company structure, ShoreBank Corporation, to contain nonprofit and nonbanking affiliates in addition to its for-profit banking organizations. The purpose of these structural components was specifically to channel higher risk funding and partially subsidized management and marketing assistance to clients, and thereby to jump-start markets in need. By targeting the higher risk market segments which are often avoided by mainstream institutions, the enabling conditions can be created for later more substantial funding from the subsidiary bank and other banks. This innovation, using differing corporate structures to fund pre-bankable economic investments, recognizes that while banks can use their capital to tap the nation’s deposits to provide productive credit, more philanthropic or higher risk funding is also at times required. Of the overall holding company model, Houghton stated: the vision is that both the bank and the not-for-profits are working in the same market, they work with different customers, they work with the same customers, sometimes they work together. But in general we have a variety of products or tools that are of use to entrepreneurs in our market. The idea of structural innovations to address social purpose banking is not new. It is interesting to note that in the early 1970s the Board of Governors of the U.S. Federal Reserve System, in its interpretation of the 1970 Amendments to the Bank Holding Company Act, recognized the value of structural innovation when it observed that a bank holding company may … engage in ‘making equity and debt investments in corporations or projects designed primarily to promote community welfare, such as economic rehabilitation and development of low-income areas.’ … Bank holding companies possess a unique combination of financial and managerial resources making them particularly suited for a meaningful and substantial role in remedying our social ills (Federal Reserve Bulletin, 1972, p. 572). A few years later, Congress enacted the Community Reinvestment Act (1977) to further encourage depository institutions to help meet the diverse credit needs of their communities. One noteworthy example of structural innovation was ShoreBank’s creation of the CFSI. As a nonprofit affiliate of ShoreBank Corporation (the for-profit holding company), the CFSI helped facilitate and lead efforts to serve “underbanked” customers through the mainstream U.S. financial services industry. ShoreBank’s CFSI grew out of the entrepreneurial spirit of an employee who became interested in access to consumer banking services for the “underbanked” and who “saw an opportunity to push this agenda with the large banks of this country.” The business model for this nonprofit

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required it to be funded by revenues from two fee-based networks for banking and other financial services institutions and a fee-based consulting unit for nonnetwork members. These funds were supplemented by grants from large foundations interested in the issue of equal access to financial services. Houghton described CFSI as a different form of advocating for the mission of ShoreBank in the larger financial sector … acting as a kind of a broker of knowledge amongst product managers in very large banks and technology companies in this country. She also explained that the business benefit that it gave the holding company was a fabulous window on innovation which she saw as beneficial because that kind of innovation is hard in the context of a small bank alone. This holding company structure also allowed ShoreBank to be the so-called “midwife” (advisor) to the birth of large scale, professionally managed micro-finance organizations in developing countries, and a rebirth of small business lending in Eastern Europe in the 1990s, as well as in other developing countries since that time. This work clearly expanded the bank’s learning and international reputation. The ShoreBank example suggests that an organizational mission is worthless without an ownership structure that allows the mission to be fully implemented, in decisions small and large. Causing social change in a low-income market may require resources that can absorb more risk than a bank can traditionally accept, to subsidize the start-up of nonprofit social enterprises or to provide “patient capital” to new ventures. This may require stakeholders and governance structures for companies not fully controlled by the holding company, with differing expectations than the owners of a bank or bank holding company. Our view is that the ownership structure of a bank directly and indirectly affects the interaction between the owners and top management team, and ultimately in terms of the dedication to social purpose and practice. The important role of ownership structure is supported by evidence across the banking industry. It is interesting to note that 10 banks in the United States which have a clear social purpose (as designated Community Development Finance Institutions) are owned by nonprofit parents. Similarly, credit unions (which are, by definition, “mutually owned” that is, controlled by members who elect a board) also have the structural capacity to be socially innovative. The banking industry is, in many ways, a story of constantly shifting risks and rewards. The Federal Deposit Insurance Co. (FDIC) protects depositors, but there is no long-term permanent incentive for banks to innovate for the benefit of marginalized populations by creating greater

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access to credit.1 As Grzywinski noted long ago, there is simply not enough reward for taking the extra risk to provide needed innovations for the poor (Grzywinski, 1991). This is ironic because larger financial institutions have greater capacity to innovate because of their larger capital resources. But the normative and risk avoidance structures of the banking industry result in conventional banks choosing to not use that capacity for productive social or environmental innovation. Instead they innovate in areas that have the potential to yield higher earnings and/or market share (e.g., free checking accounts). Executive incentive compensation in conventional banks also, discourages innovative, socially beneficial behavior.

Capital Capacity Capital capacity refers to a bank’s capital assets and to its ability, under the law and in a competitive context, to leverage that capital into a portfolio of loans that generate earnings and returns on investment. Underwriting must be objective and comprehensive while risks must be mitigated so that the portfolio will perform within the budgeted provisions for losses. For for-profit companies the saying, “no margin, no mission,” is often quoted. If earnings are insufficient to generate retained earnings, the bank’s capacity for mission achievement will be severely limited. The bank must generate net earnings; if it does not, mission goals will be compromised. A bank’s capital capacity affects both its ability to make loans and the relationship between risk and solvency. Banking regulation in virtually every nation exist for the dual purpose of protecting depositors and ensuring that banking institutions remain solvent that is, able to repay their depositors while meeting the demand for credit through loans. ShoreBank successfully extended credit to less advantaged clients: borrowers who may be considered by some as “marginally qualified,” or who must be financed at interest rates that do not adequately cover the risk involved, or on terms that fail to protect depositors and investors without government intervention. The bank’s staff became expert underwriters of loans for individuals and businesses operating in their specific local community, with its associated characteristics. By knowing the customers, and their businesses in depth, ShoreBank loan officers were able to serve the community within tolerable risk parameters. For any bank, the yield on bank loans is higher than the yield on its investments, so a bank that maintains a high proportion of its assets in

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loans generally increases its net interest margin. ShoreBank kept its loan losses low by deep knowledge of both the geographical market and of the kinds of specialized lending categories/mechanisms in which it operated (e.g., multifamily building rehabilitation, and nonprofit organizations). Over time, this allowed ShoreBank to accurately identify borrowers who were likely to have better repayment rates. ShoreBank also effectively used SBA, FHA, and state government guarantee programs to share and mitigate risk, and successfully financed large numbers of minority owned franchise businesses who were disciplined by the use of franchisor management and information systems. For the majority of its lifetime, ShoreBank enjoyed average loan losses that were within 10 basis points of all FDIC-insured banks in its asset size class no small feat for a bank which was making loans that traditional banks would have previously considered “unlendable.” (The importance of the local context on social impact is discussed in more detail in the section, “Local Knowledge: Local Context.”) It is important to make the distinction between banking that has a specific social purpose and unsound banking. ShoreBank demonstrates that the former is possible, and that the latter is not the destiny of community banking institutions with social missions. Too much unsound behavior was performed by banks of all sizes and types leading up to the recession it was a rather a widespread phenomenon in the early 2000s.

Local Knowledge: Local Context The concept of local focus was a fundamental underpinning of the model and the corporation’s theory of how change occurs. In 1973, ShoreBank chose to create a local bank, in one specific market, and deliberately narrowed the priority service area to very specifically named neighborhoods. The first neighborhood of South Shore was the only named neighborhood as a priority for the first 10 years, seemingly counterintuitive for an organization seeking large scale impact. Houghton explained why this approach is important: you can build up quite a lot of deep market knowledge about what’s going on in the market, and you can build relationships with active residents in the neighborhood, that over time have a lot of trust and mutual knowledge embedded into them. She further stated: Our goal was to actually reverse the deterioration in the housing market and be a catalyst for appreciation in that market. If we hadn’t but had dispersed our lending into a larger

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catchment area, we wouldn’t have changed the nature of a market … that principle has helped us to have a real impact over the years. ShoreBank’s experience in a variety of domestic and international markets suggests several important reasons why this local context and knowledge is so pivotal to achieving mission-related success. First, longterm and deep market knowledge allows a bank to successfully identify customers who may have lower borrowing needs or who need less sophisticated loan packages, but who repay at the same rate as others who borrow from banks. Innovation in credit at ShoreBank included loan structures tied tightly to cash flows, lower loan size minimums, and the willingness by ShoreBank’s loan officers to gather information more informally. To build the local real estate market on the south side of Chicago, ShoreBank made it clear to real estate investors that rehabilitation of property needed to accompany an acquisition, but they were willing to accomplish this goal, organically, with borrowers over time, and not as an immediate condition of the loan. Similarly, its west coast bank achieved its environmental agenda by pointing out relatively modest incremental steps that a small business borrower could easily afford. Second, ShoreBank found that borrowers in a market recognize lenders with excellent skills, and gravitate toward and remain with them. By specializing deeply in specific geographic and industry markets, ShoreBank’s loan officers could embed market and technical knowledge in the course of underwriting loans and working with loan customers, thereby eliminating the need for other forms of fee-based information delivery that thinly capitalized customers resist. However, some forms of technical assistance are too expensive and time consuming to be bundled into loan pricing. As a result, ShoreBank continuously attempted to develop knowledge delivery services that customers would value because they were willingly purchased. ShoreCap Exchange, a nonprofit ShoreBank affiliate that provided consulting services to banks in developing countries after receiving equity from a companion equity fund, found that when an investee bank was required to pay approximately one-third of the cost of technical assistance, the investee bank CEO became deeply engaged in deciding project priority and demanding adherence to delivery schedules. Because advisors were sometimes earning first world salaries, some subsidy was necessary. This suggests some valuable lessons about why and how to deploy subsidy to make banking services available to people or groups who might not have the ability to pay. First, it is important to be willing to use subsidy in some situations, like starting up a new venture. Second, grant funding by a third party can create distortions: where neither the primary beneficiary, nor the provider

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of the service, are focused on the most efficient use of the resources provided. In other words, because in some sense “nobody” is paying, neither party has the incentive to manage it as efficiently as possible. ShoreBank experimented with different models over time, but the model used for ShoreCap Exchange proved to be effective: ShoreCap Exchange, which was providing Northern consultants to southern (Africa and Asia) banks got it right … the bank CEO was spending real money, but the third party was subsidizing the higher Northern consulting rates.

Building a Talented Institution ShoreBank’s experience suggests that sufficient talent is attracted to socially purposeful careers since the opportunity to innovate and help others to succeed offsets the desire to maximize personal compensation. However, adequate performance-based compensation is needed to retain the best talent. An organization must also invest to develop its highest performing personnel with skills of general management for its core business if successor management will be drawn from within. As a social enterprise organization grows, the pool of senior executives qualified for the top job shrinks and better paying conventional employment opportunities often attract the best talent. This creates a serious leadership gap that may, or may not, be recognized by the board of directors until the moment of leadership change arrives. The need for talented and committed individuals also extends to the board of directors. Governance is an especially critical aspect of a hybrid institution’s success, which requires directors who can balance the social and business mission of the enterprise. Over the span of four decades, ShoreBank was able to attract knowledgeable, experienced, wise men and women to its board of directors. Many were attracted because of the unusual use of the banking system to achieve a social purpose. In effect the founders were moving the civil rights movement from the political to the economic realm, and this was a powerful motivator for many leading thinkers and practitioners to have involvement. The fact that Shorebank was seen as a serious business, with risks certainly, but also a significant opportunity to impact the long-term health of inner city neighborhoods, was also a factor. Potential board members (and investors) perceived that the risk was generally manageable, and were attracted to the idea of putting the hard money of America to work in inner city neighborhoods. Lastly, directors of ShoreBank largely knew that their

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primary role was to advise management, that their opinions were taken seriously and that there would be genuine dialogue between board and management. In retrospect, the lesson learned is that the most valuable attribute of a bank director is the ability to advise executive leaders on major decisions where a delicate balance of business and mission considerations is needed. This perspective, translated through wise counsel, helps keep the social mission squarely in focus through the “fog” of numerous and difficult operational decisions.

Scale and Replication Capacity: From Local to Global ShoreBank proved effective at innovation, development of talent, and maintaining a culture of high energy and drive. Starting with $1 million of loans during its first year, ShoreBank built momentum and grew into a $4 billion credit provider over 40 years. Most of that money went into the south side of Chicago with a population of less than one million people. Its first major success at replication came in the Pacific Northwest on its fifth try. ShoreBank had earlier achieved varying levels of success in the different communities that it entered. After 25 years of operation, Southern Development Bancorporation (now Southern Bancorporation) has grown into a permanent community development presence in rural Arkansas and Mississippi. But conditions in Detroit and Cleveland were markedly different than those in Chicago, and ShoreBank’s model was less effective. However, its learning has been shared broadly and effectively through Enclude, the international advisory company, the CFSI, and the companies serving two international local bank investment funds. The challenge of how to replicate the impact of social innovations efficiently and effectively has become a key issue for both practitioners and researchers of social entrepreneurship (Bloom & Dees, 2008; Bloom & Smith, 2010; Bradach, 2003; Dees, Anderson, & Wei-Skillern, 2004; Seelos & Mair, 2012). As former President Bill Clinton observed, Nearly every problem has been solved by someone, somewhere. The frustration is that we can’t seem to replicate [those solutions] anywhere else (Olson, 1994, p. 29). Replication of an innovation may not always happen by the original innovator. For example, after its closure in 2010, all but one of ShoreBank’s companies continued in operation and its legacy of innovative ideas proved to be a catalytic presence in its community, in the banking

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industry, and throughout the world. ShoreBank’s model of progressive banking lives on in the national movement of community development financial institutions it inspired (Taub, 1988), shaping federal community investment legislation, creating the nation’s first environmentally oriented development bank, cosponsoring formation of the Global Alliance for Banking on Values, and serving as a role model for dozens of progressive banks. Across this array of accomplishments, important lessons have been learned and shared about what it takes to bring a socially innovative initiative to market and community success.

THE PURPOSE OF A BANK: BACK TO THE FUTURE The importance of banking to the modern economy cannot be overstated. Without credit, it would be impossible to conduct nearly all modern economic transactions. ShoreBank underscores the importance of recognizing, however, that the contemporary bank can be more than just another corporation working for shareholders and management; the modern bank must serve a wider set of stakeholders. Throughout history, banks have been seen as a pillar of the community … investing in the community’s future (Grzywinski, 1991, p. 87). This role has greatly changed in recent decades. A bank’s traditional purposes are the protection of deposits, the earning of a reasonable return on invested capital, and by recycling the savings of the “community” as loans, the contribution to economic growth and vitality. However, over time the third purpose has become significantly downplayed. As Grzywinski wrote, (Many banks) have grown larger and less community orientated. Banks that began as local institutions grew to national, even global proportions, and came to focus more and more on the size, variety, and yield of their transactions, in some cases with dire results. The communities they originally served have changed very little; the banks themselves have changed enormously (Grzywinski, 1991, p. 8). Despite the reorientation of purpose of most mainstream banks, over the last few decades the socially responsible investment (SRI) movement has challenged us to question these assumptions and to think critically about how capital is used that is, the ends to which it is put and the means through which that transfer occurs. Two overarching questions are presented: Does it promote socially useful, constructive activities? Is credit available through mechanisms that are efficient and socially beneficial? In this context, banking is a socially responsible endeavor when capital is used

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to promote socially important and constructive activities in socially beneficial ways. However, as we noted above, the approaches and business models of mainstream capital markets are not well designed for this social purpose. That is why innovation is required if we are to encourage banking institutions to be a mechanism for getting capital to flow to the poor. Mainstream banks have focused on creating earnings based on market value, as opposed to creating value in the “real economy.” This illusion that you can make money from money is regarded as one of the important contributors to the financial crisis of 2008 (Spitzeck et al., 2012, p. 195). Spitzeck et al. suggest that banks that create societal benefit are those which take a harder, but more societally beneficial approach of value creation in the “real economy.” We believe that none of the types or examples of innovations presented above could have happened (or have been scaled or replicated) without the first rule of banking: solvency. An insolvent bank is of no use and downright harmful to depositors, borrowers, investors, or the community. Of course, there have been a number of innovations in financial services throughout history which have had a socially constructive intention. The ShoreBank model certainly shares with micro-finance institutions and cooperatively owned credit unions the purpose of using a financial institution in order to broaden access to credit to borrowers who are smaller and less affluent. All three types of institutions do this by attracting investors who also wish to achieve this objective, and employing talent motivated in the same way. However, ShoreBank was uniquely focused on community economic development by broadening access to credit in a low-income African American community, where small business formation and housing rehabilitation were the primary types of need. The needed loans were larger than a microloan, and larger than the loans possible through the majority of cooperative banks and community credit unions. These different needs required a different approach, finding ways to lend to these borrowers, while ensuring adequate returns. ShoreBank’s strategy and holding company structure were the answer to that challenge for nearly 40 years.

SHOREBANK: ENDURING LESSONS It is fair to ask the question: “If ShoreBank was such a great model, then why did it ultimately fail?” The question is discussed in detail in Post and Wilson (2011), but merits some discussion here.

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Three reasons stand out. First, its lending was highly concentrated in Chicago real estate and for program and earnings purposes the bank held all of these loans in its portfolio rather than reduce concentration through loan sales. Second, the real estate collapse fell heaviest on housing prices in the low-income neighborhoods that ShoreBank served (−50% from 2000 to 2012). Third, as real estate values plunged, regulators reclassified large portions of ShoreBank’s loan portfolio as “troubled debt,” forcing a write down of the bank’s existing capital and compelling it to raise new capital in a terrible market. Nonetheless, $146 million of private capital was raised but could not be released from escrow as it was conditional on receipt of $71 million in TARP funding that was denied. (See Sheila Bair, 2012, pp. 284 290.) Ultimately, the bank ran out of options and its assets were sold to a new bank. The financial tsunami had claimed another victim. Overall, we believe that ShoreBank’s successful experience for nearly 40 years demonstrates that it is possible to conduct community banking in ways that serve the community, earn reasonable returns for investors, and safeguard the savings of depositors. It is possible to build a successful enterprise by focusing on sustainable growth rather than earnings alone, and by emphasizing five tenets of good practice that flow from the prior discussion: (1) Mission matters The stated mission of an enterprise fundamentally affects its “will” to focus on innovations that can achieve social goals. The more deeply the board, executive officers, and associates believe that “mission matters,” the more deeply the commitment to social change will be felt and lived by everyone in the organization. (2) Committed ownership The ownership structure directly affects an organization’s potential to achieve its social mission. The investors and senior management must share this commitment. The focus and direction of their conversations is reflected in decisions to share information, address risks, and strike the balance between mission and operating decisions. In addition, the design of the organization itself (i.e., the holding company structure at ShoreBank Corporation) can be a critical factor in aligning the organization with its operating environment. (3) Capital capacity Every bank is limited by its financial assets and its capacity to leverage those assets into a portfolio of loans that generate earnings and returns on investment, subject to the law and prudent risk management. ShoreBank’s mission shaped its operating policies and practices, including its focus on community-based real estate, a strategy that succeeded for more than three decades. Sound risk management,

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in service to social mission, will continue to facilitate the productive use of capital for social impact. (4) Talent and institution-building Social enterprises often compete in fields such as banking that require a high level of talent; when social mission is added, the need for top talent is even more demanding. While potential associates are attracted to social enterprises for the chance to do socially consequential work, the opportunities for personal growth and development may be more limited. Thus, social enterprises must find ways to recognize, reward, and develop top talent despite well-understood compensation gaps. (5) Scale and capacity A social enterprise must be properly “sized” to the problem to which it is responding. New enterprises typically begin small and, if successful, grow in size and operational complexity. With that complexity come “scale problems” and challenges of coordination, communication, and direction. Leaders must recognize the signs of scale-related stress and honestly consider shrinking or redesigning the organization, as well as growing it. These five elements mission, ownership, capital, talent, scale form the foundation on which social mission can be articulated, developed, and executed in any organization. As ShoreBank showed, a virtuous circle of social investment, innovation, and sound business practices can succeed.

CONCLUSION Given the financial calamity the world has faced since 2008, it is reasonable to ask, “Is there any vestige of honest and socially constructive banking to be found in the modern world?” Events of recent years suggest that banks have, as a group, done great social harm. Much of the Occupy Wall Street movement’s focus was a critique of the banking practices that plunged the world into a global recession through the creation of what are now known as “systemic risks.” Worse, since the collapse of Lehman Brothers in 2008, there have been a number of financial “relapses” as witnessed in the failure of MF Global, the manipulation (rigging) of LIBOR rates involving Barclay’s and other global banks, and the admissions of banking giant HSBC that it knowingly violated laws regarding money laundering for drug dealers, and illegal currency trading for Iran. Commenting on the LIBOR scandal, The Economist (2012) went so far as to characterize the situation as The rotten heart of finance. The editors’ point was bluntly

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stated: The most memorable incidents in earth-changing events are sometimes the most banal. … [In this instance], it is the everydayness with which bank traders set about manipulating the most important figure in finance. This pattern is repeated in so many of these cases and mirrors the “everydayness” with which risky mortgage loans were bundled, sliced, diced, and falsely rated for unknowing investors less than a decade ago. In this sense, mainstream banks have treated “regulation as nothing but a constraint to their profit margins” (Spitzeck et al., 2012, p. 193). This chapter was written with the events of recent years firmly in mind, but also with the belief that banking and the banking system can (and must) be a platform for positive social innovation. The study of ShoreBank emphasizes the conditions under which positive social innovation can occur. Certainly the existence of systemic risk threatens the solvency and stability of the entire international banking system. In many countries, including the United States, enormous concentration of assets that presents the challenge of managing and regulating a banking system in which 73% of assets are now held by the 6 largest banking institutions (the “Too Big to Fail” banks) leaving 27% of assets among more than 7,000 smaller institutions. Moreover, a “shadow banking system” of hedge funds and less regulated private financial institutions has become a powerful competitor to regulated banking. Despite these challenges, we believe the scale of social issues facing humanity requires a banking system that helps us address these issues. Community development financial institutions offer one hope for more innovation and more social investment. It should also be noted that many other social banks, such as Triodos Bank and 24 other banks who are members of the Global Alliance for Banking on Values, with who ShoreBank shared a similar mission and approach, are still functioning. ShoreBank closed for a number of reasons discussed above, but it had nothing to do with its social mission. Other banks in the Global Alliance on Banking Values,2 like Triodos, have grown throughout the crisis, demonstrating that using a regulated bank to fulfill a social mission, even in times of financial uncertainty is both viable and effective. Indeed, ShoreBank demonstrated that such a vision could become reality over the course of many years. There was continuous learning at ShoreBank. The challenges the bank faced were daunting at times. Throughout the experience however, an unwavering commitment to make a difference and to adapt to new realities breathed life into the bank’s motto: “Let’s Change the World.”

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NOTES 1. One exception is the Bank Enterprise Act of 1991 which enables grants to be made to FDIC-insured institutions according to a formula based on an increase in loans outstanding in distressed markets, funding to nonprofit community development financial institutions in those markets, and direct financial service delivery. For FY12, $18 million was awarded to 59 financial institutions. 2. http://www.gabv.org/

REFERENCES Bair, S. (2012). Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. New York, NY: Free Press, pp. 284 290. Bloom, P. N., & Dees, J. G. (2008). Cultivate your ecosystem. Stanford Social Innovation Review, 6, 46 53. Bloom, P. N., & Smith, B. R. (2010). Identifying the drivers of social entrepreneurial impact: Theoretical development and an exploratory empirical test of SCALERS. Journal of Social Entrepreneurship, 1(1), 126 145. Bradach, J. L. (2003). Going to scale: The challenge of replicating social programs. Stanford Social Innovation Review, 1, 19 25. Carroll, A. B., Lipartito, K., Post, J., Werhane, P., & Goodpaster, K. (2012). Corporate responsibility: The American experience. Cambridge: Cambridge University Press. Dees, J. G., Anderson, B. B., & Wei-Skillern, J. (2004). Scaling social impact: Strategies of spreading social innovations. Stanford Social Innovation Review, 1, 24 32. Federal Reserve Bulletin. (1972, June). Board of Governors. Federal Reserve System, 572pp. Ferguson, N. (2008). The ascent of money: A financial history of the world. New York, NY: Penguin Press. Grzywinski, R. (1991). The new old fashioned banking. Cambridge, MA: Harvard Business Review. Olson, L. (1994). Growing pains. Education Week, November 2, p. 29. Post, J. E., & Wilson, F. S. (2011). Too good to fail. Stanford Social Innovation Review, (Fall), 66 71. Seelos, C., & Mair, J. (2012). Innovation is not the holy grail. Stanford Social Innovation Review, (Fall), 44 49. Spitzeck, H., Pirson, M., & Dierksmeier, C. (2012). Introduction. In H. Spitzeck, M. Pirson, & C. Dierksmeier (Eds.), Banking with integrity, the winners of the financial crisis? Basingstoke, England: Palgrave Macmillan. Taub, R. P. (1988). Community capitalism: The South Shore Bank’s strategy for neighborhood revitalization. Boston, MA: Harvard Business School Press. The Economist. (2012). The rotten heart of finance. The Economist, July 7, pp. 25 27. United Nations Development Program. (2011). Human development report: Sustainability and equality. New York, NY: UNDP.

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APPENDIX: SHOREBANK HISTORY AND TIMELINE August 1973

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1981 1983 1984 1985 1986 1987

• Founders purchased South Shore National Bank (later renamed ShoreBank), with $40 million in assets in South Shore, a neighborhood on the south side of Chicago whose residency had changed from 100% white to nearly 100% African America since 1960. • The bank’s holding company, Illinois Neighborhood Development Corporation (INDC; later renamed ShoreBank Corporation) raises additional capital and receives permission to create for-profit real estate development subsidiary and a nonprofit organization to take investment and capacity building initiatives in the neighborhood of South Shore. • CEO of South Shore Bank is only banker to testify in favor of the Community Reinvestment Act (CRA). • INDC creates three affiliates to complement the bank: a real estate development company, a nonprofit organization and a minority venture capital fund. These new organizations were a critical extension of the bank’s lending activities. • South Shore National Bank converts to a state charter and is renamed South Shore Bank. • South Shore Bank becomes a “Certified Lender” of the U.S. Small Business Administration. • Two of ShoreBank’s founders are invited to advise Grameen Bank in Bangladesh. • Federal bailout of Continental Illinois National Bank. • INDC decides to expand to Austin, a large neighborhood on the west side of Chicago. • INDC changes its name to ShoreBank Corporation. • ShoreBank Corporation raises the capital for the start-up of Southern Development Bancorporation an Arkansas bank holding company, and agrees to manage it for the investor group. • Upon application by ShoreBank Corporation, the Federal Reserve Board expands permissible activities for all bank holding companies to include consulting services for

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Appendix.

1989 1990

1991 1995

1994 1997

1995

1997

(Continued )

economic development in low and moderate income communities. • Charles Rial and Associates, a small consulting company is acquired and renamed ShoreBank Advisory Services. • Savings and loan industry financial collapse. • South Shore Bank begins advisory work to eight stateowned banks in Poland to provide bank loans to small businesses, which leads to development of an international consulting practice. • ShoreBank Corporation expands to northern Michigan, Cleveland, Detroit, and the Pacific Northwest. Its expansions in each market generally include a bank, a real estate development subsidiary to invest in affordable housing, a nonprofit affiliate focused on financial and other support to small businesses. • ShoreBank becomes the first banking corporation in the United States to address environmental issues through partnership with Ecotrust, an environmental organization, to create ShoreBank Enterprise Pacific, a nonprofit (later renamed Craft3) (and later in 1997 ShoreBank Pacific, a commercial bank). • Riegle Community Development and Regulatory Improvement Act is passed creating the Community Development Financial Institution Fund, managed by the U.S. Treasury. Clinton had campaigned for it using ShoreBank and Grameen Bank as illustrative examples of its potential value. • South Shore Bank acquires Indecorp, a minority owned bank holding company with two banks on the south side of Chicago. The acquisition doubles the size of South Shore Bank to just over a half-billion dollars. • Nations Bank offers to capitalize the National Community Investment Fund, a trust managed by ShoreBank Corporation, to make equity investments in community development banks. • South Shore Bank is renamed ShoreBank, and all subsidiaries are renamed to include the words “Shore” or “ShoreBank” in their names.

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2004 2007 2008 August 2010

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• ShoreCap Management, a fund management subsidiary of ShoreBank Corporation sponsors the capitalization and begins to manage ShoreCap International, an equity investment fund which invests in small business and micro-finance banks in Africa, Asia, and Eastern Europe. • ShoreCap Exchange, a nonprofit affiliate created to write down costs of consulting services to investee banks. • ShoreBank Corporation starts the nonprofit Center for Financial Services Innovation. • ShoreBank acquires Bank of Bellwood, in near western suburbs of Chicago. • Collapse of Lehman Brothers; bailout of AIG; global financial crisis. • FDIC closes ShoreBank.

THE EMERGENCE OF IMPACT INVESTMENTS: THE CASE OF MICROFINANCE Harry Hummels and Marieke de Leede ABSTRACT Purpose This chapter sketches a new development in responsible investing, namely impact investing. Impact investing, which we define as the entire spectrum of investments deliberately aiming to create shared value, can be seen as an integrative approach to wealth creation through investments. The case of microfinance is used to illustrate this new development. Methodology/approach The chapter combines a viewpoint and a case study that serves to illustrate the practical relevance of the viewpoint. Findings The chapter starts with a brief overview of the origin and rise of responsible investments, followed by a description of missionrelated investments and impact investing as its latest development. Microfinance is presented as a special case, thereby focusing on the investors, the asset allocation and the meaning and application of the notion of impact.

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 91 115 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007004

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Practical implications The chapter shows that a focus on social and financial returns can be combined without having to make serious financial sacrifices. It also demonstrates that investments can come from investors as diverse as pension funds, foundations or high net-worth individuals. Social implications If impact investing really takes off particularly supported by institutional money there will be much more opportunity to tackle social and environmental innovation than without those investments. Originality/value of chapter The chapter challenges (institutional) investors to evaluate their responsible investment strategy and to rethink their asset allocation. Impact investing can become an important addition to the responsible investment landscape. Keywords: Responsible investing; impact investing; microfinance; impact measurement

INTRODUCTION Definitions matter, just as concepts do. Talking about the domain of investments that tries to connect the practice of financially motivated investments to the social, ethical and environmental performance of the investees, we have witnessed a changing vocabulary over time. Following the shift from ethical investing to sustainable investing and responsible investing a term that got traction when the UN Principles for Responsible Investment (PRI) were launched in 2006 under the guidance of former UN Secretary General, Kofi Annan the focus gradually moved from social investing to fiduciary investing (Hawley & Williams, 2000). In the transition a lot of the original inspirations and motivation has disappeared, but not everything. As Wood and Hoff (2007) argue investments do not only have a financial function but also a social function. An investor, allocating money to businesses, public infrastructure, affordable housing or healthcare research, always performs a social function. Whether intended or not, the investment has consequences that reach beyond the simple act of investing. Recently, a new type of investing has emerged which intentionally aims at simultaneously realising financial and social objectives: impact investing. In this contribution our focus is on this new kid on the responsible

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investing block. We briefly describe what it is, its origins and why it may be important to investors. In the final section we will focus on microfinance as an exemplary case of impact investing. But before we will start our expose on impact investing we would like to reflect on the wider category of responsible investing, of which impact investing is only a part. This introduction is relevant because it sheds light on the roots, the motives and the inspiration of responsible investors in their earlier days motives and inspiration that can now be recognised in the emerging impact investing community.

THE ORIGINS AND RISE OF RESPONSIBLE INVESTING Even though responsible investing is still a rather new phenomenon for many investors, the first signs of a developing practice could already be found around the year 1760. Over the years and in particular in the last few decades there has been a move from a religiously inspired movement to a secular and rather codified or regulated practice. In less than 10 years’ time an industry emerged with its own language, values, events and industry organisations, but also with its own limitations. In the remainder of this section we will briefly describe the development of responsible investment as a practice that evolved from making religiously motivated investment decisions to the pragmatic integration of environmental, social and governance (ESG) issues into the investment process.

A Faith-Based Practice The first traces of responsible investing can be found in the Quaker and Methodist movements in the 18th century (Domini, 2001, p. 29; Hummels, Boleij, & van Steensel, 2001, p. 44; Sparkes, 2002, p. 46, 2006, p. 42). Preachers like John Wesley and John Woolman were critical about investments with adverse effects on society. Sparkes (2002, p. 46) refers to Wesley’s sermon ‘The use of money’ (1760) in which he makes an argument for ‘the right use of money’. In using money Christians should act like stewards, not proprietors, by making sure that ‘our neighbour will not be hurt in his substance, his body or his soul’. Usually this is taken to mean that Quakers and Methodists did not invest in slave trading, in gambling

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or in the production of tobacco, liquor or weapons. However, Wesley also condemns charging excessive interest rates. Using or investing money carries in it a moral connotation. Coming forward 200 years, morality was also the driving force behind the actions of students, academics, church representatives and others, targeted at the United States and in a later stage multinational companies in the 1960s and 1970s. They used their shares or convinced existing shareholders to cast a vote against management in order to spark change. The first example of activist shareholders making use of their voting power was at the Kodak’s annual general meeting of stockholders in 1967. Industrial Arts Foundation’s Saul Alinsky, together with Reverend Franklin Florence’s FIGHT1 tried to get Kodak management’s attention for improving living conditions and job opportunities for black employees. In order to bring together an unprecedented number of shareholders voting for change, they approached existing shareholders and convincing them to let FIGHT members attend the AGM in their place. In addition, Alinsky and Florence rallied for the support of the university leaders, church leaders and pension plans. ‘Within a few weeks time, the national representatives of Presbyterians, Episcopalians, the National Church of Christ, and Unitarians all announced publicly (albeit hesitantly) that they were withholding their Kodak stock proxies from management’ (Kleiner, 2008). TIAA-CREF was also sympathetic to their cause. Even though the action wasn’t immediately successful in improving the conditions of the black working community, it ultimately resulted in the creation of a new company: FIGHTON. The company, which was controlled by FIGHT, was a subcontractor and provider of parts to Kodak. It was the successful end of the first shareholder action against the management of a company. Many were to follow, including the high profile ones against Dow Chemical, Honeywell and General Motors (Harrington, 1992). There were more indirect effects generated by the confrontation between responsible shareholders and companies. In the first place, religious institutions joined forces in the early 1970s by creating the Interfaith Committee on Corporate Responsibility (ICCR) later to become the Interfaith Center on Corporate Responsibility. In a collective effort, the committee’s aim was to influence corporate policies regarding divestments in South Africa in reaction to the South African government’s politics of Apartheid. More in general, ICCR members intended ‘to shape corporate policy on a number of environmental, social and economic justice concerns’ and thereby ‘promote justice and sustainability in the world’.2 A second important development was the creation of the Investor Responsibility Research

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Center (IRRC) in 1972. The centre screened companies on their involvement in matters that morally aware investors would like to change or abstain from. It also provided proxy-voting services making it possible for investors to vote on their shares. Increased Secularisation The previous examples explain the motives of the first responsible investors to stand up against management and use their voice and vote as a holder of the company’s stock. The screening of companies and the use of discretionary shareholder power to invoke social change were to become the dominant strategies in the decades to come for stockholders to exert influence (cf. Sullivan & Mackenzie, 2006, p. 15). It wasn’t surprising, therefore, that investors talked about ‘ethical investing’ or ‘socially responsible investing’. Harrington (1992) even called it ‘investing with your conscience’, while Brill, Feigenbaum, and Brill (1999) used the term ‘values-based investing’. In all cases the financial value was important, but in some cases not the most important. Quite often the social value added took centre stage. Notions like sustainable investing, ESG-investing or responsible investing, which have come to focus more, if not primarily, on the financial value added, were not the primary motivator at the time. It is precisely the introduction of these latter concepts that opened up new ways of looking at the relation between investing and social and environmental issues and in a later stage also governance issues. In addition, these concepts created a new arena that provided opportunities for new groups of investors, like institutional investors, to get involved. It was, however, only in the beginning of this new millennium that responsible investing gained momentum. In 2004 Mercer and the UNEP FI3 coined the term Environmental, Social and Governance (ESG), which was rapidly followed by the launch of the UN Principles for Responsible Investment. The ambition of this organisation was and still is to bring as many mainstream investors together under one umbrella to share knowledge and experience but also to increase shareholder power in the area of ESG issues. From Niche to Mainstream The launch of the PRI as it is currently called,4 has marked a significant change in the responsible investmentscape. The principles abstain from any reference to the social or environmental effects that investments can have

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on our society per se, but simply refer to the financial consequences of E, S and in particular G-factors for investors. As the PRI writes, the principles ‘reflect the view that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios and therefore must be given appropriate consideration by investors if they are to fulfil their fiduciary (or equivalent) duty’.5 Investors commit themselves to the principles ‘where consistent with our fiduciary responsibilities’.6 What that means is up for each member to decide. With more than 1,100 asset owners and asset managers signing the principles representing assets under management exceeding US$ 30 trillion the organisation demonstrates that responsible investment has become a mainstream investment activity. This development came, however, at a price (cf. Viviers, Bosch, Smit, & Buijs, 2008). The introduction of the ESG-vocabulary replaced another term that was widely used at the end of the previous millennium and the start of the new: Social, Ethical and Environmental (SEE). In other words, ethics was replaced by the notion of governance, which was much more acceptable to institutional investors facing their fiduciary responsibility towards their beneficiaries (cf. Hawley & Williams, 2000; Monks, 2001). With only a few exceptions left, morality was lost underway. Quite recently the PRI extended its focus from major asset classes like public equity, credits and sovereign bonds to emerging asset classes like private equity and alternatives. Examples of the latest trends are the initiatives on responsible agriculture and on inclusive finance. In both cases a limited group of PRI members launched a set of principles to guide the activities of the members in areas like agricultural investments7 and microfinance.8

THE SUN IS RISING IN THE WEST Approximately the same time that ESG got any traction and investors gradually started to integrate environmental and in a later stage social issues in their investment processes, a new trend emerged in the United States. Mission-Related Investing (MRI) was introduced among foundations and other philanthropic organisations that wanted to align their investments with their mission and their principles (Cooch & Kramer, 2007; Emerson, 2003a, 2003b; Godeke & Bauer, 2008; Kramer, 2006; Kramer & Cooch, 2006; NEF, 2008; Porter & Kramer, 2002). Annually, US foundations are required by law to spend at least 5 per cent of their assets on their mission. That ultimately resulted in addressing

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the very simple question by the Jessie Smith Noyes Foundation: ‘What about the other 95 per cent?’.9 Until early 2000 it was quite common for foundations and not-for-profits as principals to outsource the management of their financial means to asset managers as agents with the intention to make as much money as possible. That money could then be used to allocate more resources to the mission of the principal. But there was clearly a separation between the management of the assets and the social, cultural, environmental or religious orientation of the principal. Re-visioning the role of foundations in society, Emerson (2004) endorsed a changing role of foundations from that of charitable grant-givers to ‘investment partners in social well-being’. In order to mark the transition and to guide foundations and not-for-profits in practicing their new role he introduced the concept of ‘blended value investing’ (Emerson, 2003a; Emerson, Spitzer, & Harold, 2007). The basic idea behind the concept was to convince charitable institutions to do two things. First, Emerson tries to make the point that in addition to giving grants and guarantees it might make sense for foundations and not-for-profits to add investments instruments to their toolbox in order to enhance and promote their mission. Second, he introduces a double bottom line. The outcomes should be measured in terms of their financial and non-financial outputs, outcomes and added value. By doing this, charitable foundations and not-for-profits who receive significant public financial support by being exempted from paying taxes could increase their effectiveness (Emerson, 2004). The F.B. Heron Foundation was among the first to develop an integrative investment policy that aligned its asset management with its mission. The foundation designed an approach in which it used the entire spectrum of investment opportunities. Others, like the KL Felicitas Foundation, the Jessie Smith Noyes Foundation, the Packard Foundation, the Rockefeller Foundation and the Ford Foundation, were quick to follow.

TWO WORLDS COMING TOGETHER Following the developments in the United States with regard to missionrelated investing the Rockefeller Foundation with additional support from the Annie E. Casey Foundation, the W.K. Kellogg Foundation and the JPMorgan Chase Foundation commissioned a study by the Monitor Institute (Freireich & Fulton, 2009) to research, evaluate and document the most important trends in the field. The resulting report not only

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documented a new emerging field of investments with a dual purpose to make an investment return while creating social or environmental value but also introduced a new term: impact investing. Impact investing, which we define as the entire spectrum of investments deliberately aiming to create shared value, can be seen as an integrative approach to wealth creation.10 The new phenomenon is best described by its two defining characteristics. The first is quite comparable to what mainstream responsible investing wants: receiving a reasonable return on the investment during and at the end of the investment period. Whatever is reasonable is up to the investor to decide. Most will put financial returns first and will be looking for (above) market rate returns on their investments. In addition to this financial return impact investors value the realisation of predetermined social or environmental objectives. These investors are known as ‘finance first’ investors (Freireich & Fulton, 2009, p. 31) and they can often be found in the world of institutional investors, but also among foundations and family offices. Other investors put social, community and environmental returns first. These investors prioritise the extra-financial outcomes and are often willing to sacrifice some financial return if that would lead to better social or other extra-financial results. This group is called ‘impact first’ investors (ibid., p. 31) and are mostly found among charitable foundations, but also among family offices, and high net-worth individuals. This simultaneous realisation of financial and extra-financial objectives is what Michael Porter and Mark Kramer (2011) have called ‘shared value creation’. This focus on shared value may be an attractive feature for impact investees being the recipients of the new type of investment.11 Apart from investors and investees, the general public keeps a close watch on the investors and the nature and outcomes of their investments. Politicians, NGOs and the media, among others, want to know whether investments are made in the public interest. The second characteristic of impact investing, therefore, is its focus on measuring impact. Where mainstream investors are usually satisfied with financial, organisational and operational data to assess the quality of the investment, impact investors also require information about the achievement of predetermined extra-financial objectives. Calling oneself an impact investor entails a responsibility to provide evidence to beneficiaries or clients of the impact created.12 Microfinance is a case in point. By creating access to finance for previously excluded poor people, microfinance can be an important financial toolbox to create shared value. Unfortunately this is not always the case. During the course of the last decade microfinance has both been applauded

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and taunted because of its intended and realised financial and extrafinancial consequences on the communities it invests in. Before and just after 2000 it was welcomed as an important contribution to the Millennium Development Goals in general and to the combat of poverty in particular. Ten years later, it was severely criticised for not living up to its implicit promise. Some, like Bateman (2010), openly criticise the added value of microfinance, while others are more sympathetic to the modern practice of microfinance that was set into motion by Muhammad Yunus. Following Yunus’ vision (2007) that microfinance could alleviate or reduce poverty, attempts have been made to measure the impact of microfinance on poverty alleviation (see Copestake & Williams, 2011 for an overview).

THE CASE OF MICROFINANCE An Emerging Investment Category Microfinance is about providing access to financial services in low-income economies (Symbiotics, 2012, p. 13). It refers to informal and formal arrangements offering financial services to the poor (Brau & Woller, 2004, p. 3) and often provides access to finance to those previously excluded from banking services. The bulk of the financial transactions are in the form of microcredit, although savings and insurance products are increasingly offered to the microfinance clientele.13 Lack of assets and collateral to guarantee the payback of a loan was usually the most important reason for financial exclusion (Brau & Woller, 2004, p. 11). But that is not the only reason, as Armendariz and Morduch (2010, p. 8) point out. Banks often do not have sufficient information to assess whether a potential borrower will be able to pay back her or his loan, even though history has shown that default rates are very low and often significantly lower than the ratios western banks are facing. Also, banks that want to increase their outreach in suburban or rural areas are faced with high transaction costs. Handling small transactions for which one has to travel far is more expensive than servicing larger transactions in densely populated areas. The concept of microfinance is not new. Savings and credit groups that have operated for centuries include the ‘susus’ of Ghana, ‘chit funds’ in India, ‘tandas’ in Mexico, ‘arisan’ in Indonesia, ‘cheetu’ in Sri Lanka, ‘tontines’ in West Africa and ‘pasanaku’ in Bolivia. In Europe, microfinance dates back to the 16th century when informal and small-scale lending and

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savings clubs were established. In Ireland, Jonathan Swift initiated a loan fund system early in the 18th century, using peer monitoring to enforce weekly repayments (Seibel, 2003). In Germany, after the hunger year of 1846/1847, Raiffeisen created rural savings and credit cooperatives, originally called credit associations, and currently known as Raiffeisenbanken (Seibel, 2003). The concept of microfinance as it is known today, received wide attention and recognition since the establishment of the Grameen Bank in Bangladesh in 1976. The initiator behind this Bank, Muhammad Yunus, demonstrated the importance of providing access to financial services for poor people. The microfinance industry as it is today is rather dynamic. In the 1980s and 1990s the market was dominated by NGOs and development aid organisations. Since 2004, the industry started growing at an unprecedented rate. The number of microfinance institutions (MFIs) and microfinance funds increased rapidly (Chen, Rasmussen, & Reille, 2010). Both donors and investors began channelling large amounts of funding to MFIs across the globe. This trend brought essential benefits to the underserved poor. As of 2011, more than 205 million microfinance clients, of whom 82 per cent are female, have been reached in more than 85 countries. The number of clients grew in the last decade around 20 per cent per year (Reed, 2011). The financial crisis has caused a slowdown of the growth of microfinance, although the sector still shows impressive growth figures (El-Zoghbi, Mayada, & Martinez, 2011; Symbiotics, 2012). Fig. 1 shows the growth and regional distribution of microfinance assets globally provided by microfinance investment vehicles (MIVs) (MicroRate, 2011).

Fig. 1.

Distribution of Microfinance Assets. Source: MicroRate (2011).

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Until this very day there is a discrepancy between the current offering of microfinance services and the alleged need or desire for financial services. This discrepancy creates a huge opportunity gap to serve people excluded from access to financial services. According to CGAP and the World Bank (2010) around 2.7 billion people still lack access to formal financial services. This leads to a capital requirement of some US$ 250 300 billion (ING, 2012).

Three Types of Investors Investors in microfinance can be divided into three groups: (1) governments and Development Financial Institutions (DFIs), (2) institutional investors and (3) NGOs and other retail investors. The last two groups are private investors whereas the first group is public. Without a clear focus on social or environmental objectives fostered through social performance management (SPM) which is relatively new in the world of microfinance (Brody, Greeley, & Wright-Revolledo, 2005; Copestake, 2007; Grameen Foundation, 2008) the amount of microfinance debt, for instance, has increased rapidly over the last few years to reach a number of US$ 21 bn in 2010 (Sapundzhieva, 2010, p. 3). In that year, financial institutions were responsible for the bulk of the debt investments in microfinance, followed by DFIs and microfinance funds (Sapundzhieva, 2010, p. 4). Local actors contributed 60 per cent of the funding, while 40 per cent was cross-border (Sapundzhieva, 2010, p. 5).14 DFIs and multilateral organisations, like the World Bank, IFC and EBRD, provided more than half of all foreign investments whereas institutional investors contributed significantly to the growth of microfinance in the last few years particularly in the area of private equity investments (El-Zoghbi et al., 2011, p. 10). This group of institutional investors includes a broad range of institutions and funds, including international banks, pension funds and insurance companies. The impressive growth figures have sometimes been interpreted as a sign that the microfinance industry is maturing and that microfinance has become an attractive investment category for institutional and other financially oriented investors. As de SousaShields, Frankiewicz, Miamidian, Van der Steeren, and King (2004, p. vii) claimed, microfinance was in a ‘process of transformation from a sector dominated by a mission-driven ethos to one responding to the needs and interests of private capital’.15 Brau and Woller (2004) and Krauss and Walter (2009) also believe that microfinance adds value to institutional

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investors. According to these authors microfinance adds social value, has attractive risk-adjusted returns and supposedly has a low correlation with other asset classes. We have to be mindful, however, that the world has changed significantly since 2008 when Krauss and Walter published their data. That also counts for microfinance investments by institutional investors even though the verdict is not in yet.16

Microfinance and Asset Allocation Throughout its existence the provision of debt-based products has been the mainstay of microfinance investment. As such these investments are akin to fixed income investments, albeit with limited liquidity with a typical duration of 2 3 years. Debt accounts for 85 per cent of all MIV investment and 70 per cent of direct investments of the DFIs. Despite a recent shift towards local currency funding 65 per cent of all cross-border debt is still denominated in hard currency. After years of financial returns of more than 5 per cent, mainstream MIV returns went down for the first time in 2008, and then continued in a downward trend throughout 2009. This was mainly explained by lower reinvestment base rates and by realised credit losses in, for instance, Nicaragua, India, Eastern Europe and Morocco. Having a disciplined and rigorous investment process prevents financial losses even though one can never completely be protected against defaulting MFIs. In 2010, MIV returns reached a historical low of 2.5 per cent. Nonetheless, by 2010 returns remained positive and were 200 basis points above the LIBOR six-month rate (Reille, Forster, & Rozas, 2011). Overall, the outlook for debt-based microfinance investments in terms of financial returns appears less promising than it did a few years ago and net returns are not expected to bounce back to the historical levels of 4 5 per cent. That also has to do with the perceived risk of overindebtedness of clients and potentially higher default rates. Looking at equity, the pool of investment-ready MFIs is small and is not expanding at the speed of the supply of equity investment. During 2006 2009, the abundant supply of equity in this relatively narrow market boosted prices for investment-ready MFIs with high growth prospects. MFI valuations grew by more than 50 per cent during this time, to reach an average of 1.7 times forward book value.17 However, the recent market situation has also affected equity valuations, and the upward trend in valuations has been reversed, albeit slightly (Reille et al., 2011). Currently there is a lack of available data on the internal rate of return of microfinance equity portfolios. Most microfinance equity funds are young (below

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five years), and few of them have completed an investment cycle to provide meaningful return benchmarks. New investment opportunities for equity investors are in smaller MFIs earlier in their development cycle or in developing new MFIs in countries with large markets and less microfinance penetration. Such MFIs are in need of investors who are prepared to take a long-term, hands-on approach. Concerns about corporate governance of MFIs are highlighting the important role that equity investors can play (Reille et al., 2011).

What Makes Microfinance a Type of Impact Investing? As mentioned before impact investing is best described by its two defining characteristics: financial returns and measuring impact. After having discussed the financial orientation of impact investors in previous sections, we will now concentrate on measuring the impact of microfinance. Generally speaking, both Webster’s and Oxford dictionaries, define ‘impact’ as ‘coming into contact with another object’. If a car ‘impacts’ another car it simply means that both cars collide. The Oxford dictionary adds, however, a second meaning of the word ‘impact’ referring to the marked influence or effect of an intervention whether an act or a decision on a recipient. This influence can be either positive or negative and is illustrated in McKinsey’s (2010) definition of impact: a meaningful change in economic, social, cultural, environmental, and/or political conditions due to specific actions and behavioral changes by individuals and families, communities and organizations, and/or society and systems.

Determining impact becomes even more difficult if we take into account the notion of time and the outreach, duration and intensity of the investment, programme or policy and its impact.18 Measurement then requires analysing the outputs and outcomes and relating them to means that have been deployed to achieve the outputs and outcomes while having a clear eye for alternative explanations.19 So what does this mean for measuring the impact of microfinance on the entrepreneurs that take up a loan? In order to understand the impact microfinance has on borrowers we first have to decide what the social objectives are that microfinance aims to achieve. When Mohammad Yunus introduced microfinance, he particularly foresaw that it could contribute to the alleviation of poverty clearly a long-term objective. To determine whether microfinance has had any impact in Yunus’ operationalisation of the concept ‘microfinance’, information is required on the reduction of poverty as a result of the provision of

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microfinance loans. However, one can also see microfinance primarily if not only as a tool to provide ‘access to finance for poor people’. In the latter case the question becomes how many people have gained access to finance and to what type of financial products and services. Also it is important to know whether the right type of people has been reached. Are they poor or even very poor? Did they already have a loan when they applied for (yet another) access to financial products? Measuring impact usually starts with an ex ante evaluation. The process commences with an exploration of the objectives the investor wants to pursue and the means that are needed in theory to achieve those objectives. This part is often referred to as designing the investment theory, which will be followed by a baseline study. In addition to impact assessment investors nowadays also want to evaluate the social performance of MFIs before making any investment. Although both types of evaluation are quite related, they nevertheless differ significantly. Where microfinance impact particularly focuses on the outcomes of an investment on the lives of an MFI’s clientele, social performance refers to the way in which microfinance is offered to this clientele. This has to be done in a responsible way, protecting the interests of microfinance borrowers upfront through compliance with regulation, codes, engagement, education of clients and so forth. MFIs are increasingly required to protect the interests of their clients by offering loans at accepted interest rates, in terms that the clients understand and preventing clients from becoming over-indebted.20 Numerous industry initiatives have been developed during the last few years to improve the social performance of microfinance. An important landmark is the Universal Standards for Social Performance Management,21 which was launched by the Social Performance Task Force (SPTF). The standards focus on management commitment to social goals, responsible treatment of clients and employees, product development based on client needs and balancing financial and social objectives. Where (socially) responsible investors focus particularly on issues like human rights violations, child labour, forced labour, controversial weapons, bribery and corruption, climate change or environmental degradation, impact investors in microfinance use a different set of criteria.22 The most important criteria that are currently being assessed in the area of SPM relate to client protection, transparency and ‘reasonable’ interest rates23: 1. The Client Protection Principles24 These principles cover issues such as the prevention of overindebtedness, appropriate product design, transparency, fair treatment of clients and complaint mechanisms.25

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2. Transparency This criterion refers to open and honest communication about the costs, fees and prices of microfinance products and services. Transparency is needed to ensure a responsible growth of the sector. 3. Fair interest rates Sometimes MFIs charge interest rates that are considered to be excessive. The rates should at all times be fair and reflect the price of finance in the local or national markets. As such, a low interest rate is not a social target in itself. So investors will have to assess whether the effective interest rates an MFI charges are fair and whether the client really understands what she has to pay on a weekly or monthly basis. Furthermore, MFIs should prevent clients from accepting loans they are not capable of repaying. Over-indebtedness should be avoided at all times. In order to stimulate MFIs to prevent over-indebtedness impact investors can assess the credit policies of MFIs and the measures they take to prevent microfinance borrowers from getting into financial trouble. This includes the assessment of a borrower’s capability to pay the periodic interest rates and to repay the loan. To come back to the difference between impact and social performance we can conclude that social performance and impact may be positively correlated in the sense that MFIs operating responsible may have a greater chance of providing the best opportunities for microfinance borrowers to improve their situation and avoid getting into financial trouble. However, an outstanding social performance is not a guarantee that the lives of microfinance borrowers will be improved. As recent studies have shown, microfinance may not have a positive effect on reducing poverty (Banerjee & Duflo, 2011; Copestake & Williams, 2011) even though it may have other beneficial effects (Collins, Murdoch, Rutherford, & Ruthven, 2009).

Measuring Impact Until a few years ago, microfinance was generally considered a force for good even if research could not provide evidence that it resulted in increased household income for the micro-entrepreneur. There is value in providing access to financial opportunities that poor people did not have before. Also contributing to financial independence and allowing for consumption smoothening was considered a positive (Roodman, 2011a,

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2011b; Sen, 1999). So, rather than a tool to combat poverty microfinance is increasingly promoted as a tool to give people control over their lives. Recently, however, the image of the sector has changed. Serious social issues have cast doubt on many MFI boards and managers that they were acting in ‘good faith’ working in the interests of their clients. Crises in Nicaragua, India (Andhra Pradesh), Morocco or Mexico have resulted in a strong criticism on microfinance and its naive promoters (Bateman, 2010; Sinclair, 2012). It was not only the lack of responsibility on behalf of MFI managers that was criticised, but also the notion of microfinance itself and the negative impact it could have on the lives of the poor. Focusing on microfinance in the last decade more than simply a few impact studies have been conducted to see whether microfinance has lifted people out of poverty. The research findings offer a mixed bag of impressions. Looking at the Randomised Control Trials (RCTs) that have been executed (Banerjee, Duflo, Glennerster, & Kinnan, 2009; De Haas, de Harmgart, Augsburg, Attanasio, & Fitzsimons, 2012; Dupas & Robinson, 2009; Karlan & Zinman, 2010) one is inclined to conclude that microfinance does not have a clear positive impact on the reduction of poverty. Box 1 provides a short overview. In addition to the RCTs, Copestake and Williams also present some quasiexperimental studies as well as two qualitative studies (Athmer, Bekkers, Hunguana, Murambire, & de Vletter, 2006; Collins et al., 2009). The latter studies are particularly interesting even though they show some methodological flaws when it comes to an objective assessment of the impact of microfinance on the alleviation of poverty. What the qualitative studies show is that microfinance does have a positive effect on the lives of the borrowers mostly women. The Athmer study found that 85 per cent of the borrowers interviewed in depth self-reported positive impact. The loans were particularly being used for working capital and house improvements more than capital investment. The Collins study added to this picture that the respondents highlighted the importance of microfinance for smoothing consumption, coping with emergencies, acquiring asset and paying for ‘big-ticket’ expenditure items. So microfinance is not only about reinforcing the microenterprises, but also about improving control over the respondents’ lives. The respondents specifically addressed this issue when they stressed ‘the importance of access to a portfolio of regulated and unregulated financial services’. Finally, ‘the diaries reinforced the point that poverty persists not just because of lack of income but because of risk and variability of income’. This leads us to conclude that microfinance can be highly relevant for those who receive it, without suggesting that it provides a context in

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Box 1. Microfinance RCTs. Randomised control trials in microfinance In a randomised control trial (RCT) subjects are randomly assigned to an experimental or a control group. The experimental group with access to microfinance is then compared to the control group with no access to the intervention. If the sample is large enough, the specific characteristics of the subjects will be randomly distributed between both groups. No selection bias will, therefore, interfere with drawing valid and reliable conclusions. The MIT Abdul Latif Jameel Poverty Action Lab (J-PAL) is considered to be one of the leaders in the field of RCT-studies. In their recently published book Poor Economics, professors Banerjee and Duflo (2011), report on a number of studies they have conducted. But they are not the only ones. In an attempt to provide insight on the impact of microfinance on poverty alleviation, Copestake and Williams (2011) analysed existing research findings. Actually, there are only three studies available which is quite a small sample as a basis for drawing conclusions on the impact of microfinance. The first study was conducted by Banerjee et al. (2009) to measure the impact of opening a branch of the MFI Spandana in Hyderabad. The authors found increased borrowing, with 27 per cent of households in Spandana-served areas taking microcredit compared to 19 per cent in control areas. The study found that business profits, inputs and revenue increased, although the results were not found to be statistically significant. The second study by Karlan and Zinmen (2010) took place in The Philippines among potential clients of First Macro Bank. The researchers found that the programme had little effect on the business investment of the entrepreneurs receiving a loan. In addition, the programme had no significant effect on issues like poverty, income, food quality or visiting a doctor. Third, Dupas and Robinson (2009) studied the impact of improved access to micro-savings on business investment in Kenya. Improved access resulted in a significant rise in business investments by at least 40 per cent, according to Dupas and Robinson. However, Copestake and Williams (2011, p. 11) mention, ‘access to a savings account may have impacted on respondents indirectly by influencing their response to the advice and support provided in filling out the log books’.

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Fourth, De Haas et al. (2012) conducted an RCT-study in Mongolia to assess the added value of two microfinance lending models: individual and group lending. The authors find that microfinance doesn’t make much of a dent in poverty, as incomes remained static in both loan groups. With regard to business creation and household well-being the group loans were more effective. Women in that programme put more food, including fresh produce, on the table than the control group. In addition, the researchers found that most households ended up with more durable household equipment, such as televisions and VCRs, than before. This leads to the conclusion that microfinance does have impact albeit not in the area of poverty reduction.

which borrowers will work themselves out of poverty. For both society and investors this is good news. Although the conclusions of the qualitative studies cannot be generalised, they certainly cannot be discarded as irrelevant either. On the contrary, the studies shed light on the added value of microfinance for the clients of MFIs in a way that RCTs or quasi-experimental studies cannot. Overall, impact investors are thought to have contributed to the allocation of capital to MFIs and their clients in a positive way. These investments enabled MFIs to increase the size of their loan book, to raise the average maturity of their funding and to improve the visibility of microfinance among mainstream investors. Also, the investments contributed to familiarising MFIs with more sophisticated financing techniques, like professionalising treasury departments and the standardising of loan contracts. This leads to a more professional integration of MFIs into the (regulated) financial system and therefore allow society both through government and NGOs to focus on new areas where commercial capital is not being deployed. Some caution is required, though. The recent disruptions in the market caused a wake-up call for the entire microfinance sector and resulted in a process of professionalisation. Initiatives like the Client Protection Principles,26 the Principles for Investors in Inclusive Finance,27 MFTransparency28 and the Progress out of Poverty Index29 are all recent inventions. At present it is still unclear what will be the lasting contribution of these innovations. But one thing seems quite apparent: the institutionalisation of the financial infrastructure provides the poor with opportunities to increase control over their

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own financial affairs they would not have had without having access to microfinance.

CONCLUSION With the arrival of impact investing the responsible investmentscape has changed not only for foundations, family offices or ‘high net-worth individuals’, but also for institutional investors. Impact investing does not focus on exclusion, inclusion or engagement of company stocks or other highly liquid assets like credits or sovereign bonds even though social, ethical, environmental and governance performance criteria are often important for impact investors. However, as we explained, the regular criteria used by (socially) responsible investors are not at the forefront of the impact investor’s decision-making process. Other criteria prevail, like client protection, transparency and fair interest rates. Moreover, impact investments have a social function in providing capital to places where capital is needed and that do not have access to finance or only in a very limited way. In this respect impact investing adds value to investors and society by providing opportunities to allocate money to potentially relevant investment objects in need of capital, while at the same time having a clear eye for the creation of non-financial added value. In terms of microfinance, the most important value is not that it offers borrowers the opportunity to grow out of poverty, but that it improves the control of the borrowers over their own lives. As a result, microfinance can have a liberating effect. It adds to the freedom of the individual borrower to designate her (or his) future as long as she (or he) lives up to the contractual obligations. What counts for microfinance also counts for other types of impact investing whether it means investing in affordable housing, access to healthcare, renewable energy, small and medium enterprises, culture or other relevant social or environmental issues. The positive thing about impact investing is often that it opens up opportunities. It provides a gateway to possible futures that usually cannot rely on sufficient financial support to make them real. Unlike the Quakers and their original interpretation of responsible investing, impact investing does not so much want to protect the community and prevent undesirable outputs and outcomes from occurring. Its aim is to create shared value for the community and contribute to a better life for all and a reasonable financial return for the investors. Although there is more to SRI than Impact Investing, the latter is certainly a relevant addition to the responsible investmentscape in the 21st century.

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NOTES 1. Harrington (1992) points out that FIGHT is an abbreviation of FreedomIntegration-God-Honour-Today. 2. http://www.iccr.org. ICCR currently has some 300 member organisations with collective assets totalling over $100 bn. 3. UNEP FI is the United Nations Environment Programme Finance Initiative, http://www.unepfi.org 4. In 2011 the name was changed from United Nations Principles for Responsible Investing to the Principles of Responsible Investing (while sometimes the qualification ‘UN-backed’ is added). 5. http://www.unpri.org/about/ 6. http://www.unpri.org/principles/ 7. Principles for Responsible Investment in Farmland were launched in September 2011 as an initiative of a limited number of institutional investors: AP2, ABP, APG, PGGM, Hermes EOS, USS and TIAA-CREF. When investing in farmland the investors have made a commitment to uphold certain standards with regard to environmental promotion and protection, human rights issues, land and resource rights, ethics and reporting. 8. The Principles for Investors in Inclusive Finance (PIIF http://www.unpri. org/piif) provide guidance to investors in promoting responsible investments in the area of inclusive finance including microfinance, affordable housing for the poor and access to other financial products and services that help to integrate poor people in a regulated financial system. 9. http://www.noyes.org/presmsg.html 10. This new, integral approach to investing is distinguished from an ESGapproach. Impact investing as ‘creating shared value’ is about the creation and fair distribution of prosperity. It combines solid financial returns with social, environmental and community wealth and takes the business rationale as its point of departure. 11. There may be an exception to this rule for investees simply looking for money for projects that may have an additional social or environmental return, but who are not primarily in the business for or not even particularly motivated by non-financial reasons. For them the impact investor may come with a burden of having to provide additional information and having to deal with highly involved investors. 12. Measuring impact is not a new phenomenon. Sociologists have pointed out (Becker, 2001; Freudenburg, 1986) that impact assessment has been around since the earliest days of sociology the days of Durkheim and To¨nnies. After a lingering existence for decades, the ‘ex ante’ policy evaluation was revived at the end of the 1960s as a result of the increasing complexity of decision-making processes. A new term was coined: Social Impact Assessment (SIA). In addition, ‘ex post’ evaluations were conducted to measure goal attainment and effectiveness. Usually these studies were referred to as ‘evaluation studies’. The idea was, however, the same as the current impact studies. They aim at researching the relationship between an intervention or an instrument and an output or outcome (Hummels, 2012).

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13. Armendariz and Morduch (2010, p. 15) argue that as a result of the ‘microfinance revolution’ the focus has shifted from the very poor ‘towards “less poor” households and towards the establishment of commercially oriented, fully regulated financial entities’. This has resulted in a debate on ‘mission drift’, which we will address later in this contribution. 14. There is a distinction, however, between NGOs and Non-Banking Financial Institutions (NBFIs) on the one side and banks on the other. The latter received substantially more foreign investments (Sapundzhieva, 2010, p. 5). There are also regional differences. Latin America and Eastern Europe attract most foreign investments, while South Asia, Africa and Middle East and North Africa (MENA) were clearly lagging. 15. The authors create a false dichotomy between mission-driven and commercial microfinance. Investors with a focus on commercialising microfinance can have a clear eye for the mission of an MFI. 16. Both the financial crisis and the microfinance crisis in Andhra Pradesh have done microfinance no good. Since these events have taken place very recently no academically reliable research has been published yet to support this claim. Nevertheless, the interviews we conducted for this contribution indicate in this direction. The financial crisis has an influence on the allocation towards innovative investments, whereas the AP events have highlighted that microfinance does not always positively contribute to the investor’s reputation. 17. Until 2009, valuations were also driven up by the successful and lucrative initial public offerings of Compartamos in Mexico and SKS in India. 18. Some of these notions already date back to Jeremy Bentham’s The Principles of Morals and Legislation (1789). 19. Scriven (1967, 1991) distinguishes between immediate outcomes and longterm outcomes. Measuring long-term effects is not only considered to be important, it is actually the core of any impact evaluation. However, these effects are also the most difficult to measure. Every evaluation, therefore, requires a well-designed measurement strategy. 20. Generally speaking, over-indebtedness refers to a situation in which a person, group or organisation has reached the point in which it is no longer able to repay its debt. There is no absolute cut-off point to decide when a debtor is overindebted. There will always be some subjectivity in assessing the debtor’s ability to repay his or her loans. The issue of over-indebtedness became pressing in Andhra Pradesh in 2010, when many microfinance borrowers allegedly took their own lives because of their inability to repay their loans. See for instance Banerjee and Duflo (2011). 21. http://sptf.info/images/sptf%20usspm_final%20english.pdf 22. Nevertheless, impact investors investing in microfinance do regularly pay attention to the aforementioned criteria. However, the specific issues related to microfinance as described in this paragraph take priority. 23. Other criteria that tend to appear on the radar screen of the microfinance investor are related to gender (division between female and male clients) the region the MFI invests in (rural or urban), and the size and nature of the MFI’s product portfolio (only financial products or also non-financial services). 24. http://www.smartcampaign.org

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25. For investors in microfinance, the Principles for Investors in Inclusive Finance (PIIF) are the most important principles to comply with as a responsible investor in microfinance. See www.unpri.org/piif 26. http://www.smartcampaign.org 27. http://www.unpri.org/piif 28. http://www.mftransparency.org 29. http://progressoutofpoverty.org

REFERENCES Armenda´riz, B., & Morduch, J. (2010). The economics of microfinance (2nd ed.). Cambridge, MA: MIT Press. Athmer, G., Bekkers, H., Hunguana, H., Murambire, B., & de Vletter, F. (2006). The microfinance market in Maputo, Mozambique: Supply, demand and impact. A case study of Novobanco, Socremo. Banerjee, A., & Duflo, E. (2011). Poor economics: A radical rethinking of the way to fight global poverty. New York, NY: PublicAffairs. Banerjee, A., Duflo, E., Glennerster, R., & Kinnan, C. (2009). The miracle of microfinance? Evidence from a randomized evaluation. Retrieved from http://econ-www.mit.edu/files/ 4162 Bateman, M. (2010). Why doesn’t microfinance work? London: Zed Books. Becker, H. A. (2001). Social impact assessment. European Journal of Operational Research, 128, 311 321. Brau, J. C., & Woller, G. M. (2004). Microfinance: A comprehensive review of the existing literature. Journal of Entrepreneurial Finance and Business Ventures, 9(1), 1 26. Brill, H., Feigenbaum, C., & Brill, J. A. (1999). Investing with your values. Gabriola Island, BC, Canada: New Society Publishers. Brody, A., Greeley, M., & Wright-Revolledo, K. (2005). Money with a mission: Managing social performance in microfinance. Bourton-on-Dinsmore: ITDG Publications. CGAP and World Bank. (2010). Financial access 2010. Washington, DC: CGAP. Chen, G., Rasmussen, S., & Reille, X. (2010). Growth and vulnerabilities in microfinance. CGAP Focus Note No. 61. Washington, DC: CGAP. Collins, D., Murdoch, J., Rutherford, S., & Ruthven, O. (2009). Portfolios of the poor. Princeton, NJ: Princeton University Press. Cooch, S., & Kramer, M. (2007). Compounding impact: Mission investing by US foundations. Boston, MA: FSG. Copestake, J. (2007). Mainstreaming microfinance: Social performance management or mission drift? World Development, 35(10), 1721 1738. Copestake, J., & Williams, R. (2011). What is the impact of microfinance and what does this imply for microfinance policy and for future impact studies? Utrecht: Dutch National Platform on Microfinance. de Sousa-Shields, M., Frankiewicz, C., Miamidian, E., Van der Steeren, J., & King, B. (2004, December). Financing microfinance institutions: The context for transitions to private capital. Washington, DC: USAID.

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Domini, A. (2001). Socially responsible investing. Making a difference and making money. Chicago, IL: Dearborn. Dupas, P., & Robinson, J. (2009). Savings constraints and microenterprise development: Evidence from a field experiment in Kenya. NBER Working Papers 14693. Cambridge, MA: National Bureau of Economic Research. El-Zoghbi, Mayada, & Martinez. (2011). Measuring changes in client lives through microfinance: Contribution of different approaches. Washington, DC: CGAP. Emerson, J. (2003a). The blended value proposition. California Management Review, 45(4), 35 51. Emerson, J. (2003b). Where money meets mission. Stanford Social Innovation Review, (Summer), 38 47. Emerson, J. (2004). Reflections on philanthropic effectiveness. Retrieved from www.blendedvalue.org Emerson, J., Spitzer, J., & Harold, J. (2007). Blended value investing: Innovations in real estate. Oxford: Skoll Centre for Social Entrepreneurship. Freireich, J., & Fulton, K. (2009). Investing for social and environmental impact. New York, NY: Monitor Institute. Freudenburg, W. R. (1986). Social impact assessment. Annual Reviews of Sociology, 12, 451 478. Godeke, S., & Bauer, D. (2008). Mission-related investing. New York, NY: Rockefeller Philanthropy Advisors. Grameen Foundation. (2008). A vision for social performance management. Washington, DC: Grameen Foundation. Haas, R., de Harmgart, H., Augsburg, B., Attanasio, O., & Fitzsimons, E. (2012, May). Group lending or individual lending. Evidence from Mongolia. EBRD Impact Brief No. 1, London. Harrington, J. C. (1992). Investing with your conscience. Hoboken, NJ: Wiley. Hawley, J. P., & Williams, A. T. (2000). The rise of fiduciary capitalism. Philadelphia, PA: University of Pennsylvania Press. Hummels, G. J. A., Boleij, S., & van Steensel, K. M. (2001). Duurzaam Beleggen, meer waarde of meerwaarde [Sustainable investing, added value of surplus value]. The Hague: SMO. Hummels, H. (2012). Coming out of the investors cave? Making sense of responsible investing in Europe in the new millennium. Business and Professional Ethics Journal, 31(2), 331 349. ING. (2012, March). A billion to gain? Dutch contribution to the microfinance sector. Amsterdam: ING. Karlan, D., & Zinman, J. (2010). Expanding credit access: Using randomized supply decisions to estimate the impacts. Review of Financial Studies, 23(1), 433 464. Kleiner, A. (2008). The age of heretics. A history of the radical thinkers who reinvented corporate management. Hoboken, NJ: Wiley. Kramer, M., & Cooch, S. (2006). Investing for impact. FSG prepared for the Shell Foundation. Boston, MA: FSG. Kramer, M. R. (2006, 23 March). Foundation trustees need a new investment approach. The Chronicle of Philanthropy. Krauss, N., & Walter, I. (2009). Can microfinance reduce portfolio volatility? Economic Development and Cultural Change, 58(1), 85 110. MicroRate. (2011). The state of microfinance investment 2011, Arlington, VA. McKinsey Social Sector. (2010, April). Learning for social impact, p. 2. Retrieved from www. mckinsey.com

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Monks, R. A. G. (2001). The new global investors. Oxford: Capstone. NEF. (2008). Mission possible. Emerging opportunities for mission connected investment. London: NEF. Porter, M., & Kramer, M. (2002, December). The competitive advantage of corporate philanthropy. Harvard Business Review, 5 16. Retrieved from http://www.expert2business. com/itson/Porter%20HBR%20Corporate%20philantropy.pdf Porter, M., & Kramer, M. (2011, January/February). Creating shared value. Harvard Business Review, 1 17. Retrieved from http://www.waterhealth.com/sites/default/files/ Harvard_Buiness_Review_Shared_Value.pdf Reed, L. R. (2011). State of the Microcredit Summit Campaign Report 2011, Washington DC. Reille, X., Forster, S., & Rozas, D. (2011, May). Foreign capital investment in microfinance: Reassessing financial and social returns. CGAP Focus Note No. 71, Washington, DC. Roodman, D. (2011a). Is there a future for microfinance. Speech delivered at The second European conference on microfinance, 16 18 June, Groningen, The Netherlands. Roodman, D. (2011b). Due diligence: An impertinent inquiry into microfinance. Washington, DC: Centre for Global Development. Sapundzhieva, R. (2010). Funding microfinance: A focus on debt financing. Microbanking Bulletin, MIX Markets. Scriven, M. (1967). The methodology of evaluation. In R. Tyler, R. Gange, & M. Scriven (Eds.), Perspective of curriculum evaluation (pp. 39 83). Chicago, IL: Rand McNally. Scriven, M. (1991). Evaluation thesaurus (4th ed.). Thousand Oaks, CA: Sage. Seibel, H. (2003). History matters in microfinance. Small Enterprise Development, 14(2), 10 12. Sen, A. (1999). Development as freedom. Oxford: Oxford University Press. Sinclair, H. (2012). Confessions of a microfinance heretic: How microlending lost its way and betrayed the poor. San Francisco, CA: Berrett-Koehler Publishers. Sparkes, R. (2002). Socially responsible investment. A global revolution. Hoboken, NJ: Wiley. Sparkes, R. (2006). A historical perspective on the growth of socially responsible investment. In R. Sullivan & C. Mackenzie (Eds.), Responsible investment. Sheffield: Greenleaf Publishing. Sullivan, R., & Mackenzie, C. (2006). Responsible investment. Sheffield: Greenleaf Publishing. Symbiotics. (2012). Microfinance investments: An investor’s guide. Geneva: Symbiotics. Viviers, S., Bosch, J. K., Smit, E. v. d. M., & Buijs, A. (2008). Is responsible investing ethical? South African Journal of Business Management, 39(1), 15 25. Wood, D., & Hoff, B. (2007). Handbook on responsible investment across asset classes. Boston, MA: Institute for Responsible Investment, Boston College. Yunus, M. (2007). Banker to the poor. New York, NY: Public Affairs.

FURTHER READING Becker, H. A., & Vanclay, F. (2003). The international handbook of social impact assessment. Cheltenham: Edward Elgar Publishing. CGAP, Reille, X., Forster, S., & Rozas, D. (2011, May). Foreign capital investment in microfinance: Reassessing financial and social returns. Focus Note No. 71. CGAP, Washington, DC.

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Morgan, J. P., & the GIIN. (2011, December). Insight into the impact investment market. New York, NY: J. P. Morgan. Scriven, M. (2007). The logic of evaluation. In H. V. Hansen et al. (Eds.), Dissensus and the search for common ground (pp. 1 16). Windsor, ON: OSSA. Retrieved from http:// www.coris.uniroma1.it/news/files/scriven_logic_evaluation.pdf SEEP. (2012, May). Market outlook 2012: Perspectives of microfinance association leaders. New York, NY: SEEP. UNEP FI. (2006). Show me the money. Geneva: UNEP FI. UNEP FI. (2010). Translating ESG into sustainable business value Key insights for companies and investors. Geneva: UNEP FI. UNEP FI. (2011). Universal ownership Why environmental externalities matter to institutional investors. Geneva: UNEP FI. UNEP, International Year of Microcredit 2005. (2007). Why a year? About microfinance and microcredit. Retrieved from http://www.yearofmicrocredit.org/pages/whyayear/whyayear_ aboutmicrofinance.asp

PART III SRI CHALLENGES: LIMITS AND EFFECTIVENESS

WHERE DO-GOODERS MEET BOTTOM-LINERS: DISPUTES AND RESOLUTIONS SURROUNDING SOCIALLY RESPONSIBLE INVESTMENT Christel Dumas and Emmanuelle Michotte ABSTRACT Purpose Much of the management research on socially responsible investment (SRI) consists in demonstrating how SRI is good for business and good for society. But the belief that business and market-based strategies will bring positive social and ecological change is far from natural and results in disputes. This study shows how SRI proponents have to develop and combine arguments in order to construct and defend a valid and plausible discourse on SRI that could resist the critiques and appease the disputes resulting from its institutionalization. Methodology We collect articles in the media to identify the SRI controversies. For these disputes, we look at the attempts of SRI to give a robust justification of the particular arrangement it promotes, vis-a`-vis a public audience, and we discuss possible resolutions.

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 119 148 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007005

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Findings SRI focuses on appealing to conventional finance with a market logic, resulting in very few challenges of the legitimacy of the existing institutional order. In a few cases, SRI seeks a resolution based on a competing principles resulting in hybrid constructions of compromises, which could be consolidated by SRI models and tools. Implications The results contribute to a better understanding of SRI as it is perceived today, and of how the disputes around its mainstreaming may unfold in the future. This helps us clarify our expectations towards SRI and shows that if we want to address shortcomings in finance, we should probably not rely on SRI as it is defined and practiced in the 21st century. Keywords: SRI; disputes; justification; legitimacy; justice; convention theory

INTRODUCTION The history of socially responsible investment (SRI) and the variety of SRI practices suggest that there is more to it than the often cited process of including ‘social, environmental, governance and ethical considerations into investment decision making’ (Cowton, 1994; Eurosif, 2010; Hudson, 2005; Renneboog, Terhorst, & Zhang, 2008; Sparkes, 2002; Waddock, 2003). SRI is also about aligning investors with broader objectives for society (PRI, 2012, p. 24). Of course SRI should not be confused with advocacy as practiced by non-profits, and it does not limit itself to the fast growing area of impact investing, which both focus on having an impact on society (Sparkes, 2002). But SRI does claim to make companies act in a more socially responsible way (Eurosif, 2010), and acknowledges that investments have an impact on society. Therefore, SRI aims to ‘evaluate that impact and to direct it, as much as reasonably possible, to societally productive ends, while achieving a competitive return’ (Louche & Lydenberg, 2011). With such claims, SRI seems to position itself differently than mainstream finance. Some authors even suggest that SRI introduces an alternative potentially subversive (Markowitz, Cobb, & Hedley, 2011) vision of the role and ends of financial markets. The proponents of SRI thus defend the idea that finance not only must but also can have a positive impact on society. However, looking at it more closely, SRI seems to be a fuzzy concept for different reasons. First,

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the principle of competition on the market that is characteristic for conventional finance, and that goes hand in hand with a particular representation of the common good, is in SRI ‘completed’ by, if not ‘in competition’ with other principles pertaining to the environment and to society as a whole. By nature, SRI combines principles that could be seen as different from each other, or even antithetic. Second, the SRI actors put different meanings behind this big idea of ‘doing good by doing well’, and translate it differently in practice. SRI is still under construction. Third, despite this heterogeneity, SRI is nowadays undergoing institutionalization (De´jean, Le Theule, & Oxibar, 2011; Louche, 2004; Penalva-Icher, 2012). But this attempt to stabilize SRI inevitably results in tensions precisely because of the two first reasons. Fourth, the literature on SRI mainly focuses on its expected financial return (Derwall, Bauer, & Koedijk, 2005; Renneboog et al., 2008) and rarely investigates other types of return for society, to the exception of a stream of literature which focuses on the impact of shareholder engagement on corporate social performance (Carleton, Nelson, & Weisbach, 1998). The proof that SRI has a positive impact on society is therefore currently rather weak. Considering all these issues, it is probably not an easy task for the SRI proponents to convince a financial and a nonfinancial audience alike that SRI not only must but also can have a positive impact on society. In order to convince, SRI must be ‘valid’ from a normative point of view, and also ‘plausible’ from a cognitive point of view (Berger & Luckmann, 1967). The SRI proponents have to develop and to combine arguments in order to construct and defend a valid and plausible discourse on SRI that could resist the critiques and appease the controversies, which we call ‘disputes’ according to the theoretical framework that will be presented in the next section. This chapter aims to 1. identify the disputes around SRI’s mainstreaming 2. analyse the arguments and counter-arguments around those disputes 3. explore potential resolutions of the disputes surrounding SRI To answer these questions, we analyse the UK media coverage of responsible investment in the past 10 years. We rely on the framework of Boltanski and The´venot (2006) as a tool to identify how the SRI discourse negotiates different representations of common good. We first find a number of expressed tensions regarding the justness of a particular social order. We then look at the attempts of SRI to give a robust justification vis-a`-vis a public audience. In doing so, we show to what extent SRI discursively not only justifies competing visions of how the world should be what is

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worthy and what is just but also proposes a way to bring them together, through compromises. We thereby contribute to a better understanding of SRI as it is perceived today, and how of the disputes around its mainstreaming may unfold in the future. This chapter first recalls how SRI evolved over time through multiple definitions, to focus on its current characteristics in the 21st century: a fragmented concept which moved away from ethics towards investment practices based on the integration of environmental, social and governance (ESG) criteria integration. Following that, we present the main concepts of the theoretical framework. We then describe the data and method applied to select the topics of disputes for a multi-level content analysis of press articles on SRI. Follows, for each topic of dispute, a set of results identifying whether the dispute challenges the legitimacy of a specific institutional order. Another set of results determines the possible resolution of these disputes among a plurality of forms of agreement such as compromise seeking or shorter term arrangements. This development places our chapter in the new strand of SRI literature on the legitimacy of ESG issues, which Gond and Piani (2013) recently referred to in their call for research on processes of deliberative negotiation by investors and managers over claims’ moral legitimacy, using convention theory.

DISPUTES AND JUSTIFICATION FOR SOCIALLY RESPONSIBLE INVESTMENT SRI Over Time The history of responsible investment can shed light on the current disputes surrounding the institutionalization of SRI. SRI went through different periods (Dumas & Louche, 2011) during which not one, but plural visions of justice were defended by SRI actors. In its early days, the first SRI actors, who were Quakers, were governed by principles derived from religion (Kurtz, 2008; Louche & Lydenberg, 2011), which lead in practice to the exclusion of sin stocks from investment portfolios. The SRI actors of the 1980s were more inspired by a civilian representation of justice, where collective solidarity and human rights played an important role. This resulted for example in investment decisions against apartheid. The SRI actors of the 1990s were mostly green funds governed by ecological principles.

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These different ‘anti-market’ and ‘anti-corporate’ visions precede thus what became today ESG integration: an approach consisting in the integration of environmental, societal and governance criteria into investment decisionmaking. This is a very corporate focused view of SRI involving quantification in the form of key performance indicators, ratings, and financial modelling. With this approach comes the quest for materiality (AccountAbility, 2006) (what criteria influence financial performance) and commensuration (De´jean, Gond, & Leca, 2004) (how can the criteria be measured). But the legitimacy of these ESG issues have to be built in the SRI institutional context as they are quite different from the original drivers of SRI. While SRI continued to evolve, these various approaches did not disappear. In fact, they coexist today, illustrating how the institutionalization of SRI leads to disputes that must be resolved if SRI wants to survive. This makes SRI an ideal place to understand how different representations of justice, relying each one on disparate notions of common good, are conflicting. It also makes convention theory, with its ability to take pluralism into account, an indicated framework to deal with SRI, which we explain next.

Dispute and Justification through the Lens of the Orders of Worth In the thriving literature on convention theory, the orders of worth of Boltanski and The´venot (2006 [1991]) are usually used as a means to study plural social orders, typical of complex and fragmented institutional environments. The original intention of the authors, however, was not only to develop a functional tool as such, but also to better understand how people practically qualify other people or things in their daily lives and can create or use categories that help to distinguish them from each other. They particularly paid attention to the kind of qualifications that are taken for granted because they are seen and experienced as legitimate in a certain situation. These are legitimate in terms of coherence or logic (justness) but also in terms of justice which, in our view, Berger and Luckmann (1967) identified as the plausibility and validity of an institution. These qualifications rest on general conventions oriented towards specific conceptions of the common good, and allow to assess if someone or something is a worthy being or not through a ‘test’. This is possible because everyone is well aware of the principle that governs the situation. The authors call this kind of principle the higher common principle. This principle can take various forms, but it always has the characteristic that it is a very general principle on which people can base themselves to find an agreement. It functions as a

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landmark that contributes to the coordination of human activity. It makes it possible to evaluate the beings (persons or things) and to articulate them logically to this principle. The social order, the ‘world’ as the authors say, is seen as legitimate, and what is judged as worthy is considered as contributing to the common good as it is represented in this social order. According to the authors, the invisible hand of Adam Smith is the most accomplished way to justify an unequal distribution of the wealth held by rich people. The ‘market world’ is harmonious in this sense that competition, as higher common principle, guides human activity. Of course, social life is far more complex and fragmented. The market world is only one of the different ways to organize social order around a higher common principle. To reflect this multiplicity, Boltanski and The´venot (2006 [1991]) identified five other worlds, namely the ‘domestic’, ‘fame’, ‘industrial’, ‘civic’ and ‘inspired’ worlds (The´venot, 2007). New worlds were added later such as the ‘green’ one and ‘information’ world (Lafaye & The´venot, 1993; The´venot, Moody, & Lafaye, 2000) and the ‘connectionist’ one, also called project oriented world (Boltanski & Chiapello, 2005; Chiapello & Fairclough, 2002). Table 1 presents these worlds and the higher common principles in relation to which people and things are evaluated as being more or less worthy. Within each of these worlds, there can be disagreements among the actors about how a being has been evaluated. The judgment is thus subject to critiques, and those who criticize as well as those who defend the judgment both need to justify their point of view in relation to the conventions of the world in question. This is what the authors call a dispute. In order to take back the course of the action, people have to appease this dispute and to find an agreement. One example among many (Boltanski & The´venot, 2006 [1991]) is a Table 1. World

Worlds Organized Around a Higher Common Principle to Determine What Is Most Worthy. Higher Common Principle

Market Industrial

Competition Efficiency

Civic Domestic Inspired Fame Green Connectionist

The preeminence of collectivities Anchored tradition Inspiration The reality of the opinion Respecting and protecting nature; sustainability Project oriented activities in networks

Highest Worth Desirable, wealthy Efficient, productive, operational Representative, statutory Hierarchically superior Graceful, singular Renowned, famous Environmentally friendly Committed, mobile, engaging others

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situation of the selection of a candidate for a job. It appears, after the selection process, that the chosen candidate is the nephew of one of the jury members, the one who precisely gave him a very positive evaluation. Because of the preeminence of the industrial world in terms of efficiency of the selection, and not the domestic world in terms of personal ties, the selection of this candidate is questionable and subject to criticism. After a debate made of critiques and justifications, those who are responsible for the selection process agree that a new test has to be organized and that the candidate’s uncle has to be replaced in the jury by a non-relative. In this case, the test had been purified without betraying the higher common principle. This example illustrates how a dispute can arise within a situation which is dominated by one world where the persons (the candidates, the jury members) and the objects (the tests) have to be well articulated from a logical point of view as well as from a normative point of view if they want to be seen and experienced as legitimate. But disputes also arise in situations where multiple worlds are at stake. Suppose we take the same situation in the context of a family business where the industrial logic competes directly with the domestic one wherein loyalty, tradition and personal ties are very important. It is then more difficult to find a legitimate agreement because of the presence of different conventions and higher common principles. The answer to the question of which one is the best candidate is not the same depending on the logic that are seen and experienced as legitimate, not only to take a decision but also to justify it in front of those that (could) contest it. Still, people can try to find a resolution of the dispute, through a local arrangement, or through a compromise. The first one does not pretend to preserve the common good, whereas the second one does. However, a compromise can’t go back to one higher common principle and to one representation of the common good. This is why a compromise remains fragile, especially when a dispute about it may lead to the clarification of the common good (Boltanski & The´venot, p. 410). As de Blic and Lemieux (2005) stress in their study on the institutionalization role of scandals, conceiving a scandal or a dispute (such as those we will identify below) as a test situation means that we recognize the uncertain outcome of the dispute. The values, or rather ‘worths’, which are disputed may be shaken, but may also come out strengthened by the dispute. Boltanski (2009) identifies three types of tests, leading to different resolutions. The ‘test of truth’ attempts to defend what is. It is characterized by a tautological discourse to defend the constructed reality with the intent of confirming it rather than criticizing it, with readymade formulas, glorifying or blaming and by opposing good and evil. The next level is the ‘test of legitimacy’ during which actors question the reality as it is constructed by

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confronting it with what they are experiencing. As illustrated by Patriotta and Gond in the case of a nuclear crisis in Germany, it may lead to an institutional change while preserving the legitimacy of existing institutions (political parties, media…). Finally comes the ‘existential test’, which takes place at an individual level, based on personal experience of injustice or humiliation for example and which therefore does not have the same institutionalization role as the previous two tests. These tests have uncertain outcomes but may lead to arrangements or compromises as a result of the institutional work of justification (Patriotta, Gond, & Schultz, 2011), which is one reason why they are relevant to discuss how socially responsible investment might impact the financial system. There are many other approaches than convention theory that could be appropriate to perform discursive analysis of institutions. However, based on the above, and confirmed by Cloutier and Langley (2013), we see several arguments supporting this approach to study SRI. First is the micro perspective, including a way to relate to the macro level through daily narrative accounts, which counter-balances the meso scope of institutional theory. Then comes the focus on legitimacy struggles and how they are resolved on a day-to-day basis, since the framework offers more than just a grammar to quantify worlds of worths. In addition, there is the pragmatic view according to which Boltanski and The´venot bet on actors’ capacity to define by themselves what is fair or unfair, and hence the focus on the ‘critical capacities of actors’. For these reasons, and while not a common approach, researchers have recently reached a similar conclusion regarding its appropriateness to study financial and CSR-related topics (Huault & Rainelli-Weiss, 2011; Gond & Piani, 2013; Taupin, 2013).

Results of Justification in SRI The proponents of SRI seem to bring to the marketplace principles that, at least discursively, endorse other conceptions of the common good and of justice than those of the ‘market world’ which is the main justification for conventional finance. To decide on the issue of a test (typically to decide to invest or not in a certain company) is, in the context of SRI, problematic by nature. As a result, it is correct to believe that SRI is profoundly crossed by tensions between different ‘worlds’, and that these tensions are harmful in terms of the validity and plausibility of SRI. In this chapter, we ask ourselves which kind of resolutions SRI proposes to appease these tensions (arrangement, compromise), depending on their justness.

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We thus need to identify the main disputes surrounding SRI. This can be the contested financial performance of SRI, the lack of key performance indicators for SRI or the shareholder versus stakeholder debate, to name a few. Three different scenarios need to be considered for these disputes and their resolutions. A first possibility is that the disputes stirred by SRI are about the products and practices in financial markets, rather than about the underlying principles. In other words, SRI uses mainly the same conventions as in conventional finance, and complies thus with the same logic. In this vein of thought, a recent report has challenged the presupposition that SRI is different from mainstream finance, suggesting that conventional funds invest in a similar way as SRI funds (Aeby et al., 2012), echoing some earlier vocal SRI critics (Entine, 2003; Hawken, 2004). As noted by Hoffman and Ventresca (1999), remaining within the confines of a clearly defined logic cannot lead to evolution to profoundly different institutions. As a result, SRI would be a way for conventional finance to continue business as usual while appeasing the critique of outside actors. Daudigeos and Valiorgue (2010) suggest similar results for the evolution of corporate responsibility strategies, which were absorbed by the corporate system as they matured. Some of the most damaging financial products and practices could be halted, but the underlying principle would be confirmed and reinforced. A second possible vision for the SRI discourse is to circumscribe conventional finance, by showing that the financial sphere must comply with other spheres of justice (democracy, ecology, civil rights…) rather than constantly relying on the principle of competition and the dominant conventions of the financial markets. If it justifies visions of justice that compete with the one promoted by conventional finance, SRI is subversive (Markowitz et al., 2011). In this case, the dispute questions competing representations of common good and may imply an in-depth reform of the financial system. For example, it could argue that, with competition as higher common principle, finance doesn’t serve the real economy and, in the end, doesn’t serve society as a whole. Such a critique calls for a significant shift of focus and power. In this scenario, SRI would be more consistent with the assertion that business should generate wealth for society, within social and environmental frameworks (Sparkes, 2002, p. 42). A third possibility, which we hypothesise as the most likely, is that SRI is neither completely compliant nor completely subversive in relation to the market logic. In this third possible type of SRI discourse, there is no clear vision of the common good and of justice. SRI in the 21st century proposes hybrid practices and language, but does not discuss the underlying

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principles that it is built on, because this would probably lead SRI to a dead end. SRI would be a form of temporary compromise. But as suggested by Boltanski and The´venot, compromises as the resolution of disputes are by nature fragile because it is never possible to go back to one higher common principle in order to find an agreement.

METHOD Use of Media Discourse For a methodological fit with the theoretical framework, we need to collect data in a way that brings us to the actors and to what they are really saying, and in a way that does not force actors’ discursive engagement. It is indeed not so much how the worlds interact which is key in convention theory but rather how the actors call upon the different worlds to justify a situation. Because we did not want to force artificial discourse and justification, a risk particularly present in interviews with ‘why’ questions, we chose to collect data in the media. A stream of research in media studies presents news reports as a ‘social thermometer’, an important source of information about society (Montes-yGo´mez, Gelbukh, & Lo´pez-Lo´pez, 2008). According to this view, their textual analysis allows the measurement of current social interests, and the trends for these main opinion topics. This vision of media as a platform for discussion (Norris & Robinson, 2003), while very convenient for this study, requires a note of caution. Media is indeed much more than a platform. On the one hand, we cannot omit to mention the power games and agenda setting that form the media content. And on the other hand, general audience media as forums for public discourse on an issue, and their impact on public opinion, should not be overestimated (Gamson & Modigliani, 1989). When researching how media discourse and public opinion interact, Gamson notes the relatively marginal role media discourse plays for the respondents’ understanding of issues that are close to their everyday experience (i.e. nuclear power in his example). In these cases, their own experiential knowledge and popular wisdom take precedence over media discourse, which is merely used to ‘spotlight’ (p. 134) particular facts and public figures but not to inform respondents’ understanding. The author shows the role of framing of an issue in media, by developing the idea of a ‘media package’ which conceives of media discourse as a set of interpretive

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packages that give meaning to an issue. These packages, or frames, include a range of positions, allowing a certain level of controversies on the issue (Gamson, p. 3) as we see in the responsible investment media discourse. Our data includes the discourse of many different actors, reflecting the range of positions around the SRI mainstreaming. Most speakers in our data are service providers. Specialized responsible investors come next, followed by mainstream investors and SRI advocates. Each of these will have different interpretative packages and justifications. In addition to the framing done by media, we need to bring the notion of power into the analysis of media and its framing (Vliegenthart & van Zoonen, 2011). This was highlighted in particular by Golding and Elliott (2006) who show the ideological consequences of the way news is produced, for example by demonstrating how production routines maintained the societal status through power. Because media production and interpretation are affected by social context, media frames, power games and agenda setting, we need to avoid an individualist and voluntarist orientation assuming that both individual journalists and individual audience members are relatively autonomous in their news production and consumption (Vliegenthart & van Zoonen, 2011). These notions highlight the importance of multiplying media sources with different ideological backgrounds, as we do in this study with three different media samples, and by developing a solid qualitative method of analysis, as described in the next section.

Sampling of Newspapers and Articles We tracked the evolution of responsible investment disputes through the UK press from 2001 to 2012, with three samples of data. A first sample of articles comes from the financial press, represented by the Financial Times, Wall Street Journal Europe and The Economist. These media provide good data in terms of articles on responsible investment, since they all largely coincide with other sources of information, as confirmed by Kaminsky and Schmukler (1999) and applied by Dyck, Volchkova, and Zingales (2008). Two other samples of articles were collected in the non-financial press, represented by a sample of 11 newspapers from the United Kingdom and split in two groups: the tabloid and the non-tabloid press. For each nonfinancial newspaper, the typical selection criteria of significant circulation size, and area of circulation was amended to take cultural aspects into account. Broadsheet press was added to the sample for its content and nature, despite a smaller circulation than tabloid press. When newspapers

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were not accessible through the databases over the full period of analysis, they were included in the sample from the first full month they became available. This sampling resulted in a selection of articles from broadsheet press (The Times, The Guardian, Daily Telegraph, The Sunday Times) and another selection from tabloids (Daily Express, Daily Mail, Daily Mirror, Daily Star, The Sun, News of the World, Sunday Mirror, The Mail on Sunday), including both daily and Sunday papers. In the pursuit of efficacy for a qualitative analysis, we constructed theoretical two-week years, a principle used in media research as discussed by Hijmans, Pleijter, and Wester (2003), leading to a sample of 97 financial press articles for the 2001 2012 period, 112 broadsheet press articles and 25 tabloid articles. Levels of coverage are used as surrogate measures of the penetration of SRI questions into society, similarly to previous research by Barkemeyer, Holt, Figge, and Napolitano (2010). Since 2001, when the first article on SRI appeared in the UK financial press, the coverage in the financial and non-financial press follows similar cycles (Fig. 1). One exception is the financial crises year 2008 where coverage dropped in the financial press but peaked in the non-financial press. The coverage in tabloids is negligible.

Data Coding and Analysis Our coding process went through three stages, leading to our analysis of the type of disputes.

Financial press

Broadsheets

Tabloids

18 16 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fig. 1.

SRI Press Coverage Increases Cyclically Over Time.

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Open Coding We began the analysis by identifying initial concepts in the data and grouping them into categories. This open coding was performed with the NVivo software. This first descriptive coding focused on the categories of dispute between responsible investment and mainstream investment, which was then confronted with the impediments to SRI mainstreaming identified in literature for validity (Guyatt, 2006; Juravle & Lewis, 2008). Indeed, impediments are likely to coincide with the areas where mainstream investors’ practices are challenged. Impediments flow from characteristics of SRI that are new, or different, resulting in tensions or conflicts. Each utterance in the discourse was taken to be a ‘unit of meaning’ (Miles & Huberman, 1994), that is a phrase bound by a clear ending and that expressed at least one clear idea. Sixteen themes of disputes emerged from this coding (see Table 6). Axial Coding We applied the orders of worth to give sense to the first results, showing, when aggregated, which orders of worth are called upon and coexist for each type of dispute. When an utterance referred to multiple worlds, based on a list of words identified by Boltanski and The´venot (2006 [1991]) and by further research, presented in Table 2, it was assigned to more than one code, as suggested by the authors. Stakeholder Coding To be able to interpret discourse based on the speakers, we coded categories of speakers in the financial press and broadsheet press. We did not code this in the tabloids once it appeared that the sample was much smaller and the content less relevant. As highlighted in Table 3, the main speakers in the financial press are service providers such as consultants and rating agencies, who are concerned by the practicalities of doing SRI, while the main speakers in the broadsheet press are SRI investors and SRI advocates.

Analysis of the Type of Disputes We began the analysis as we collected the data, grouping controversies by themes, identifying the orders of worth and keeping track of stakeholders. The final analysis focused on how the tests unfold and are resolved for each dispute.

Civic

Collectives, collective will, legal, rule, governed, official, representative, common objectives, unitary concept, participation, rights and obligations, solidarity, moral beings, democratically, legislation, formality, code, statement, organizational goals, membership, mobilization, unification, freeing people form selfish interest, escape from chaos (division) and isolation, aspiration to civil rights, renunciation of the particular, transform interests of each into a collective interest, gathering for collective action, exclude, join, assemble, association, recruiting, extending, active mobilization, liaising, constant contact with organization, the legal text, republic, state, democracy, assembly, movement, election process, consultation, corporatism, rules, law, legal and formal steps, actions, processes, decisions and orders, reaction of state institutions, orderliness, legal way, socialization, central state control, control, agreement, precept, political interests, approbation, political negotiation, legality, legal evaluation, legal precondition, right/false, political commission, political intervention, state regulation, political misuse, political report, anticompetitive, legal force, cartel, nuclear consensus, state observation, violation of law, resolution, proposal, democratic principle, public interest, corporate secrets, suing, ethical.

Competition, rivalry, value, saleable, interest, love, desire, selfishness, market, wealth, luxury, opportunism, liberty, opening, attention to others, sympathy, detachment, distance, possess, contract, deal, price, money, benefit, result, management, conversion, costs, calculation, liberalization, profit, allowance, economy, profit maximization, success, compensation, services, business processes, forfeit, dividends, euro, calculation, finance, payment, wages, oligopoly, monopoly, commerce, price, politics, saving, margin, asset, ownership, demand, supply, economy, production, millionaire, winner, competitors, client, buyer, salesman, independent worker, employee (worker), investor, supplier, buy, get, sell, economically, business, cheap, expensive, economical efficiency, growth. Efficiency, performance, future, functional, predictability, reliability, motivation, work energy, professionals, experts, specialists, operator, person in charge, means method, task, space, environment, axis, direction, definition, plan, goal, calendar, standard, cause, series, average, probability, variable, graph, time models, goals, calculation, hypothesis, solution, progress, dynamic control (security, opposite of risk), machinery, cogwheels, interact, need, condition, necessary, integrate, organize, stabilize, order, anticipate, implant, adapt, detect, analyse, determine, light, measure, formalize, standardize, optimize, solve, process, organize, system, trial, setting up, effectiveness, measure, instrumental action, operational, measurement instruments, technique, technological, technological event, technological effects, nuclear power, degree of efficiency, coal, technological production process, faults, security, security management, security system, lack of danger, production, uncontrollability, consequences, analysis, report, information, causes, construction, knowledge, scale, security tests, time, emergency power supply system, aggregators, perturbation, supply system, components, construction, check, proof, solution, energy, technology, system, installation, approach, (intangible, market, ESG) factors, tobacco, pornography, armament.

Market

Industrial

Content Keywords used during the axial coding to link ‘units of sense’ to ‘worlds of worth’. Italicized terms reflect additions to the original list provided by Patriotta et al. (2011) based on Boltanski and The´venot (2006)

Terminology for Nine Worlds of Worth that Guided the Axial Coding.

World

Table 2. 132 CHRISTEL DUMAS AND EMMANUELLE MICHOTTE

Anxiety of creation, passion, dream, fantasy, vision, idea, spirit, religion, unconscious, emotional, feeling, irrational, reflex, invisible, un-measurable, magic, myth, ghost, anthroposophy, super-human beings, affective relationships, warmth, creativity, escapism, intuition, fantastic, memories, genius, fascination, harmony with beliefs.

Public opinion, public, audience, public attention, reputation (through mass communication), desire to be recognized, public debate, boycott, public pressure, public legitimating, opinion leader, journalist, PR-agent, sender, receiver, media contact, communication strategy, banner headlines, reporting, personality, advertising, brand, message, campaign, recognition, public image, persuasion, influence, propaganda, promotion, mobilization, down playing, misleading, camouflage, fig leaf, red herring, lip service, pillory, populism, rumour, lie, breach of promise, best, biggest, largest, transparency (to signal good image).

Environment, influence or danger on environment and human beings, ecological, environmental protection, protection of the nature, plants, climate, environmental pollution, atomic waste, climate protection, climate change, radioactive pollution, rescue of the planet, reduction of CO2 emissions, global warming, climate catastrophe, earth, renewable energies, sustainability, biomass, protection of the nature, fauna and health, ecology, carbon, green.

Inspired

Fame

Green

Information, data availability, data quality, data gathering, CSR data, Carbon data, report, questionnaires, forecast, advisers.

Source: Adapted from Patriotta et al. (2011).

Information

Connectionist Engaged, engaging, mobile, enthusiastic, involved, committed, flexible, adaptability, evolving, autonomy, employability, tolerant, team lead, reputation (through personal relationships), corruption, privileges, old-boys networks, a group, signatories, members, initiative, in association with, UN PRI, CDP, community, part of, involved in.

Engenderment, tradition, generation, hierarchy, leader, benevolent, trustworthy, honest, faithful, determination of a position in a hierarchy, inscription of signs of worth (titles, heraldry, clothing, marks), punctuality, loyalty, firmness, honest, trust, superior, informed, cordial behaviour, honest, trusting, good sense, leaders, family, rejection of selfishness, duties (even more than rights), loyal, harmonically, respect, responsibility, authority, subordination, honour, shame, hierarchy, cooperation, celebrations, family ceremonies, responsibility, transparency, duty, task, dialogue, seriousness, information, German nation, irresponsible, arrogant, euphemism, common identity, integration, common sense within organization, vice.

Domestic

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Table 3. Actors Behind the SRI Discourse Vary According to the Press Medium. Speaker Mainstream investor Othera RI advocate SRI investor Service provider a

Financial Press (%)

Broadsheet Press (%)

19 11 11 24 35

8 24 16 33 20

Academics, corporates, individuals and international associations.

As mentioned earlier, each test unfolds either through a test of truth, a test of legitimacy or an existential test. After identifying the type of test, we determined whether it seemed to be resolved in the form of a temporary (local) arrangement or of a compromise. In other words is the compromise that would allow a contribution to the real economy reached? Since SRI is somewhat ambiguous, it could accommodate several worlds as required by a compromise. But this supposes that the debate agrees on a general interest, a common good. If this is not possible, then all there can be is private arrangements, in the sense that they do not address a common good but rather the private interests of the parties involved.

DISPUTES AND RESOLUTIONS FOR SRI For each dispute identified in the data, we identify the type of justification used by the actors as a combinations of orders of worth. For a specific dispute with a specific justification, we then look at the quality of the test and how is it resolved.

First Level Results: Disputes and Justification We quantified the worlds of worth in the justification discourse of SRI. We counted the occurrences of each stakeholder’s voice in the 234 articles in our dataset, identifying 1,047 passages corresponding to a stakeholder’s expression of a justification based on a given order of worth. The market, civic and industrial orders of worth clearly dominate the discourse (see Table 4), confirming the observations in previous research (Taupin, 2011)

Civic

201 4 19 6 9 12 11 5 40 19%

Civic Connectionist Domestic Fame Green Industrial Information Inspirational Market

4 48 8 4 0 7 9 0 2 5%

Connectionist 19 8 113 3 8 4 7 1 16 11%

Domestic 6 4 3 78 3 3 4 1 11 7%

Fame 9 0 8 3 97 3 3 2 30 9%

Green 12 7 4 3 3 157 15 4 17 14%

Industrial 11 9 7 4 3 15 60 4 11 8%

Information 5 0 1 1 2 4 4 52 12 5%

Inspirational

40 2 16 11 30 17 11 12 241 23%

Market

Occurrences of Worlds in the Justification Discourse, Including Multiple Worlds in the Discourse.

Column 1

Table 4.

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which identify the resolution of disputes as a market civic industrial compromise. However, some variations appear depending on the type of press. A first noteworthy point is that the main orders of worth mobilized to justify responsible investment in the financial press is the civic logic rather than the market one. A plausible reason for this is that the market logic does not need to justify itself in the financial press: it is taken for granted and shared by all, within a specific arena of justification (here, the financial press). On the contrary, the market logic is the most called upon in the broadsheet and tabloid press, where it is not taken for granted and needs to be justified. In the broadsheet press, the domestic logic is part of the top three justifications, instead of the industrial logic. The discourse disputing SRI, just like the discourse disputing conventional finance, promotes a specific vision how the world should be what is worthy and what is just. Investing is about making money. However, even when this discourse is strongly oriented, it still combines multiple logics in order to increase legitimacy. A second result to be highlighted is that most of the justification occurs within the three dominant logics of financial markets the market, industrial and civic orders of worth, as illustrated in the following quote. It’s just as well virtue is its own reward, for it seems vice is much better for the wallet [market world]. An upstart fund based on the principle of anti-ethics has just ended the quarter as one of the top ranking investment funds based on returns over the past 12 months [market world]. Driven by distaste at the new craze of ‘socially responsible’ investing [inspirational world], Mutuals.com decided to look at all those things mother told you to steer clear of guns, fags, booze and gambling [domestic world]. Fund manager Dan Ahrens admits the Vice Fund was established as a reaction to the do-gooders. ‘Investing should be about making money’, he says, ‘not making a political or social statement’. Months of research convinced him the idea was a flyer. [market world]. (Dan Ahrens in The Daily Telegraph, 9 April 2005)

It is particularly in the broadsheet press that justifications come from multiple worlds. Again, looking at the speakers in Table 3 sheds light on this result: there is a broader variety of speakers in the broadsheet press (with the ‘other category’, representing academics, individuals or international associations such as the United Nations). The broadsheet press also gives room to justification using the green, domestic and fame worlds of worth, each one relying on competing vision of justice. As a result, we might observe a higher quality of tests in the broadsheet press (Table 5). Another possibly counter-intuitive result is that the green world of worth comes in the sixth position only, in the financial and broadsheet press,

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Table 5.

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Justification Discourse in the Financial and Non-Financial Press.

Civic Market Industrial Domestic Fame Green Information Connectionist Inspirational

Financial Press

Broadsheet

Tabloid

125 113 107 63 60 54 45 42 32

59 61 25 39 11 24 8 5 17

17 67 25 11 7 19 7 1 3

Worlds representing more than 15% of the media’s discourse are highlighted in grey.

although SRI has focused a lot on global warming issues in the past years. While the CO2 dispute is present in many articles, the sustainability and environmental protection arguments are anecdotal when justifying investing based on CO2 considerations. When CO2 emissions are mentioned, it is not in terms of global warming but in terms of risk and return, a market discourse and in terms of certificates, an industrial discourse. This is not the case in the tabloid press, where the green logic comes in fourth position. But as mentioned, we chose not to focus on this sample of data due to its nature and small size of the sample. We noted that SRI justifies itself in different ways, as illustrated in Table 6. Many of the disputes around SRI are linked to a market logic, responding to critiques coming from the market world, domestic world or industrial world (the first three columns of Table 6). The competing logics are only found in disputes that are much less important in the media discourse, to the exception of the environmental debate which we will focus on in the next section. The next level of analysis is to determine whether the content of the dispute is a test of truth (confirming the institutional order) or a test of legitimacy (the existential test not being quite applicable in media discourse, as it would require interviews).

Second Level Results: Tests and Resolutions We now drill into some of the most common disputes emerging from the data, to identify how the disputes around SRI are resolved. We limit our analysis here to three disputes among the 16 identified for the sake of conciseness. Our

Lack of clear methodology (9) Need for regulation (13)

The number in parenthesis corresponds to the ranking of the disputes according to its frequency in the media discourse.

Missing resources and skills among analysts (8) Shareholder vs. stakeholder debate (14)

Fiduciary duty (7)

Lack of ethics in financial markets (12)

Environmental concerns (1)

Critique from Civic World to Industrial/Market/ Domestic World

Claim to financial return with limited diversification (16)

Lack of information (3)

Critique from Industrial World to Market World

Inappropriate investment methods (4)

Short-termism (5)

Critique from Domestic World to Market World

Agency problem and Unknown materiality inactive shareholders (11) of factors (6)

Inconclusive financial performance (2)

Critique from Market World to Market World

Table 6. How SRI Justifies Itself for 16 Main Disputes.

SRI no different than traditional funds (15)

Accountability deficit (10)

Critique from Fame World to Industrial/ Domestic World

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139

choice of disputes was based on their relevance in terms of frequency in the media discourse, and terms of variety in the type of justification. For each of the three disputes, we look at the possible resolution of the conflict in terms of short-term arrangement or longer lasting compromise. When Environmental Sustainability becomes Carbon Finance: A Critique of the Civic World to the Industrial World As a first illustration of the resolution of a dispute, we take the dispute around environmental issues, one of the most common disputes in our data. We have shown in the previous section that the tests are mostly grounded in the areas of market, industrial and civic logics. One could imagine that the disputes on environmental issues are resolved through tests grounded in the green world of worth. The green world defends the principles of respecting and protecting nature, and of sustainability, yet it is barely present in the SRI disputes linked to environmental concerns. The dispute on environmental issues which is deployed both in the financial and non-financial press is in fact generally a critique from the civic world to the industrial world, and is largely resolved with a market and industrial world compromise. Mr Tickner says investors should be asking companies whether they have mapped any of their operations and supply chains in relation to areas where water is scarce (green), whether they have a water risk strategy in place (industrial world). (Dave Tickner, head of fresh water at WWF in Financial Times, 22 April 2011) Mr Simpson perhaps sums up the new mood among institutional investors: ‘If governments fail to regulate to avoid dangerous climate change then investors need to act to protect their wealth’. (civic and market world). (Paul Simpson, chief executive of the Carbon Disclosure Project in Financial Times, 22 April 2011)

Looking further at the quality of dispute, we see that the dispute about environmental concerns in SRI is a legitimacy test. It takes the context into account , such as the current mood and the current state of regulation and confronts the experienced reality with the socially constructed reality a real questioning can take place. A civic justification is brought in to resolve the market industrial disagreement. This third logic allows a compromise between opposing logics, bringing together seemingly irreconcilable conceptions of the world, and of worthiness. But our data suggests that the resolution of the dispute between the civic world and industrial/market worlds is not that solid, and can be qualified as a fragile compromise. Sometimes the attempts to propose an acceptable resolution reconciling all logics seems too stretched to be

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genuine, which may lead to ironic discourse as illustrated below. And irony and sarcasm could be good indicators of the loss of common good. This tree-hugging nation loves its recycling and fair trade coffee (green + civic), so it should seem natural that companies are trying to attract shareholders by branding themselves as ‘socially responsible’ (fame). Peter Michaelis, manager of Norwich Union’s UK ethical fund, explains that such marketing can pull in the investors (market). He says: ‘The younger generation is more concerned about global issues like climate change, fair trade, child labour, employees’ rights and human rights’. (green + civic). (The Daily Telegraph, 13 March 2006)

We conclude from this first dispute that there seems to be no main obstacle to drag the ESG criteria into the market world. This corresponds to the second possible vision for the SRI discourse we had envisioned: it circumscribes conventional finance, by showing that the financial sphere must comply with other principles. But our data shows that ESG proponents rarely seize the opportunities offered by the possibility of framing responsible investment within other worlds. As a result, the ecological critique has been taken over by capitalism. The current public debate about global warming is not framed in terms of a green logic. Instead, the civic world is brought into the discourse for justification. In other words, the framing strategy revealed here consists of attempts to suspend the disagreement with the industrial and market worlds. This is done by proposing a perspective that would be acceptable to all, because it is located within the civic world, where ‘beings all belong to a collective that includes and transcends them’ (Boltanski & The´venot, 2006, p. 192). Maximizing Shareholder Value: Critique Circumscribed to the Market Llogic Just like much of the academic research on SRI focuses on financial return, much of the SRI disputes in the public discourse are about financial return. This dispute is dealt with within a single logic, the market one. HCT Group, a transportation firm, also blends commercial [Market] and social aims [Civic]. It reinvests a third of its profits into social schemes such as training for unemployed people [Market, civic]. Dai Powell, HCT’s chief executive, attributes part of its success to the fact it does not have shareholders to satisfy [Market], which means it can accept lower margins on tenders [Market]. As well as bank loans and asset-backed financing, it has an equity-like loan whose interest rate is based on turnover: investors get paid more when HCT earns more [Market]. (The Economist, 31 March 2012)

As in the above abstract, the discourse for the shareholder value dispute is anchored in a market logic: it is about profit, investors, return. In other words, SRI uses the same language and principles as conventional finance. SRI is not subversive; it complies with the market logic’s vision of justice.

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But within the market logic, the objective of maximizing shareholder value is explicitly challenged. So far, maximizing shareholder value was accepted as a higher common principle, which means it was supposed to benefit the whole of society and was thereby more than the pursuit of individual interests. This is now contested, and an alternative objective of satisfying social aims is proposed. As a result, maximizing shareholder value becomes an arrangement rather than a compromise, meaning that it serves the interest of a minority, which reduces its legitimacy. Because the critique is circumscribed to the market logic, the validity of the test itself is not challenged, and the dominant values come out strengthened from the test. This situation falls in the first possible scenario we had envisioned for the results of justification in SRI. We therefore conclude that SRI disputes about shareholder value ‘purify’ the market logic finance, a term coined by Boltanski and The´venot (2006 [1991]). Some of the most damaging financial products and practices can be halted, but the underlying principle and conventions are confirmed and reinforced. Daudigeos and Valiorgue (2010) suggest similar results for the evolution of corporate responsibility strategies, which were absorbed by the corporate system as they matured. The Need for a Practical and Efficient Framework: Critique of the Industrial World to the Market World The dispute on the appropriateness and completeness of financial tools (the need for company disclosure, ESG integration and a framework to determine the materiality of issues) available for investment decisions refers to a larger number of worlds than most disputes. Many logics are called upon to resolve this dispute. While the main critique comes from the industrial world, it is framed according to the principles of the market, industrial and civic worlds as well as the green world and the connectivity world. However, it does not seem that the presence of these other, new, worlds in the debate will result in shaking up the dominant compromise. Dark green funds apply negative screening procedures [industrial] and do not invest in companies in certain sectors that are deemed harmful, such as tobacco or armaments [market, green]. Light green funds focus on the measures that companies are taking to be more sustainable, such as waste efficiency plans or even community outreach programmes [green, civic]. However, light green funds are not necessarily ‘less ethical’ than dark green ones. Fund managers of light green funds often use their clout as shareholders to encourage companies to take more sustainable measures which are arguably just as beneficial for sustainability in general as investing directly in a wind turbine company [market, green]. (Financial Times, 11 April 2009)

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This is a test of truth, debating who is right or wrong, what is ethical or not, as illustrated above regarding the effective way to invest and manage funds. The discourse proposes hybrid practices and language, but does not discuss the underlying principles that it is built on, because these are not clear. There are multiple examples of such hybrid discourses and constructions when the common good is unclear or misunderstood. The discourse is focused on market and industrial worlds of worth, with a domestic and inspirational worth subordinated to them, which implies reconciling multiple principles. But the principle resulting from a possible arrangement is unclear, and not specific to SRI: is it active fund management, or superior financial performance, or environmentally friendly acts? It is unclear what SRI stands for, and what it stands against. ‘We never use screening as a justification for poor performance’, she says. ‘I have to deliver in the same way that any other fund manager does. If I can’t invest in oil, for example, then I will look for an alternative that I believe offers a good investment opportunity [market world] and meets our ethical criteria [domestic world]. If anything, investment teams running ethical and sustainable funds have to work harder because they can’t rely on following the stocks that the mainstream funds do [industrial]. This is good for investors as it means the funds are being actively managed’. [industrial world + market] (…) Quinn is passionate about recycling [inspirational, green world] and predicts legislation forcing us to recycle more will be introduced. ‘Britain is behind the times when it comes to educating people on their personal responsibility’, [domestic world] she says. (Julie Quinn in The Mail on Sunday, 13 April 2008)

The justification using a plurality of orders of worth is characteristic of this dispute and makes SRI potentially subversive, but the quality of the dispute is hindered by the absence of a clear common good. The following quote also introduces the value of networks into the debate. The common good might then become ‘avoiding legislating’. This is a possible basis of a new compromise between seemingly opposing worlds of worth, if it were more than a lonely quote among the sizeable dataset. […] Analysts want data on non-financial matters, such as use of raw materials and energy consumption. [industrial] ‘There is a strong feeling across Europe that if we had a better understanding of this, much of the financial crisis could have been avoided’, [industrial] Mr Hinkel says. Reflecting this trend, more than 800 investors have signed up to the UN’s Principles for Responsible Investment, accounting for $2,200bn 10 per cent of global capital markets. [fame] The goal is to nudge companies to provide environmental, social and corporate governance (ESG) data voluntarily, rather than legislating. [civic]. (Hans-Joerg Hinkel, strategic planning manager at Mitsubishi Electric, in Financial Times, 4 October 2010)

There are more proposals for a vision of a common good, but they are anecdotal in our data at this stage. This last quote suggests a vision of the

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common good, which is to make SRI obsolete by making extra-financial issues mainstream. Is this what SRI stands for? To become the common good, this objective needs to be perceived as representing the interests of all, and not just of a portion of the SRI community. Otherwise, any resolution of the conflict would be only a local arrangement, with a limited contribution to the real economy. The EAI has been one of the loudest voices calling for investors to pay more attention to long term and hidden risks. Set up four years ago to encourage brokers to produce more and better research on ‘extra-financial issues’, the EAI declared at the outset its intention to make itself obsolete by bringing these extra-financial issues into the mainstream. (Financial Times, 6 October 2008)

We conclude that SRI is neither completely compliant nor completely subversive in relation to the market logic when it justifies the need for a new, practical framework to take investment decisions. In some ways it challenges the underlying principle and conventions of mainstream finance. We also see that tools, objects such as models and frameworks help to determine and influence what is worthy. The current search for SRI models and tools might therefore play an important role in resolving the SRI disputes resulting from its institutionalization.

IMPLICATIONS AND CONCLUSION In order to understand how tensions around different notions of common good are negotiated, we looked at the disputes and resolutions around SRI, as reported in the financial and non-financial press. We collected data in three separate samples of 97 financial press articles, 112 broadsheet press and 24 tabloid articles. The articles span over the 2001 2012 period, corresponding to the professionalization years of SRI during which ESG became the key SRI approach. Using Boltanski and The´venot’s framework, we analysed the justification discourse for a series of disputes on SRI that emerged from the data. Three such disputes are about environmental concerns; inconclusive financial performance; and inappropriate investment methods and tools. We conclude from our data that (a) the SRI proponents try to develop arguments from multiple worlds, a majority of these arguments coming from the market, industrial and civic worlds; (b) the green world is almost absent from justifications, even when the discussing ecological issues; (c) the quality of the tests is advanced, showing a maturity in the SRI debate; and (d) a sometimes fragile compromise is reached to

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appease the SRI disputes, but it would require SRI models and tools to consolidate it. SRI critiques and justifications combine multiple worlds in order to construct a valid and plausible discourse on SRI, confirming the importance of using a framework that allows studying multiple logics and grammars. This first conclusion based on our analysis means that currently the market, industrial and civic logics are the perceived as the most legitimate ones in responsible investment since they are most used to justify SRI. In addition, a variety of other logics are present in most justifications, namely the green, domestic and fame logics, which is where the quests of do-gooders and bottom-liners can meet. Stating that SRI is hybrid may sound obvious. But it is important to say so because the discourse on SRI is often Manichean: SRI is presented as meaningless or presented as a way to save the world, neither of which is exact. This brings us back to the scenarios we hypothesized as the most likely that SRI is neither completely compliant nor completely subversive in relation to the market logic and that there is no clear debate, no clear vision of the world and of justice. We had hypothesized that SRI in the 21st century proposes hybrid practices and language, but does not discuss the underlying principles that it is built on, because these are not clear and because it is too dangerous for the future of SRI. We conclude most of the justification occurs within the three dominant logics of financial markets the market, industrial and civic orders of worth making it unlikely that SRI will significantly challenge the dominant order by debating and discursively justifying competing visions of the world. By referring to the dominant worlds of worth, SRI validates them and strengthens the existing compromise. This positions SRI as the solution offered by financial markets to appease the critique, rather than as a critique of financial markets. But interestingly, although SRI follows a market logic, it challenges it from the inside, by questioning the common good within that world. As a result, it purifies finance, bringing it back to its foundations. It is in this way that SRI might be making a difference and contributing to society. This first conclusion on the slow legitimation and diffusion of SRI raises new questions about practices that do not get legitimacy are not valid and plausible but still do diffuse. A variety of practices in the financial industry could possibly fit this description, and should be studied to understand the other side of the story. Another finding of our study is the quasi-absence of the green world from the justification discourse of SRI, comparatively to the frequency of ecological debates. Our coding process highlighted a problem within the ecological order, linked to commensuration and certification. The

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ecological aspects need to be measured and fit in models because they are justified by certification more than by discourse. Paradoxically, certification is part of the industrial logic. This results in a tension within the green logic, leading to the reinforcement of the industrial logic, not the green logic. The same trend characterizes ESG investing, the mainstreamed version of SRI, where one could say that the commensuration and certification requirements transform the ecological product and ecological discourse. The quality of the tests in SRI is advanced, showing a maturity in the SRI debate. When it justifies itself with the need for a practical and efficient framework for investment practices, or when it calls for dutiful shareholders (in terms of active ownership and fiduciary duty), SRI not only attempts to appease the disputes surrounding it, but it also becomes a legitimacy test for financial markets, because it challenges the reality of how markets currently function. In those disputes, SRI critiques the market principle by confronting it with a domestic logic (responsibility) or a green logic (sustainability). If we consider that a valid critique is one that questions the underlying assumptions, the legitimacy test is the type of critique that will do so. There are examples in existing literature illustrating how this type of test is institutional work which may lead to a new institutional order. Our results show that SRI’s justification efforts are another such situation of legitimacy tests. Lastly, our findings point to the role of tools and models in strengthening the compromises between multiple logics. We consider these compromises to be fragile, not only because they are hybrid by definition but because they are not (yet) consolidated by recognized SRI tools and models. The dispute on the need for a practical and efficient framework illustrated the absence of such tools. Should such SRI tools be developed in the future, they would deserve scholarly attention as one of their consequences would be to stabilize the SRI compromise between multiple logics. With all of the above, we have contributed to clarifying our expectations towards SRI and shown that if we want to address shortcomings in finance, we should probably not rely on SRI as it is defined and practiced in the 21st century. A limit of this chapter lies in the discourse versus practice tension, which suggests further research. It would be naı¨ ve to believe that a media discourse leads to a practice. How professional and organizational processes in the newsroom (leading to media discourse) influence public processes remains an even more complex issue than the impact of public discourse on public opinion. There clearly is a discursive practice, but beyond that we would like to know if there are other, non-discursive practices. The link between media discourse, a discursive practice and non-discursive practices of the

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audience (in terms of investment decisions) suffers from shortcomings inherent to our research approach, since we are basing ourselves on press articles without assessing how the discourse is translated in day-to-day processes. This is a common difficulty for all discourse analysis that must recognize that discourse does not forcibly correspond to practice. However, SRI practices are documented, in practitioner reports for example, and do show an evolution similar to the discourse on these practices, such as the evolution from screening, to engagement, to ESG integration. For future studies using the Boltanski and The´venot framework to understand SRI, it would be important to focus on the micro-level by meeting and observing the actors in their daily practice and attempts of justification.

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INCREASING THE EFFECTIVENESS OF SRI CORPORATE ENGAGEMENT ON CLIMATE CHANGE THROUGH A RESPONSIVE REGULATION FRAMEWORK Ben Jacobsen ABSTRACT Purpose Socially responsible investment (SRI) engagement currently performs a variety of supportive regulatory functions such as reframing norms, establishing dialogue and providing resources to improve performance, however corporate responses are voluntary. This chapter will examine the potential gains in effectiveness for SRI engagement in a responsive regulatory regime. Approach Global warming is a pressing environmental, social and governance (ESG) issue. By using the example of climate change the effectiveness of SRI engagement actors and the regulatory context can

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 149 171 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007006

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be considered. This chapter builds the conceptual framework for responsive regulation of climate change. Findings SRI engagement may face resistance from corporations due to its voluntary nature and conflict with other goals. Legitimacy and accountability limit the effectiveness of SRI engagement functioning as a voluntary regulatory mechanism. This chapter argues that the effectiveness of SRI engagement on climate change could be enhanced if it served as part of a responsive regulation regime. Practical implications Engagement is used by SRIs for ESG issues. A comprehensive regulatory regime could enhance corporate adaptation to climate change through increasing compliance with SRI engagement. The implication for SRI practitioners is that lobbying for a supportive regulatory regime has a large potential benefit. Social implications Responsive regulatory policy involves both support and sanctions to improve compliance, enhancing policy efficiency and effectiveness. There are potentially large net social benefits from utilising SRI engagement in a regulatory regime. Originality of chapter In seeking to re-articulate voluntary and legal approaches this research addresses a gap in the literature on climate change regulation. Keywords: Socially responsible investment; responsive regulation; political economy; climate change

INTRODUCTION Concerns about the global effects of anthropogenic greenhouse gas production surfaced in the 1970s (Hoffert, 1974; Landsberg, 1970; Sawyer, 1972) and have been growing since (IPCC, 1990). The nature of climatic change and warming presents a global problem which requires a societal response. Amidst the new constraints and opportunities from climate change businesses are responding with a wide range of strategies (Kolk, Levy, & Pinkse, 2008; Kolk & Pinkse, 2005). Where there is a lack of clear regulation highly variable responses are to be expected. In a study of Australian corporate responses to climate change Rankin, Windsor, and Wahyuni

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(2011) found that despite limited public policy some companies were voluntarily preparing for a low carbon economy. Despite Stern’s (2006) forceful argument for international collective action current regulatory mechanisms in the global climate change adaptation response do not yet have a coordinated international framework. Still nation states have introduced many different types of regulatory policy options. Regulatory policy options include ‘hard’ legislation and ‘soft’ mechanisms, where hard regulation involves enforcement and punishment and soft regulation is permissive and not compulsory (Kuruvilla & Verma, 2006). Soft or voluntary policy options include efforts by non-state actors to regulate business. Soft regulatory mechanisms for climate change also include transnational reporting, disclosure and engagement efforts such as the Global Reporting Initiative (GRI) and Carbon Disclosure Project (CDP). Socially responsible investment is the result of investors seeking to use the influence of their capital. Formerly associated with negative screens and divestment socially responsible investment has turned to positive methods such as engagement with companies to revise their environmental, social and governance (ESG) standards. Socially responsible investment (SRI) engagement with corporations is a soft regulatory mechanism that features in the climate change adaptation response. In this chapter I argue that the effectiveness of SRI engagement on climate change could be enhanced if it served as part of a responsive regulation regime. Social and environmental actors seek to regulate business and hold them accountable (Bendell, 2004). Accountability processes include those which facilitate action on the part of organisational stakeholders (S. M. Cooper & Owen, 2007). Rather than promoting accountability corporate desire for legitimacy is likely to limit the effectiveness of stakeholder actions through manipulation and capture. In contrast, responsive regulation offers a way to conceptualise SRI engagement as supportive regulation, complementary to and integrated with sanctions. A responsive regulatory framework offers the potential to align corporate desire for legitimacy with accountability thereby improving SRI engagement effectiveness. Voluntary regulation of corporate social and environmental effects seeks to broaden the focus of accountability. Corporate activities such as sustainability reporting are one response to calls for accountability. However corporate reporting usually results in the giving of an account. Thus corporate social and environmental reporting often results in a limited form of accountability rather than answerability involvement in a process of being held to account.

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SRI engagement is one strategy used by socially responsible investors to achieve ESG goals. A limited scope usually emerges incorporating the profit maximisation goal, where SRI engagement is, ‘seen as a means of driving shareholder profit through the risk management of environmental, social and governance (ESG) issues’ (Hebb, Hachigian, & Allen, 2012, p. 108). Despite this limited scope there remains some potential for accountability through SRI engagement seeking, ‘both information disclosure (process accountability) and management practices that reflect the values of their shareholders (accountability outcomes)’ (Newell 2008, p. 142). Whether the current practice of SRI engagement has the potential to hold corporations to account will be explored in this chapter. SRI engagement is often conceptualised as stakeholder engagement (Gifford, 2010; Hebb et al., 2012). Mitchell, Agle, and Wood (1997) identify stakeholders through three attributes: power to influence the firm, a legitimate relationship with the firm and an urgent claim on the firm. However stakeholder ‘theory does not imply that all stakeholders (however they may be identified) should be equally involved in all processes and decisions’ (Donaldson & Preston, 1995, p. 67). Therefore it requires a normative proposition to establish stakeholder theory as an accountability mechanism.1 The way in which corporate motivation to maintain legitimacy might limit the potential for SRIs as stakeholders to operate effectively as a regulatory mechanism on climate change will be examined. Although SRI engagement currently performs a variety of supportive regulatory functions such as reframing norms, establishing dialogue and providing resources to improve performance, SRI engagement is currently not integrated with sanctions. As a stand-alone voluntary regulatory mechanism its effectiveness as an accountability mechanism is limited. This chapter argues that the effectiveness of SRI engagement on climate change could be enhanced if it served as part of a responsive regulation regime. Responsive regulation features a pyramid of support mechanisms which operates in conjunction with a pyramid of sanctions (J. Braithwaite, 2011). Regulators engage with regulatees with an appropriate level of either support or sanctions in an iterated game. Supportive options are linked to sanctions depending on compliance. If initial interactions do not evoke compliance, then the regulator escalates to higher levels of actions. A responsive regulation policy regime involves both support and sanctions to improve compliance. SRI corporate engagement can be viewed as a supportive regulatory mechanism; engaging with firms in dialogue, praising those who show commitment and engaging further with those who resist. A pyramid of supports

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might allow SRI networks to function as supportive regulatory actors, at higher levels. SRI networks might become involved in coordinated action against corporations who do not respond to initial SRI engagement requests for disclosure of carbon exposure. A key feature of responsive regulation is a super sanction at the peak of the sanctions pyramid. The super sanction is an ultimate punishment that corporations perceive as a deterrent, something to be avoided. Exactly what this sanction could be in the global regulation of climate change is uncertain. However the responsive regulatory approach involves collaboration between actors to design the regulatory system; state regulators, businesses and NGOs forming a partnership to design the regulatory pyramids (J. Braithwaite, 2011). This chapter contributes to the literature by extending responsive regulation to the policy problem of corporate adaptation to climate change. The methodology of the research presented here is grounded on data gathered at an ethical fund, including non-participant observation of engagement strategy meetings and semi-structured interviews. Exposure to practitioner viewpoints prompted an exploration of conceptual frames that fit the practice of SRI engagement. In addition it draws upon an extensive literature including grey literature, as well as a variety of theoretical frameworks. The chapter is set out in the following way. The literature on accountability, stakeholder engagement and responsive regulation is explored to identify the theoretical failure of the current regulatory approach. Next the case of SRI engagement on climate change is described. Then a conceptual framework of responsive regulation is applied to climate change, providing an alternative context for SRI engagement. This is followed by a discussion of the implications and conclusion. The conclusion seeks to summarise how this understanding of the role of SRI engagement as a regulatory mechanism might improve policy.

SRI AS A VOLUNTARY REGULATORY REGIME The choice of regulatory response to climate change has a political economic foundation (following Tinker, 1984). D. J. Cooper and Sherer (1984) suggest political economy research should be explicitly normative, descriptive and critical. The normative basis of this chapter is that climate change requires a social response and regulation of corporate adaptation should be effective. The normative rationale for regulating the corporate response to

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climate change is similar to that underlying social and environmental accounting (Spence, 2009), in considering the control and accountability of capital to those who produce the wealth (Puxty, Willmott, Cooper, & Lowe, 1987). Accountability The political economy of SRI engagement highlights the relationships between actors, particularly the accountability of corporate actors on social and environmental issues. ‘Accountability is a very versatile concept that may be applied to all types of social relationships, in which the “giving and demanding of reasons for conduct” takes place’ (Steffek & Hahn, 2010, p. 14). One way in which accountability on financial aspects is considered discharged is through reporting, including the auditing of recording and reporting procedures. Reporting is a narrow interpretation of accountability (D. J. Cooper & Sherer, 1984). Voluntary regulation of corporate social and environmental effects seek to broaden the focus of accountability to a wider group than financial stakeholders (Spence, 2009). Corporate reporting is key to engagement as SRI investors might request corporations to prepare a report and publicly disclose their carbon exposure. However voluntary reporting on social and environmental issues is not without difficulties. Difficulties in voluntary reporting operating as an accountability mechanism on social and environmental issues include opportunities for, ‘…corporate posturing and deception in the absence of external verification, and … corporate “greenwashing” and other forms of corporate disinformation’ (Laufer, 2003, p. 253). Reservations about the potential of environmental, social and sustainability reports appear despite the fact that such reporting is ‘… designed to empower stakeholders and thereby enhance corporate accountability’ (S. M. Cooper & Owen, 2007, p. 649). Views include, ‘… severe reservation have been expressed in the academic accounting literature as to the degree of participatory role played by stakeholders in the process’ (S. M. Cooper & Owen, 2007, p. 650). Whilst the corporate lobby apparently espouses a commitment to stakeholder responsiveness, and even accountability, their claims are pitched at the level of mere rhetoric which ignores key issues such (as) the establishment of rights and transfer of power to stakeholder groups. (S. M. Cooper & Owen, 2007, p. 665)

Examining the potential for accountability through social and environmental reporting, even if it were mandatory, leads S. M. Cooper and

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Owen (2007) to conclude that if the process does not facilitate action on the part of organisational stakeholders it would be unlikely to improve accountability. Accountability as answerability implies an additional dimension to reporting (Bendell, 2004). This goes beyond merely giving an account to being held to account for actions undertaken. In this sense accountability can be ‘defined as the ability of people affected by a corporation to regulate the activities of that corporation’ (Bendell, 2004, p. v). S. M. Cooper and Owen also find that, ‘if accountability is to be achieved stakeholders need to be empowered such that they can hold the accountors to account’ (2007, p. 653).

Socially Responsible Investment Engagement SRI engagement is an activity undertaken to promote ESG performance. As shareholders SRI investors are direct stakeholders and prima facie have some potential to influence corporate behaviour and monitor activity (Hachigian, 2011). SRI engagement is, ‘seen as a means of driving shareholder profit through the risk management of environmental, social and governance (ESG) issues’ (Hebb et al., 2012, p. 108). This focus on risk management and value in SRI engagement shares the same limitations for accountability as corporate social and environmental reporting; it may obfuscate the conflicts inherent in commercial activity (Spence, 2009). Stakeholder theory has been offered as one explanation for SRI engagement (Allen, Letourneau, & Hebb, 2012; Gifford, 2010; Hebb et al., 2012). Given finite resources, managers must determine which of the many groups that display an interest in regulating corporate activity on climate change should be considered stakeholders and therefore receive management attention. Mitchell et al. (1997) suggest salience is defined by power, legitimacy and urgency. With limited time, energy and other resources to track stakeholder behaviour and to manage relationships, managers may well do nothing about stakeholders they believe possess only one of the identifying attributes, and managers may not even go so far as to recognize those stakeholders’ existence. (p. 875)

Thus if SRI stakeholders do not possess salience, their engagement will be less successful. Gifford’s research into corporate engagement by socially responsible investors extended Mitchell et al.’s stakeholder salience framework.

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He, ‘…found that a strong business case and the values of the managers of investee companies are likely to be the most important contributors to shareholder salience’ (2010, p. 79). The explanatory power of SRI engagement through the descriptive theory of stakeholder salience needs careful examination. Stakeholder ‘theory does not imply that all stakeholders (however they may be identified) should be equally involved in all processes and decisions’ (Donaldson & Preston, 1995, p. 67). The stakeholder concept juxtaposes, ‘serving the needs of shareholders through dividend maximization, and serving the needs of a wider constituency of stakeholders’ (Stoney & Winstanley, 2001, p. 604). Thus financial motivations may outweigh SRI investors’ interests as stakeholders. In order to assess the potential of SRI engagement to effect corporate change this tension between profit maximisation and stakeholder claims warrants examination. Legitimacy theory, both as an attribute of stakeholder salience and as a theory of corporate action, provides some insights into how this tension might affect the interactions. Legitimacy stems from stakeholder relationships with the corporation. Legitimation is the process of justifying a right to exist, ‘…the corporation may wish to evaluate its legitimacy status and communicate that status to the relevant publics …’ (Lindblom, 1994, p. 4). The corporate desire for legitimacy is a strong motivation leading to manipulation and seeking to maintain control. ‘The use of the CSD [corporate social disclosure] is oriented toward manipulating the perceptions of the relevant publics rather than toward educating and informing them’ (Lindblom, 1994, p. 15) [added]. Brown and Fraser describe the limitations of voluntary corporate responses as ‘the dominance of capital-oriented values and perspectives is such that CSR [corporate social responsibility] and SEA [social and environmental accounting] are likely to fall victim to business capture and lead to mystification rather than liberation’ (2006, p. 110) [added]. This potential for manipulation in efforts to maintain corporate legitimacy directly impacts the potential for SRI engagement to operate effectively as a voluntary mechanism on climate change. Baker elaborates on business capture in engagement: However, the concept of capture has subsequently been extended to characterise the highly selective nature of corporate engagement with stakeholders, and the control by management of the agenda and dialogue with stakeholders. The absence of binding corporate commitments to the outcomes of such processes, and the apparent divorce of these processes from corporate decision making is taken as evidence of the ‘success’ of managerial capture. (2010, p. 848)

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These limitations on SRIs to effectively represent societal interests are a constraint to realising social benefits from SRI engagement. Corporate self-interest is likely to limit the answerability potential of SRIs as stakeholders. Voluntary adaptation mechanisms such as engagement may thus face difficulty in providing sufficient incentive for corporate change. Although SRI engagement faces limitations as a stand-alone policy measure, it could improve social welfare as a supportive regulatory mechanism. Voluntary regulatory mechanisms have the potential to be more effective when integrated with hard mechanisms. Griffiths, Haigh, and Rassias (2007) and Utting (2005) identify integrating market mechanisms with corporate regulation as an important economic adjustment pathway. Integrating soft mechanisms with legislation, the carrot and stick approach, is a key feature of responsive regulation. Responsive regulation will be explored with particular attention to the mode of implementation which draws upon both supportive activities and sanctions as possible courses of action.

Regulation Responsive regulation offers a way to conceptualise SRI engagement in the regulatory space. This regulatory framework offers potential improvement in accountability and effectiveness. A responsive regulatory approach involves integrating supportive activities with sanctions (Ayres & Braithwaite, 1995). Responsive regulation features both a pyramid of support as well as a pyramid of sanctions (J. Braithwaite, 2011). Recent expositions of responsive regulation theory include a pyramid of support operating conjunctively with a pyramid of sanctions. The pyramid of support is a strengths based pyramid. The first idea, therefore, is to move up a pyramid of supports that allows strengths to expand to solve more and more problems of concern to the regulator; when that fails to solve specific problems sufficiently, the regulator … starts to move up a pyramid of sanctions. (J. Braithwaite, 2011, p. 481)

In contrast to supportive activities operating in isolation, responsive regulation posits that a negative pathway also needs to exist in order to change corporate behaviour. At the peak of the pyramid of sanctions lies a super punishment. ‘Ayres and Braithwaite (1992) suggest that there needs to be a clear possibility, somewhere within the regulatory environment, of a maximally potent sanction, or “super punishment”’ (Islam & McPhail, 2011, p. 795). This super punishment should be non-discretionary.

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Super punishment works as a deterrent because regulation is an iterated game, a series of interactions between regulator and regulatee. The pyramid suggests, ‘unless you punish yourself for law-breaking through an agreed action plan near the base of the pyramid, we will punish you more severely higher up the pyramid (and we stand ready to go as high as we have to)’ (J. Braithwaite, 2011, p. 487). ‘A paradox of the pyramid is that to the extent that we can absolutely guarantee a commitment to escalate if steps are not taken to prevent the recurrence of lawbreaking, then escalation … will rarely occur’ (J. Braithwaite, 2011, p. 489). As a result the regulatory context creates a culture of compliance. Responsive regulation invokes the social setting in the implementation. ‘Collective action problems in the purely economic arena are overcome in part through the transformation of economic wrongs into moral wrongs’ (Ayres & Braithwaite, 1995, p. 160). The social setting involves building relationships. ‘We have shown that analyses of what makes compliance rational and what builds business cultures of social responsibility can converge on the conclusion that compliance is optimized by regulation that is contingently cooperative, tough and forgiving’ (Ayres & Braithwaite, 1995, p. 51). ‘The job of responsive regulators is to treat offenders as worthy of trust, because the evidence is that when they do this, regulation more often achieves its objectives’ (J. Braithwaite, 2011, p. 489). ‘The most important way we improve regulation, according to the responsive approach, is by conceiving of regulatory culture not as a rulebook but as a storybook and helping one another to get better at sharing instructive stories’. (Shearing and Ericson, 1991, in J. Braithwaite, 2011, p. 520)

SRI engagement as a voluntary mechanism fails to make corporate constituents answerable on social and environmental issues. Responsive regulation offers a regulatory framework within which the supportive benefits of SRI engagement could be integrated with sanctions. To see substantive corporate adaptation on climate change we need to nest SRI engagement within a responsive regulatory frame. The way in which this integration might enhance effectiveness of SRI engagement as a climate change mechanism will be investigated.

THE CASE OF SRI ENGAGEMENT The operation of SRI engagement in promoting ESG performance is explored to further consider SRI engagement as a regulatory mechanism for corporate adaptation to climate change. The way in which SRI engagement is conducted, including whether the scope of engagement using the business

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case is likely to result in sufficient adaptation is further analysed. A business case contributes to salience in stakeholder engagement (Gifford, 2010) yet this does not avoid manipulation and capture by corporations as they seek to maintain legitimacy. Engagement is one way for SRI to promote ESG issues. Socially responsible investment maintains an explicit focus on social and environmental factors rather than centring solely on financial returns (Cowton, 2004). However there exists potential incompatibility (Kreander, McPhail, & Molyneaux, 2004). The potential for conflict may limit the efficiency of ESG engagement on ESG social good issues (Sullivan & Mackenzie, 2006). In practice, SRI climate change engagement is often framed using the business case. Thus the potential of ‘business-case’ engagement to yield social benefits on climate change should be critically evaluated. Responsible investment engagement is commonly, ‘seen as a means of driving shareholder profit through the risk management of environmental, social and governance (ESG) issues’ (Hebb et al., 2012, p. 108). ESG considerations may not be central to SRI: The basis of the ESG movement is less about the values investing commonly associated with the socially responsible investing (‘SRI’) funds, and more about long-term value investing focussed on reduced risk and improved shareholder value. (Hess, 2007, p. 223)

Often ESG issues are viewed through the financial (risk-return) perspective; ‘The critical point is that performance on ESG issues can influence the profitability of companies and other investments’ (Sørensen & Pfeifer, 2011, p. 60). This lens suggests that ESG issues that do not have a direct financial impact could be ignored. The implication for socially responsible investment is that some ESG goals that cannot be expressed in financial terms may be viewed as less important. Some social and environmental impacts of climate change fall into this category. Thus the business case (or financial perspective) is a serious limitation for a regulatory mechanism with a net social benefit goal. SRI engagement is also constrained due to the voluntary nature of the mechanism, ‘…voluntary action was limited to those decisions that would not adversely affect a corporation’s share value’ (Bendell, 2004, p. 17). SRI engagement lacks the potential to achieve systematic change due to the voluntary nature of responses (Haigh & Hazelton, 2004). Voluntary actions are likely to lead to superficial attempts to respond to wider societal concerns for corporate social responsibility due to managerial capture (O’Dwyer, 2003). In the evolution of SRI engagement, coordination has played a significant role, perhaps even more so for climate change engagement.

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Two significant coordinated engagement efforts are the United Nations Principles of Responsible Investment (UNPRI) and the Carbon Disclosure Project (CDP). The UNPRI emerged from collaborations between the United Nations Environment Programme and institutional investors. The UNPRI is a norm entrepreneur in the investment sector and UNPRI membership spans all major capital markets. Its activities include engaging at the regulatory level with stock exchanges, corporate engagement (via a clearinghouse) and assisting investment funds and asset managers to implement its six principles. The CDP provides support for calculating, recording and reporting carbon and other greenhouse gas emissions, as well as corporate engagement and policy consultations with governments among other activities. The CDP reporting framework is notable for its definition and delineation of the scope of emissions. Coordinated SRI engagement offers some potential to improve corporate response. Yet despite these significant coordinated engagement efforts, the voluntary nature of participation mean that as a regulatory mechanism, SRI engagement is limited. Particularly so for climate change where there is a lack of clear regulation and uncertain reputational risks, highly variable voluntary responses are to be expected. Studying Australian corporate responses to climate change Rankin et al. (2011) found that despite limited public policy, some companies were preparing for a low carbon economy. ‘These proactive companies have implemented internal organisational systems such as environmental management systems as well as using external NGO guidance provided by CDP and the Global Reporting Initiative (GRI) standard to report their responses about climate change risks’ (Rankin et al., 2011, p. 1061). As the current potential of SRI engagement is limited, two kinds of regulatory changes might improve corporate adaptation: improving the mechanism and integrating the mechanism with harder regulatory options. As suggestions for supportive regulation, Clark and Hebb note that regulators must sustain their current initiatives in the area of corporate governance: that is, improving transparency with respect to corporate decision making, ensuring that boards of directors have independent directors, and, most importantly, expanding shareholder and stakeholder representatives. (2004, p. 2029)

Hachigian (2011, p. 49) indicates the type of benefits available from improving the engagement mechanism: This paper suggests that synergies are possible. Through leveraging shareholder legitimacy, urgency and to some degree, power, the state can effectively create a mechanism

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for monitoring the behaviour of corporations, without expending significant resources on monitoring and regulating. On the other side, shareholders are provided with more instruments and avenues to engage with issuers, thereby allowing them to manage their ESG risks more effectively.

Earlier arguments for increased accountability are one rationale for improving and integrating regulatory policy options. ‘Rather than seeing corporate self-regulation and voluntary approaches as a superior alternative to governmental and international regulation, the corporate accountability agenda suggests a re-articulation of voluntary and legal approaches’ (Utting, 2005, p. 386). Bendell describes the relationship between voluntary and mandatory as, ‘one being crucial to the effectiveness of the other in delivering true corporate accountability’ (2004, p. v). Integration of corporate regulatory settings with market mechanisms could be an important economic adjustment pathway to climate change (Griffiths et al., 2007). Integrating SRI engagement with hard regulatory mechanisms such as securities exchange regulation and corporate regulation is possible. For example the US Securities and Exchange Commission published a ruling in 2010 outlining grounds for climate change minority shareholder proposals being included in company meetings. However to date there are no examples of integrating soft mechanisms with hard mechanisms on climate change. SRI engagement can be integrated with sanctions at the national level which hold deterrence implications for transnational organisations. Here the example of coordinated engagement mechanisms is instructive. Both the UNPRI and CDP have engaged with securities exchanges regarding listing rules and disclosure requirements surrounding ESG risks. Securities exchange de-listing could well feature as the super sanction in a responsive regulatory regime. That is, if soft engagements to improve disclosure and accountability fail, a lack of compliance could involve sanctions such as restrictions on raising capital, and ultimately suspension from trading. Voluntary adaptation mechanisms such as engagement on social and environmental issues may face difficulty in providing sufficient incentive for corporate adaptation. To increase the effectiveness of SRI engagement, a cohesive policy regime addressing climate change is required. Rather than operating as a stand-alone voluntary mechanism, the way in which SRI engagement as a supportive mechanism could be integrated with hard regulation will be explored through a responsive policy regime.

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DEVELOPING A CONCEPTUAL FRAMEWORK OF RESPONSIVE REGULATION FOR CLIMATE CHANGE In viewing SRI engagement as a regulatory instrument this chapter analyses the form of corporate regulation for climate change. Tinker (1984) advocates exploring the foundation of regulatory problems in a political economy approach. Political economy suggests explicitly considering the social, economic and political context. Puxty et al. (1987) argue that the market, the state and the community provide modes of regulation. D. J. Cooper and Owen (2007) critically analyse corporate accountability in regulation for social and environmental issues. In this chapter so far we have examined the features of SRI such as accountability, the legitimacy of corporate actors and the potential for a voluntary mechanism to effect corporate adaptation. In this section we explore the potential of responsive regulation as a policy regime for climate change, within which SRI engagement functions as a supporting mechanism. A responsive regulatory regime involves state and non-state actors in regulation. Responsive Regulation of Climate Change Developed from theories of restorative justice (of crimes) and regulatory enforcement, responsive regulation has been applied to settings such as taxation (V. Braithwaite, 2007), nursing home regulation and transport safety (J. Braithwaite, 2011). One possible formulation of responsive regulation to climate change policy is used to illustrate the way in which such a framework could integrate SRI engagement with hard mechanisms (see Fig. 1). The proposed responsive regulation framework would involve a fundamental change in SRI engagement moving from a voluntary mechanism to a supportive mechanism (but not voluntary). SRI engagement practitioners have many advantages as corporate regulatory actors; they have a supportive orientation (which government agency regulators find difficult to attain), they already engage corporations in a targeted manner (at no cost to the government), and are intimately familiar with key components of the strengths pyramid such as what types of corporate action are required for compliance with CDP reporting of different scopes, and GRI processes such as auditing. This example of one possible formulation of the way in which SRI corporate engagement might feature in the regulatory framework aligns with contemporary practices. One such aspect is that CDP reporting can be

Increasing the Effectiveness of SRI Corporate Engagement on Climate Change Pyramid of Supports

Exceed benchmark performance for sector, executive remuneration linked to emissions reduction

Audited public CDP/GRI reporting of product life cycle emissions

Audited public reporting of company wide policies and management systems for climate change risk Education and persuasion about corporate sustainability reporting with independent auditing

Fig. 1.

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Revoke company registration/ halt trading

Prohibited from raising new capital

Shareholder resolutions about climate change adaptation

The Responsive Regime: A Pyramid of Supports and a Pyramid of Sanctions.

viewed as an instrument of education and persuasion about corporate sustainability on carbon emissions. The auditing feature appears as one of the reporting items in the survey. The survey itself thus illustrates the base level of the pyramid of supports. To progress to the next level of the pyramid we consider how corporate engagement practice aims to influence companywide policies and management systems. Again independent verification is used as an indicator of transparency for the requisite level of accountability on public reporting. This auditing feature of each stage is akin to the trust and confidence mechanisms for financial disclosure on stock exchanges. Continuing with the example of the pyramid of supports, the third level sought by SRI corporate engagement has a broader scope than carbon (equivalent) emission from direct activities and energy use, when it seeks the sustainability of the activity itself (product lifecycle). Thus audited reporting of scope one or two emissions might satisfy level one of the pyramid, but to achieve level three further disclosure would be required. SRI would be ultimately satisfied by corporate achievement of sector best practice and the incorporation of emissions featuring in executive performance evaluation. These features indicate the highest level of performance because of the nature of the socially responsible investment industry as a voluntary

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regulatory mechanism; with effective full disclosure, investors would be free to choose their investee companies. However as a voluntary regulatory measure it suffers from the problem of non-compliance. Therefore there must be some incentive for corporate actors to engage with their climate change impacts within the regulatory regime. Responsive regulation features a pyramid of support which operates in conjunction with a pyramid of sanctions (J. Braithwaite, 2011). Regulators engage with regulatees with an appropriate level of either support or sanctions in an iterated game. If initial interactions do not evoke compliance, then the regulator escalates to higher levels of actions. The direct linkage between the pyramid of supports and the pyramid of sanctions changes the nature of SRI engagement, from voluntary to one of compulsory compliance, albeit with a supportive orientation. Other regulatory actors such as government agency corporate or securities regulators might be involved in regulatory enforcement on the pyramid of sanctions, activities such as prohibiting capital issues and halting trading/deregistering the corporation (see Fig. 1).

Benefits of SRI Engagement in the Responsive Regime As part of a suite of regulation addressing climate change responsively, SRI engagement as a supportive regulation mechanism could fulfil some key functions. One significant problem with SRI from a critical perspective, its use of the ‘business-case’ discourse, becomes a key benefit, a desirable attribute, as it signals a shared language and established dialogue between actors. Such dialogues become more structured and purposive in the responsive regulatory regime. However the clear progression of the pyramid of supports provides a signal that increasing compliance is expected. SRI corporate engagement has a supportive orientation, engaging with firms in dialogue, praising those who show commitment and engaging further with those who resist. A pyramid of strengths would allow SRI networks to function as coordinators of voluntary regulatory actors (individual SRIs), and then involving coordinated action against corporations who do not respond to requests for disclosure of carbon exposure.

Supports and Sanctions Higher levels of supportive action might include a letter from investors such as in the CDP Carbon Action initiative. The importance of networks

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of actors becomes clear, if individual company contact by an SRI does not achieve satisfactory outcomes, then other SRIs can be recruited in enforcement action. Continued non-compliance would then prompt a move to a regulatory sanction. This illustrates the change in orientation of SRI engagement from being a voluntary mechanism, to being a supportive mechanism integrated with hard regulation. Regulatory sanctions involved at the lowest level of the sanctions pyramid might involve current corporate governance mechanisms of control and accountability. Sanctions further up the pyramid would involve government agency regulators in securities issue restriction and corporate de-registration. This progression and indicative path of escalation shows how an integrated policy regime could offer enhanced effectiveness. Companies would have a clear self-interest compliance to avoid interactions with government regulators, and this acts as an incentive to cooperate with SRI engagement requests for climate change adaptation.

Hard Regulation An example of sanctions in capital markets can be found in a Canadianbased company Talisman Energy Inc. The oil and gas exploration company took a stake in a Sudanese state oil company. At the time Sudan was embroiled in a particularly bloody civil war. The company was listed on the Toronto Stock Exchange as well as the New York Stock Exchange. U.S. government sanctions against Sudan banned the Sudanese oil company from participating in U.S. equity markets (Nguyen & McKenna, 2001). Amendments to legislation were proposed which specifically targeted prohibited capital raising or trading in the United States. The Securities and Exchange Commission raised concerns about U.S. companies benefitting countries targeted by sanctions, linking mandatory disclosure to human rights issues (McKenna, 2001). Capital market sanctions foreshadowed in the political arena included de-listing Talisman from the New York Stock Exchange (Nguyen & McKenna, 2001). Talisman eventually sold its Sudanese interests. Studying the Sudan example led Windsor to concluded that, ‘… enforcement occurs largely by stock exchanges and national jurisdictions’ (2009, p. 306). If the major stock exchanges participated in establishing the responsive regulatory sanctions, then the sanctions would be effective as a global deterrent. Such sanctions mesh with the global context of SRI engagement and international financial market actors.

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Effective Regulation The responsive regulatory regime on climate change outlined above is comparatively simpler than the current system of financial accountability regulation. Corporate regulation for financial accountability involves an extensive framework of supportive mechanisms as well as sanctions. Supportive regulation includes mechanisms such as international accounting standards, professional bodies for directors and accountants, corporate ratings, investor briefings and stakeholder engagement. Hard regulation involves legislation such as for corporate reporting, securities legislation, corporate governance and exchange disclosure rules. For the errant corporation, sanctions include a range of remedies including halting trading and director liability. Thus the pyramids of sanctions proposed for climate change is comparable, and the responsive regulatory approach offers an integrated approach to enforcement. The benefits for policy effectiveness of SRI engagement as regulatory actors become clear once J. Braithwaite’s (2011) nine principles of responsive regulation are applied to climate change policy. These principles are interpreted for the SRI context as: I. Understanding the context of business activity and the generation of climate change impacts. II. Structured dialogue giving voice to stakeholders, agrees outcomes and monitoring, help actors to find their own motivation to improve, communicate resolve to stick with a problem until fixed. III. Engage those who resist with fairness, show them respect by construing their resistance as an opportunity to learn how to improve regulatory design. IV. Praise those who show commitment, support their innovation, nurture motivation to continuously improve, help leaders pull laggards up through new ceilings of excellence. V. Signal that you prefer to achieve outcomes by support and education to build capacity. VI. Signal, without threatening, a range of sanctions including an ultimate sanction that is formidable, that can be used as a last resort. VII. Network with partners that can assist with escalating support. VIII. Elicit active responsibility for making outcomes better in the future. IX. Learn, evaluate how well and at what cost outcomes have been achieved, communicate lessons learned.

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Establishing the Regulatory Regime The responsive regulatory approach involves collaboration between actors to design the regulatory system. State regulators, businesses and NGOs forming a partnership to design the regulatory pyramids (J. Braithwaite, 2011). A responsive regulation system should be negotiated between parties. ‘… we favour enforcement pyramids that are a product of tripartite negotiations within particular regulatory communities at particular historical moments’ (Ayres & Braithwaite, 1995, p. 161). ‘In the end, the choice of a specific form or forms of delegation is likely to be highly contextual’ (Ayres & Braithwaite, 1995, p. 160). ‘(T)ripartism, is not only construed as a way to fill regulatory gaps, but also as a way to mitigate against regulatory capture’ (Islam & McPhail, 2011, p. 795).

IMPLICATIONS AND CONCLUSION SRI engagement operates as a voluntary regulatory mechanism for accountability on climate change and other ESG issues. As a voluntary mechanism it has limitations for holding corporations accountable for their social and environmental effects on climate change. Conceptualising SRI engagements through stakeholder theory does little to address corporate self-interest, such as motivations for legitimacy which result in manipulation and capture. Business case engagement has inherent limitations as a regulatory mechanism. This chapter explored an alternative articulation of SRI engagement as a soft mechanism together with hard regulation for climate change. A responsive regulatory regime based upon the key strength of SRI engagement, its supportive orientation. This feature is desirable in a policy regime, supportive regulation operating in conjunction with sanctions increases efficacy. Rather than being characterised by hard-nosed enforcement, the responsive regulation regime is characterised by respect and trust. Corporate self-interest is shifted to avoiding sanctions and therefore towards compliance with supportive mechanisms. The challenge for SRI is to work collaboratively with business and government actors to develop a responsive regulation regime. State actors, business and SRIs cooperatively develop the pyramid of support and pyramid of sanctions. The global scale presents a number of challenges for

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the policy response to climate change. Further conceptual work remains to be done as the global nature of climate change spans regulatory boundaries and jurisdictions. The problem of developing countries in climate change problem also needs further consideration. Responsive regulation theory capitalises on the strengths of SRI engagement as supporting corporate adaptation to climate change. SRI networks such as UNPRI and CDP could play a role in escalating issues. Such progression up the pyramid of supports is an integral part of a responsive regulatory approach. Socially responsible investment as a supportive mechanism linked to a pyramid of sanctions is likely to be more effective than as an isolated voluntary mechanism. For enforcement efficiency, responsive regulation must involve genuine sanctions (such as de-listing) which are both just and hold deterrence capacity. By increasing SRI engagement, accountability (answerability) to stakeholders is likely to improve. Thus integration of SRI engagement with hard regulatory options represents a cohesive policy regime that efficiently addresses corporate adaptation to climate change. This chapter addressed a gap in the literature on climate change regulation in focussing on the way in which a comprehensive regulatory regime could enhance corporate adaptation through increasing compliance with SRI engagement. The implication for SRI practitioners is that lobbying for a supportive regulatory regime has a high priority.

NOTE 1. Stoney and Winstanley (2001) suggest the normative basis is that, ‘…stakeholder interests are ends in themselves and not simply means to ends such as increased efficiency and profitability’ (p. 607).

ACKNOWLEDGEMENTS This chapter has benefitted greatly from a sabbatical at The Carleton Centre for Community Innovation where I was graciously hosted by the Director, Tessa Hebb. My PhD research which prompted this chapter owes a debt to James Thier, one of the founding directors of Australian Ethical Investments, who played a key role in establishing the Climate Advocacy Fund. Any errors or omissions are of course my own.

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COMPANY COMMUNITY AGREEMENTS IN THE MINING SECTOR Ben Bradshaw and Caitlin McElroy ABSTRACT Purpose The chapter describes the phenomenon of company community agreements in the mining sector, situates them relative to two veins of responsible investment activity, and assesses whether they might serve as a proxy for the “community relations” expectations of responsible investors. Findings Based on an evaluation of two recent company community agreements and surveying of executives from mining firms that have signed agreements with Indigenous communities, it was found that: (1) though imperfect as a proxy for many of the “community relations” expectations of responsible investors, company community agreements offer benefits and make provisions that exceed current expectations, especially with respect to the recognition of the right of Indigenous communities to offer their free, prior, and informed consent to mine developments; and (2) mining executives recognize the utility of agreementmaking with communities, and are comfortable with such efforts being

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 173 193 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007007

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interpreted as recognition of the right of Indigenous communities to consent to development. Social implications The chapter serves to introduce responsible investors to the emergence of company community agreements in the global mining sector, and calls upon them to advocate for their further use in order to reduce the riskiness of their investments, address social justice concerns, and assist communities to visualize and realize their goals. Originality/value of chapter For the first time, the growing phenomenon of company community agreements in the mining sector is situated within responsible investment scholarship. Additionally, drawing on both logic and evidence, the chapter challenges the responsible investment community to rethink its approach to screening and engaging the mining sector in order to advance the interests of Indigenous communities. Keywords: Responsible investment; mining; Indigenous peoples; agreement-making

INTRODUCTION As responsible investing practices have become more widespread in the past 10 years, the mining sector has become an especially challenging one in which to invest. As exemplified by the post-2008 rally that saw the shares of firms like Rio Tinto, Goldcorp, and Agnico Eagle Mines more than double in value in under three years, mining firms offer significant potential for value gains, which investors are hesitant to forego. At the same time, too many mining firms have, at least at some times and in some locations, failed to meet the expectations of responsible investors, especially with respect to their relations with indigenous communities. For responsible investors, these failings are not merely a matter of injustice; increasingly they generate material repercussions (see Henisz, Dorobantu, & Nartey, 2011), which all investors seek to avoid.1 This situation has given rise to thoughtful engagement efforts by responsible investment firms like Calvert Investments and NEI Investments that include meeting with management, proxy voting, and calling for independent audits of companies’ human rights records. For some mining firms, this engagement is simply reinforcing what they have already come to recognize that securing and maintaining healthy relations with

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communities, and especially indigenous communities, is the most critical aspect of their Corporate Social Responsibility (CSR) practice. This recognition is manifest in the growing use and acceptance of the “social license to operate” concept, which implies that a firm seeking to develop a mine in a remote locale secure not only a regulatory permit from governments, but also an informal license from society or key stakeholders (Prno & Scott Slocombe, 2012; Thomson & Boutilier, 2011). Firms are increasingly investing in this social license to avoid work stoppages, loss of access to the site, negative reputation, and other financially harmful conflicts. Nevertheless, for some responsible investors, divestment is a necessity; that is, despite engagement pressure, some firms’ performance does not improve sufficiently to meet the criteria for sustainable investment. This need to decide between (further) engagement and divestment places considerable pressure on the methods by which analysts screen mining firms. Firms’ social performance and impacts are often the most difficult to evaluate. Unlike environmental practices and impacts, there are limited definitive or quantitative indicators of social performance. Though the screening of firms according to their community relations policies and performance has grown in its sophistication and comprehensiveness, we suggest that the task is too onerous and the uncertainties are too many for this approach to protect investors. More critically, the approach places too much emphasis on the policies and practices of companies as the determinants of company community relations. Of course, these relations are also a function of the values and experiences of communities, or more accurately the values and experiences of the many residents of communities with whom a mining firm might engage; they are also a function of contextual circumstances that fall well beyond the control of even the most progressive mining firms. Could analysts’ burden be alleviated by making better use of the presence of company community agreements in the screening of mining firms operating in jurisdictions in which agreements are common? Negotiated directly between resource developers and indigenous communities with limited state interference, company community agreements offer developers certainty against local protest and opposition, which generally translates into expedited permitting, in return for the delivery of enhanced impact mitigation and tangible benefits to local communities including financial payments, training and employment, and preferential contracting for mine services (Fidler, 2010; O’Faircheallaigh, 1999; Sosa & Keenan, 2001). Given this dual focus on the management of impacts and the delivery of benefits, they are frequently identified as Impact and Benefit Agreements (IBAs),

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though many other labels have been used for agreements that achieve the same purpose.2 Galbraith, Bradshaw, and Rutherford (2007) describe these agreements as “supraregulatory” in that they necessarily exist and function alongside, though are not officially a part of, regulatory processes like Environmental Assessment. Notwithstanding this legislative gulf, company community agreements are ubiquitous in Canada and Australia, and are beginning to emerge elsewhere. In Canada they have been used in support of such prominent developments as Vale’s Voisey’s Bay mine in Labrador, and the three diamond mines operating in the Northwest Territories developed by BHP Billiton, Rio Tinto, and De Beers Canada. Though company community agreements have become, in essence, institutionalized in Canada (Lapierre & Bradshaw, 2008) and Australia (O’Faircheallaigh, 2000), and their presence is growing elsewhere, their recognition, let alone promotion, by responsible investors is rare. One notable exception is a recent review of the application of free, prior, and informed consent (FPIC) in the mining sector completed by the global environmental, social, and governance (ESG) rating agency, Sustainalytics, which notes that “IBAs are increasingly held up as one of the best, concrete examples of FPIC” (Sosa, 2011, p. 13). This chapter aims to support and extend this proposition. We argue herein that company community agreements can serve as a proxy for many of the “community relations” expectations of responsible investors, including with respect to the increasingly acknowledged right of indigenous communities to provide their FPIC to major projects proposed within their territories. Beyond advocating for their use by responsible investors as a screening tool, and given the growing desire of responsible investors to use their voice rather than merely exit, we further suggest that responsible investors do more to advocate for the use of negotiated agreements in the mining sector globally in order to reduce the riskiness of their investments, address social justice concerns, and assist communities to visualize and realize their goals. In making this argument, we do not intend to minimize the complications posed by company community agreements, especially with respect to their confidentiality, the tactics used and conflicts that arise in their negotiation, their lack of dynamism relative to the desire of communities to offer ongoing consent, the short- and long-term consequences for the communities involved, and their too often failure to meet community expectations (see Caine & Krogman, 2010; Gibson & O’Faircheallaigh, 2010; O’Faircheallaigh, 2010; Prno et al., 2010; Siebenmorgen & Bradshaw, 2011). Though we acknowledge the significance of these issues and the research that has helped to reveal them, we leave these aside for the moment

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in order to articulate a novel approach for responsible investors that seeks to harness the ideal elements of company community agreements in the mining sector. This chapter outlines our argument and offers two pieces of evidence in its support. The first derives from an evaluation, based on the current “community relations” criteria of a leading ESG rating agencies, of two recent company community agreements: De Beers Canada’s agreement with the Moose Cree First Nation in support of the Victor diamond mine in Ontario; and Agnico Eagle Mines’ agreement with the Kivilliq Inuit Association (KIA) in support of the Meadowbank gold mine in Nunavut. The second piece of evidence derives from two rounds of surveying of executives from mining firms that have signed agreements with indigenous communities in Canada. The surveying aimed to, respectively: identify the firms’ reasons for negotiating agreements given the absence of legislation requiring them to do so; and ascertain whether they regarded their negotiations as acknowledgment of a community’s right to FPIC. The chapter follows in four further parts. In the next section, two veins of responsible investment activity are reviewed to situate them relative to company community agreements. In the third section, the two company community agreements are assessed to determine the degree to which these agreements meet current expectations of responsible investors with respect to community relations. In the fourth section, some survey evidence is reviewed to make sense of mining firms’ use of negotiated agreements, including with respect to the issue of FPIC. Finally, some conclusions are offered.

RESPONSIBLE INVESTMENT ACTIVITIES IN RELATION TO COMPANY COMMUNITY AGREEMENTS Responsible investment in the mining sector is manifest in two different veins of activity: the first relates to project finance; and the second to shareholder activism. At times these activities work cooperatively; however, the objectives of each in advocating for more responsible mining are distinct. In this section, these two veins of activity are outlined and situated relative to negotiated agreements between companies and communities. This provides the background for our argument to call upon responsible investors to support the increasing use of company community agreements.

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These two veins of responsible investment activities reflect the identification of the spaces of influence upon the mining sector. They have become increasingly important as the mining industry has experienced growing scrutiny over its environmental and social performance, and as the true value of projects reflects their environmental and social costs (Bebbington, Hinojosa, Bebbington, Burneo, & Warnaars, 2008; Emel & Huber, 2008; Goodland, 2012; Hamann, 2003; Hilson & Murck, 2000). The mining industry is influenced by stipulations to project finance because, without the incoming capital it provides, many projects could never develop (Weber & Banks, 2012).3 Providers of project finance include large international banks as well as global lenders such as the World Bank. It is in the interest of those who provide this financing that the businesses in which they invest are conducted responsibly. Not only does it improve the positive return on their investment, it reduces the risks of being co-implicated in any negative events. Similarly, mining firms are subject to influence from shareholders. This is the source of their ongoing capital and the direct “audience” of owners for whom the firm performs. Often, institutional investors own a large number of shares. Institutional investors are responsible for large sums of money that are invested on the behalf of others such as pension funds. As a result of the size of their investment, they have greater influence on the firm. As a result, institutional investors are significant responsible investors and often follow the research of small, dedicated ESG rating agencies. Project financing offers a particularly potent space for responsible investors to advocate change to ESG practices. This initial investment is critical and a limiting factor to the establishment of sites. As such it is a bottleneck, or point of leverage, to implement checks on the ESG performance of the mine both during its construction and as it operates. In light of scrutiny and an overall increased interest in global governance organizations’ participation in supporting sustainable practices (Jenkins & Yakovleva, 2006), new standards were developed to guide sustainable practices through the conditions of project finance (Mining, Minerals and Sustainable Development, 2002). In particular the International Finance Corporation (IFC), the private sector lending arm of the World Bank, created specific performance standards first in 2006 and updated in 2012 (International Finance Corporation, 2012). These standards seek to set benchmarks for ESG performance required to continue project finance. The use of the IFC performance standards has been matched by private sector lenders through the creation of the Equator Principles (2006). The Equator Principles consist of mostly the same conditions as the IFC

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performance standards. Large private sector banks that subscribe to them commonly apply these conditions to the projects where they provide financing. Responsibility standards through project financing mechanisms leave the execution of responsible behavior primarily to contextually explicit determination. Many of the standards are based on meeting local labor, environment and governance laws. This approach does not necessarily encourage the best possible performance or standards especially where national legislation is comparatively weak (Coumans, 2010). The IFC standards and the Equator Principles do, however, engage with several international standards, such as the United Nations Declaration on the Rights of Indigenous Peoples, and in this way are able to elevate the standard of policy requirements for corporations. The particularly relevant example is the inclusion of FPIC in the revised IFC standards released in 2012. The IFC’s 2012 embrace of the right of indigenous peoples’ consent has created a powerful new standard for the development of mines in remote regions that are primarily populated by indigenous peoples. However, as has been well recognized by the International Council for Mining and Metals (ICMM) in its many deliberations on the subject (e.g., IUCN & ICMM, 2008), putting the principle of FPIC into practice represents a considerable challenge, for reasons that relate to both company and community practice, and its verification by external interested parties can be difficult. Here, company community agreements hold some promise in that: the negotiation of agreements by mine developers and locally impacted communities offers a potential vehicle for operationalizing FPIC; and, by their presence, offers to responsible investors evidence of the securing of community consent, especially when the agreement has been ratified through a transparent community vote. Hence, tying a mine developer’s project financing to, among other expectations, the securing of a negotiated agreement with would-be impacted communities offers responsible investors a potential mechanism to achieve their goals for social justice and manage their investment risks. In this way, if the environmental and social standards for project finance acknowledge and advocate for the use of company community agreements, they are not only practicing responsible finance for their practices, but also supporting good practices that are recognizable to the broader responsible investing community. The second vein of responsible investment activity with relevance to company community agreements is shareholder activism. The rise of this vein is well documented in many overviews (e.g., Viviers & Eccles, 2012).

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For the mining sector it remains a particularly perplexing or conflicted process depending on one’s perspective. As Hebb, Hachigian, and Allen (2011) note, responsible investment provides the options of voice or exit. Investors dissatisfied with the behavior of a corporation can divest. Exit, when used by large institutional investors such as the Norwegian Government Pension Fund, can have a powerful impact on the reputation of a firm if not always its financial stability. The divestment of large institutional investors is seen as a signal to other shareholders and often leads to further exit, and a potentially devastating impact on the corporation or even region in question (Hebb & Wojcik, 2005). Given these rather stark choices and consequences of exit, it is not surprising that, as responsible investment expands, it has become more focused on voice. Investor influence is used to advocate for changes in performance, and uses exit as an option of last resort. The process of investor engagement with firms has been well documented and more recent research programs are investigating the regional and contextual differences in behavior and response outside a more commonly researched UK and US focus (Allen, Letourneau, & Hebb, 2012). Advocacy occurs in many ways. Often certain investment firms conduct research and develop a list of corporations they will target for performance changes. Through calls, letters, the building of coalitions of other concerned investors, and sometimes proxy voting, specific concerns reach corporations. Reflecting a more novel approach, some firms such as Calvert Investments engage with companies that do not as yet meet their ESG criteria in order to encourage and assist them to improve their performance.4 In the interest of securing new investment, maintaining current shareholders, and avoiding negative media and reputation damage, corporations respond to these various shareholder activities. The nature of corporate response to shareholder activism is the subject of considerable academic literature (e.g., David, Bloom, & Hillman, 2007). This literature has proposed that responses are contingent upon the saliency of stakeholders, and measure this in terms of their power, urgency, and legitimacy (Mitchell, Agle, & Wood, 1997). The nature of the issues targeted seems to also have a considerable impact on corporations’ willingness and speed of response. In the research of Allen et al. (2012) concerning shareholder activism toward Canadian mining firms, it was clear that firms were more likely to respond through policy changes and internal governance rather than changes on the ground.5 To achieve change on the ground requires complex knowledge of the situation at various sites, an ability to recognize and address contextual variability, and long-term investments in

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projects and personnel, most of which seem to exceed the willingness of firms facing short-term financial pressures. The limited scope of corporate responses to activism only adds to the existing and more normative challenges of addressing the environmental and social performance of the mining industry. Divestment is not an easy option, especially in jurisdictions such as Canada where, given the prominence of mining firms in the country’s leading stock exchange, investors find it difficult to maintain a diversified portfolio without their inclusion. Responsible investors in these jurisdictions are typically compelled to acknowledge the mining sector’s ongoing role in meeting the needs of daily life and supporting global development and many national economies, and therefore continue to advocate for performance improvement rather than promote divestment. An alternative avenue for promoting improved social and environmental performance, as well as investment risk reduction, is to directly support the efforts of communities in their dealings with firms. Such an approach provides agency to communities (Coumans, 2010) and acknowledges their obvious part in company community relations. Indeed, even the best of relations have been lost by progressive firms because of changing circumstances within communities, be it a change in elected leadership or a dispute with governments over an unrelated issue. For firms engaging with remote indigenous communities for whom mining is wholly unfamiliar, the challenge is even greater and the avenues for good corporate practice are fewer. Reflecting on this type of situation, Vredenburg and Hall (2005, p. 11) commiserate with managers, noting that stakeholders such as these “are often difficult to identify beforehand, or they may not be willing or able to engage, negotiate, compromise or clearly articulate their positions.” These communities justifiably need time and resources to develop better understandings of the implications of mining for their well-being, to develop community visions that may (or may not) include partnerships with firms, and to articulate negotiating positions with as much consensus as possible (Gibson & O’Faircheallaigh, 2010; Siebenmorgen & Bradshaw, 2011). Those that have found the time and resources, such as British Columbia’s Tahltan Tribal Council, have been able to develop their own mineral policies, which present to the world the precise terms under which they will entertain requests by firms to explore within their traditional territories, engage in dialogue about mine development possibilities, and perhaps offer support for a particular development plan (see Tahltan Tribal Council, 1987). Given this preparation, the Tahltan have been able

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to effectively negotiate agreements with mine developers like Barrick Gold to manage impacts and secure benefits. If responsible investors aim to support the rights and aspirations of indigenous communities like the Tahltan and reduce the uncertainties associated with mining investments, then greater recognition of, and support for, company community agreements would seem an appropriate approach. Such agreements may also effectively serve as proxies for many of the “community relations” expectations of responsible investors, evidence of which is presented next.

MEETING RESPONSIBLE INVESTORS’ COMMUNITY RELATIONS EXPECTATIONS: COMPANY COMMUNITY AGREEMENTS IN SUPPORT OF THE VICTOR AND MEADOWBANK MINES In Canada, the negotiation of agreements between companies and indigenous communities has been common for some time, with especially notable growth in the past decade. To many observers (e.g., Siebenmorgen & Bradshaw, 2011), these agreements are the natural outcome of a system that has long privileged mineral exploration and mine development on Crown lands, and disenfranchised the indigenous peoples on whose traditional lands such exploration and development occurs. Given the growing authority of indigenous communities in Canada as elsewhere, and especially their ability to impede the authorizing of regulatory permits (or, where necessary, simply block access to a work site), mining firms have found it to be in their commercial interest to establish agreements with communities proximate to their proposed developments. De Beers Canada’s Victor diamond mine, located in the James Bay lowlands of northern Ontario and constructed at a cost of $1 billion (relative to projected revenues of $3 + billion over a 12-year lifespan), has been responsible for three such agreements (De Beers Canada, 2013). In 1999, De Beers began formal consultation with the Attawapiskat First Nation, which led to the signing of a community-ratified IBA by 2005. Community-ratified agreements with the Moose Cree First Nation followed in 2006 and with the combined communities of Fort Albany and Kashechewan in 2009, one year after the mine began production. The 2006 agreement with the Moose Cree First Nation is one of few company community agreements to circulate publicly and is therefore drawn upon herein to reveal the degree to

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which its content meets the community relations expectations of responsible investors.6 A second publicly available agreement (except for its financial chapter, in which payments are specified) that is drawn upon in this section is one signed by Agnico Eagle Mines and the KIA in 2011 in support of the Meadowbank gold mine.7 The mine, located 70 km to the north of the Inuit Hamlet of Baker Lake in Nunavut, was constructed at a cost of $700 million (relative to projected revenues of $3 + billion over an 8-year lifespan) and began operations in 2010 (Agnico Eagle Mines, 2013). The property was purchased in 2007 for $750 million from Cumberland Resources, with whom the KIA first secured an agreement in 2006. The KIA is one of three regional Inuit authorities, which, under the terms of the Nunavut Land Claims Agreement, is empowered to negotiate Inuit Impact-Benefit Agreements (IIBAs). In other words, rather than negotiate with the Hamlet of Baker Lake, Agnico Eagle Mines was obliged to secure an agreement with a higher level, regionally oriented organization as per the institutional arrangements established by the Inuit themselves. If company community agreements are to serve as a proxy for many of the “community relations” expectations of responsible investors, agreements like the two signed in support of the Victor and Meadowbank mines must perform well according to the relevant criteria that responsible investors commonly use in their screening of firms. Here we draw upon the current “community relations” and “indigenous community relations” criteria of a leading ESG rating agency,8 and simply assess the degree to which provisions within the agreements satisfy each criterion. Of course, both De Beers Canada and Agnico Eagle Mines have developed corporatelevel community relations policies and programs that could be reviewed to determine the degree to which the below criteria are satisfied. Rather than complete such an exercise, which indeed is the regular practice of ESG rating agencies, the aim of this heuristic assessment is to be able to determine if the mere presence of a company community agreement might provide sufficient assurance to analysts of the corporate commitment to community relations. To offer such assurance, these agreements would have to score very well. Starting with the “community relations” criteria, Table 1 reveals mixed results. While one would expect that a company could not negotiate an agreement with an indigenous community without policies and guidelines for community consultations or relations in place, the agreements themselves do not identify such measures. Where they perform better is with respect to setting targets for community relations (e.g., employment goals)

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Table 1. The Degree to which Sustainalytics’ Community Relations Criteria Have Been Met by the Negotiation and/or Content of De Beers Canada’s IBA with the Moose Cree First Nation, and Agnico Eagle Mines’ IIBA with the Kivilliq Inuit Association. Sustainalytics’ Community Relations Criteria Community consultation or community relations • Policy • Guidelines • Targets • Managerial responsibility • Operation-specific responsibility Stakeholder identification system Consultation with groups that may be particularly affected or may not be properly represented by local decision makers (women, elderly, minorities) Consultation timing • Exploration stage • Ongoing throughout project’s lifecycle • Regular reflection on community relations plans Grievance mechanism Reporting on community consultation issues Capacity building for effective consultation

De Beers MCFN AEM KIA IBA IIBA

✓ ✓ ✓ ✓

✓ ✓ ✓ ✓

✓ ✓ ✓

✓ ✓ ✓ ✓ ✓

✓

and identifying those responsible for ongoing consultation and relations at both the corporate level (i.e., corporate signatories to the agreement) and operations level (i.e., the companies’ IBA implementation officers). Given the importance of identifying communities and their representatives in the negotiation of company community agreements, both agreements also perform well with respect to stakeholder identification. At the same time, the tendency of firms to respect the sovereignty of the indigenous party on the other side of the table means that firms may fail to identify and empower marginal voices. The inattention to women, the elderly, and minorities in the community consultation aspects of the two agreements explains their poor performance on this criterion. Where the agreements perform better is with respect to their many provisions that build capacity for effective communication, and enable ongoing communications and reflection on the status of company community relations, with an option to attend to grievances through a defined process. This is especially so of the Agnico Eagle Mine KIA agreement, which specifies annual reporting on community consultation.

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As revealed in Table 2, the two agreements perform better with respect to the “indigenous community relations” criteria. This, in part, reflects the fact that these criteria put greater emphasis on substantive commitments and activities, which the agreements are, by design, more oriented toward. This is especially true with respect to provisions in the agreements that ensure employment and business opportunities for community members, and revenue sharing with the indigenous signatory.9 Additionally, both agreements: recognize land rights; pay special attention to, and seek to mitigate, possible impacts on culture; and engage community members and draw on their traditional knowledge to monitor environmental conditions at the mine site relative to a baseline. Where some difference is evident is with respect to the cultural sensitivity of consultations and training; the Agnico Eagle Mines KIA agreement explicitly addresses this need. The De Beers Moose Cree First Nation agreement pays greater attention to culture in its identification and protection of culturally significant areas. In sum, the two company community agreements perform well relative to the “community relations” and “indigenous community relations” criteria of a leading ESG rating agency, whose criteria are recognized as progressive. Though some expectations were not met owing to a failure of

Table 2. The Degree to which Sustainalytics’ Aboriginal Community Relations Criteria Have Been Met by the Negotiation and/or Content of De Beers Canada’s IBA with the Moose Cree First Nation, and Agnico Eagle Mines’ IIBA with the Kivilliq Inuit Association. Sustainalytics’ Indigenous Community Relations Criteria Policy on • Indigenous people and land rights • Avoiding involuntary resettlement Consideration of impacts on indigenous culture and communal property rights Culturally appropriate consultation Use of participatory methods and traditional knowledge in baseline studies and monitoring Identification/protection of culturally sensitive areas Regular cross-cultural training for employees Programs and targets to provide jobs and business opportunities to indigenous people Revenue sharing through royalties, equity, or lump sum payments

De Beers MCFN AEM KIA IBA IIBA ✓

✓

✓

✓

✓

✓ ✓

✓ ✓

✓ ✓

✓

✓

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practice (e.g., the seeming absence of cross-cultural training provisions in the De Beers Moose Cree First Nation agreement), most failings were a function of design, in that the agreements themselves do not reiterate corporate policies and guidelines on community relations or consultations. This suggests that there may be limits to the use of company community agreements as a proxy for the “community relations” expectations of responsible investors. Nevertheless, the evidence presented here certainly supports expanded recognition and promotion of agreements by responsible investors. This prescription is especially reasonable given growing calls, including from responsible investors (e.g., Boreal Leadership Council, 2012), for extractive sector firms to acknowledge the right of indigenous communities to consent to developments within their territories. How reasonable is it to suggest that this call has been fulfilled by those companies that enter into agreements with indigenous communities in Canada? The next section turns to this question.

MINING EXECUTIVES’ RATIONALES FOR NEGOTIATING AGREEMENTS AND THEIR TACIT ACKNOWLEDGMENT OF FPIC Company community agreements in Canada’s mining sector are ubiquitous. This is a curious phenomenon given that, except in a few jurisdictions established through modern land claims such as Nunavut and the Tlicho territory, there is no legislation that explicitly compels mining firms to enter into agreements with indigenous communities proximate to or impacted by their proposed developments. These circumstances led to an effort in 2007 to survey the executives of those mining firms in Canada that had established such agreements in order to determine their rationales.10 The results of this survey are reported in this section alongside the results of a subsequent, more modest round of surveying of this same cohort in 2012 that sought to identify the degree to which mining executives viewed their negotiation of an agreement as tacit acknowledgment of the right of indigenous communities to offer their FPIC to developments within their traditional territories.11 As a precursor to completing the first round of interviews in 2007, public documents were reviewed for 14 of the 16 mining firms with active mines in Canada for which agreements with indigenous communities were negotiated.12 This review of company websites, reports, and press releases

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revealed, both explicitly and implicitly, a number of rationales for signing agreements. Consistent with their non-legislated status, just one company document identified pressure from governments as a reason for their indigenous community negotiations. In eight instances an ethical rationale was offered, most commonly using implied language about it being “the right thing to do.” In contrast, in 38 instances a business rationale was revealed, reflecting a variety of themes like reputation management and risk avoidance. Greater clarity around the business case for negotiating agreements was offered by interviews, which were completed with executives from 13 of the 14 firms invoked above.13 These interviews offered a total of 56 corporate rationales for company community agreements, of which 43 reflected a business case. Notably, the number of ethical explanations (4) was less than that suggested through document review (8) as it became clear that “doing the right thing” referred to the need for the company to build good relationships with communities and ultimately secure its social license. Indeed, this risk management explanation was most dominant in executives’ remarks. As one respondent put it, “IBAs are a ‘no-brainer’ in terms of good business and obtaining community support.” Though this social license could be achieved by simply maintaining good community relations and making regular community investments, as is the norm in jurisdictions where company community agreements are less common, executives were clear in identifying the added security granted by a contractual agreement. As one executive noted, “[non-contractual] relationships take time and effort, and sometimes end badly. IBAs help to address conflict and prevent [relationship collapse] from happening, thus benefiting the firm.” Though risk management was the dominant business case rationale, cost savings was invoked by some respondents. Executives noted that company community agreements can alleviate project costs by providing access to available workforces in remote regions. This explanation was especially relevant in 2007 at time when the labor supply was tight in Canada’s northern mining sector. Importantly, the interviews also revealed a greater role played by governments in companies’ negotiation of agreements than that suggested by the document review. Of the 56 explanations offered by mining executives, 9 invoked pressure from governments; as one respondent noted, there is a “huge expectation from the Government of Canada for companies to negotiate these agreements.” A key driver of this is the Supreme Courtmandated duty of the Crown to Consult and Accommodate First Nations, which one executive noted “often gets passed onto project proponents…it becomes part of the company’s application.” This Duty to Consult and .

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Accommodate is well understood in Canada’s legal community as a less onerous test than that posed by the right of indigenous community consent. Nevertheless, mining companies’ fulfillment of this duty on behalf of the Crown has typically involved the negotiation of agreements that appear to be about securing the consent of local indigenous communities. To what degree do executives who have signed these agreements accept this proposition? Surveying in 2012 to answer this question was completed with a fewer number of mining firms in Canada with active community agreements; indeed, with just six respondents (to date), the results presented here are not representative of the population of firms in Canada with active agreements (20 + ). Of the six firms that have participated in interviews, all affirmed the “IBA as FPIC” proposition. For De Beers Canada, affording indigenous communities the right of consent is already explicit policy. For the other five firms, respondents regarded their negotiations with communities in pursuit of a workable agreement as tacit acknowledgment of a community’s right to consent. Though frustration was expressed about the downloading of the Crown’s Duty to Consult and Accommodate to industry, all the executives were comfortable with their community negotiations being interpreted as recognition of the right of consent. This finding, coupled with the widespread invocation of the “social license” explanation in the 2007 round of executive surveys, offers considerable support for the argument that responsible investors with a genuine concern for the rights of indigenous communities would be well-advised to advocate for the growing use of company community agreements in the mining sector globally. Certainly challenges exist to ensure that such agreements fulfill the important qualifiers of consent as typically defined (e.g., Sosa, 2011) that it be freely, not coercively, offered, well in advance of any significant development, and based on information that is widely understood by all members of a community. To overcome these challenges, some insights can be gained from the Canadian experience with agreement-making, which offers examples where at least one of each of these important qualifiers has been achieved. In the case of negotiations between then Inco and the Labrador Inuit in support of the Voisey’s Bay mine, the significant length of time to reach a community-ratified agreement (seven years, and voted upon by all citizens aged 15 and older), coupled with the Labrador Inuit’s unprecedented securing of limits on winter shipping from the mine to protect winter ice travel by Inuit hunters, points to the remarkable bargaining power of the Labrador Inuit and suggests that their decision to consent to development

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was freely offered. Strong evidence of prior consent is presented by the case of NovaGold’s agreement with the Tahltan Central Council, which was signed in 2006 before permitting was secured, let alone construction was initiated; the project remains undeveloped. Finally, the negotiations between Wahgoshig First Nation and Detour Gold in support of the Detour mine in northern Ontario offer an exemplary case of informed consent given that the lead negotiator for the First Nation was able to meet each evening with nearly the entire populace of the community in order to brief them on the day’s negotiations and refine positions for the subsequent day of negotiations. Again, achieving all of these important qualifiers of consent in any one agreement is challenging, but these models and other sources of guidance (e.g., Gibson & O’Faircheallaigh, 2010; Siebenmorgen & Bradshaw, 2011) are increasingly being drawn upon to do so. With support from responsible investors, prospects could be further improved.

CONCLUSIONS This chapter has aimed to spark conversation among responsible investors about the use and utility of company community agreements in the mining sector in Canada and globally, with the hope that they might better be acknowledged and promoted. This aim has been pursued by: reviewing two veins of responsible investment, project financing and shareholder engagement, that could serve to, respectively, acknowledge company community agreements, and promote them; assessing the performance of two publically available agreements according to the “community relations” expectations of a leading responsible investment research firm; and exploring rationales offered by executives of firms that have signed agreements to determine the purpose of agreements from the company perspective and whether they offer tacit acknowledgment of the right of communities to consent to development. Though responsible investors have been aggressive in demanding improved environmental and social performance in the mining sector, corporate responses have sometimes been judged as significant at the policy level and insignificant on the ground. This muted response is problematic for responsible investors, not just because of the potential for social injustice, but also because it fails to reduce the riskiness of their investments. We suggest that improved performance might be better achieved through the empowerment of the communities that responsible investors seek to

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protect. The current approach to screening and engaging companies puts too much emphasis on the practices of companies as the sole determinant of company community relations. When communities are empowered through the development of community visions that can form the basis of community mineral policies and negotiation positions, they can play a greater role in determining company community relations and driving improved environmental and social performance. This has undoubtedly been achieved in Canada’s mining sector through, among other things, the growing use of company community agreements. While company community agreements are not without their complications, they are effective in forcing companies to move beyond community relations policies and programs, and deliver tangible outcomes. Indeed, the two company community agreements reviewed herein perform well relative to the “community relations” and “indigenous community relations” criteria of a leading ESG rating agency. While the mixed results preclude the option of using the mere presence of an agreement as a proxy, they surely support expanded recognition and promotion of agreements by responsible investors. Importantly, the assessment revealed that the agreements signed by De Beers Canada and Agnico Eagle Mines offer benefits and make provisions to their partner communities that exceed the current expectations of responsible investors, especially with respect to the recognition of the right of indigenous communities to offer their FPIC to mine developments proposed within their traditional territories. The executives of mining firms that have signed agreements in Canada are clear in identifying the need for a social license as a key driver of their agreement-making and are comfortable with their community negotiations being interpreted as recognition of the right of consent. Given this, responsible investors would be wise to pay greater attention to the use of company community agreements and even advocate for their use in the mining sector globally in order to reduce the riskiness of their investments and support the aspirations of communities.

NOTES 1. Famous examples include: Manhattan Minerals in Tambogrande, Peru in 2003 a US$ 59.3 million write down; Meridian Gold in Esquel, Argentina in 2005 a US $542.8 million write down; and Northgate Minerals at their Kemess North, BC site in 2007 a US $31.4 million write down. 2. For a complete list of agreements in Canada, see www.impactandbenefit.com

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3. Project finance is “a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure. Project finance may take the form of financing of the construction of a new capital installation, or refinancing of an existing installation, with or without improvements. In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPE (Special Purpose Entity) that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the project’s assets.” Source: Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards (“Basel II”), November 2005 (http://www.bis.org/publ/bcbs118.htm). Also cited in the Equator Principles: www. equator-principles.com 4. Such firms are listed in Calvert’s SAGE Strategy portfolios; SAGE stands for Sustainability Achieved through Greater Engagement. 5. This seems to be the case with Barrick Gold and its operations in Tanzania (see Newenham-Kahindi, 2011). 6. The authors’ copy was secured from Moose Cree First Nation personnel. 7. The authors’ copy was secured from Agnico Eagle mines personnel, though copies now exist publicly (see, e.g., www.miningnorth.com/wp-content/uploads/ 2011/11/MEADOWBANK-IIBA.pdf). 8. The criteria are drawn from Sustainalytics (see www.sustainalytics.com). 9. Though the financial chapter of the AEM KIA IIBA is excluded from the publicly circulated copy of the agreement, the existence of annual payments to the KIA is publicly reported. 10. This 2007 survey was completed by University of Guelph graduate student Dianne Lapierre and reported in conference proceedings (see Lapierre & Bradshaw, 2008). 11. This surveying was completed by Ben Bradshaw and University of Guelph undergraduate student Christine Biggelaar. 12. Public documents covering the agreements were not available for two firms. 13. One firm was unwilling to participate.

REFERENCES Agnico Eagle Mines. (2013). Meadowbank mine. Retrieved from www.agnicoeagle.com/en/ Operations/Our-Operations/Meadowbank/Pages/default.aspx. Accessed on September 1, 2013. Allen, R., Letourneau, H., & Hebb, T. (2012). Shareholder engagement in the extractive sector. Journal of Sustainable Finance and Investment, 2(1), 3 25.

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Bebbington, A. J., Hinojosa, L., Bebbington, D. H., Burneo, M. L., & Warnaars, X. (2008). Contention and ambiguity: Mining and the possibilities of development. Development and Change, 39(6), 887 914. Boreal Leadership Council. (2012). Free, prior, and informed consent in Canada. Ottawa, Ontario. Retrieved from http://www.borealcanada.ca/lead-council-e.php Caine, K., & Krogman, N. (2010). Powerful or just plain power-full? A power analysis of impact and benefit agreements in Canada’s north. Organization & Environment, 23(1), 76 98. Coumans, C. (2010). Alternative accountability mechanisms and mining: The problems of effective impunity, human rights, and agency. Canadian Journal of Development Studies/Revue canadienne d’e´tudes du de´veloppement, 30(1 2), 27 48. David, P., Bloom, M., & Hillman, A. (2007). Investor activism, managerial responsiveness, and corporate social performance. Strategic Management Journal, 28, 91 100. De Beers Canada. (2013). Victor mine. Retrieved from www.canada.debeersgroup.com/ Mining/Victor-Mine/. Accessed on September 1, 2013. Emel, J., & Huber, M. (2008). A risky business: Mining and the neoliberalization of risk. Geoforum, 39(3), 1393 1407. Fidler, C. (2010). Increasing the sustainability of a resource development: Aboriginal engagement and negotiated agreements. Environment, Development and Sustainability, 12, 233– 244. Galbraith, L., Bradshaw, B., & Rutherford, M. (2007). Towards a new supraregulatory approach to environmental assessment in northern Canada. Impact Assessment and Project Appraisal, 25(1), 27 41. Gibson, G., & O’Faircheallaigh, C. (2010). IBA Toolkit: Negotiation and implementation of impact and benefit agreements. Toronto: Walter and Duncan Gordon Foundation. Goodland, R. (2012). Responsible mining: The key to profitable resource development. Sustainability, 2099 2126. Hamann, R. (2003). Mining companies role in sustainable development: The ‘why’ and ‘how’ of corporate social responsibility from a business perspective. Development in Southern Africa, 20, 237 254. Hebb, T., Hachigian, H., & Allen, R. (2011). Measuring the impact of engagement in Canada. The next generation of responsible investing. Dordrecht, Netherlands: Springer Publishing. Hebb, T., & Wojcik, D. (2005). Global standards and emerging markets: The institutional investment value chain and the CalPERS investment strategy. Environment and Planning A, 37, 1955 1974. Henisz, W. J., Dorobantu, S., & Nartey, L. (2011). Spinning gold: The financial returns to external stakeholder engagement. Academy of Management Proceedings, 1, 1 6. Hilson, G., & Murck, B. (2000). Sustainable development in the mining industry: Clarifying the corporate perspective. Resources Policy, 26, 227 238. International Finance Corporation (IFC). (2012). IFC performance standards on environmental and social responsibility. International Finance Corporation, p. 72. International Union for the Conservation of Nature (IUCN) and the International Council on Mining and Minerals (ICMM). (2008). Mining and Indigenous peoples issues roundtable: Continuing a dialogue between Indigenous peoples and mining companies. IUCN and ICMM, 30 31 January, Sydney, Australia. Jenkins, H., & Yakovleva, N. (2006). Corporate social responsibility in the mining industry: Exploring trends in social and environmental disclosure. Journal of Cleaner Production, 14, 271 284.

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Lapierre, D., & Bradshaw, B. (2008) Corporate rationales for negotiating impact and benefit agreements. Paper presented at the Canadian Institute of Mining, Metallurgy and Petroleum Annual Meeting Technical Program, Montreal, Quebec. Mining, Minerals and Sustainable Development. (2002, May). Breaking new ground: The report of the Mining, Minerals and Sustainable Development Project. London: Earthscan. Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853 886. Newenham-Kahindi, A. M. (2011). A global mining corporation and local communities in the lake Victoria zone: The case of Barrick Gold multinational in Tanzania. Journal of Business Ethics, 99(2), 253 282. O’Faircheallaigh, C. (1999). Making social impact assessment count: A negotiation-based approach for indigenous peoples. Society and Natural Resources, 12, 63 80. O’Faircheallaigh, C. (2000). An Australian perspective on impact and benefit agreements. Northern Perspectives, 25, 4. O’Faircheallaigh, C. (2010). Aboriginal-mining company contractual agreements in Australia and Canada: Implications for political autonomy and community development. Canadian Journal of Development Studies, 30(1 2), 69 86. Prno, J., Bradshaw, B., & Lapierre, D. (2010). Impact and benefit agreements: Are they working. In Proceedings of the Canadian Institute of Mining, Metallurgy and Petroleum annual meeting, Vancouver. Prno, J., & Scott Slocombe, D. (2012). Exploring the origins of ‘social license to operate’ in the mining sector: Perspectives from governance and sustainability theories. Resources Policy, 37(3), 346 357. Siebenmorgen, P., & Bradshaw, B. (2011). Re-conceiving impact and benefit agreements as instruments of Aboriginal community development in northern Ontario. Oil, Gas, & Energy Law, 4. Sosa, I. (2011). License to operate: Indigenous relations and free prior informed consent in the mining industry. Sustainalytics. Retrieved from www.sustainalytics.com/sites/default/ files/indigenouspeople_fpic_final.pdf. Accessed on February 22, 2012. Sosa, I., & Keenan, K. (2001). Impact benefit agreements between aboriginal communities and mining companies: Their use in Canada. Ottawa: Canadian Environmental Law Association. Tahltan Tribal Council. (1987, April 7). Resource development policy statement. Retrieved from www.tahltan.org/sites/tahltan.org/files/TTC%20Devopment%20Policy%201987. pdf. Accessed on February 10, 2010. Thomson, I., & Boutilier, R. (2011). The social license to operate. In P. Darling (Ed.), SME mining engineering handbook (pp. 1779 1796). Littleton, CO: Society for Mining, Metallurgy and Exploration. Viviers, S., & Eccles, N. (2012). 35 years of socially responsible investing (SRI) research General trends over time. South African Journal of Business Management, 43(4), 1 16. Vredenburg, H., & Hall, J. (2005). Managing stakeholder ambiguity. MIT Sloan Management Review, 47(1), 11 13. Weber, O., & Banks, Y. (2012). Corporate sustainability assessment in financing the extractive sector. Journal of Sustainable Finance and Investment, 2(1), 64 81.

PART IV SRI DEVELOPMENTS: VALUES AND GOVERNANCE

ETHICS, POLITICS, SUSTAINABILITY AND THE 21ST CENTURY TRUSTEE Steve Lydenberg ABSTRACT Purpose This chapter describes a number of the ethical, political, and sustainability implications inherent in the investment process; clarifies when and to what extent these implications can manifest themselves; and examines the circumstances under which trustees might wish to consider the relation these implications to the management of their assets. Methodology/approach The arguments made in the chapter are theoretical and based on analyses of historical concepts of fiduciary duty and investment management. Findings The chapter concludes that in seeking to achieve their primary tasks of acting in beneficiaries’ interests and preserving assets and income, trustees may wish to consider the ethical, political, and sustainability implications of their investment decisions in the light of broadly accepted norms or scientific consensus. If trustees choose to incorporate these considerations, their decisions should be commensurate with the levels of concern raised by these issues, be potentially effective,

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 197 213 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007008

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not impair financial goals, and not require excessive expenditure of resources. Research and practical implications The conclusions of the chapter imply that trustees acting on beneficiaries’ behalf may wish to assess the broad-based, value-creation potential of their investment decisions along with the potential of these decisions to impact portfolio performance relative to asset-specific benchmarks. Considerations of value creation can be in beneficiaries’ interests to the extent that they contribute to strong economies, safe and livable societies, and the preservation or enhancement of natural resources. Additional research is needed to elaborate on how consideration of these types of value creation affects asset allocation and specific security selection, along with its impacts on short-term and long-term financial returns. Originality of chapter This chapter reflects on the role of ethical, political, and sustainability (EPS) concerns in investment processes. Specifically it considers why, when, and how EPS concerns might be considered by trustees. Keywords: Responsible investment; fiduciary duty; value creation; investment management theory

INTRODUCTION Those entrusted with the management of the financial assets of others the trustees of pension funds, sovereign wealth funds, life insurance companies, bank trust departments, and mutual funds among others are legally responsible for managing these assets with prudence, loyalty, and care and for avoiding investment decisions that put their personal interests above those of their beneficiaries, while at the same time treating impartially beneficiaries who may have competing interests. Because incorporation of ethical, political, or sustainability (EPS) considerations complicates the already complicated job of money management, it has been often argued that there are no rational grounds for considering them.1 The only rational approach, so the argument goes, is to make investments that maximize the returns of beneficiaries’ portfolios by whatever means possible short of the illegal whatever the ethical, political, or sustainability implications of those decisions might be outside the portfolio.

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This approach, however, leaves trustees in the uncomfortable position of having to separate their investment decisions from the implications of these decisions in their beneficiaries’ world. It is nevertheless intuitively obvious that ethical, political, and sustainability considerations arise in investment processes because it is intuitively obvious that investment decision-making takes place in an ethically, politically, and sustainably complicated world. The argument that investment decisions can be divorced from this reality, that the collective decisions of trustees acting within the financial community do not or cannot have profound long-term consequences for the stability and prosperity of the economic, social, and environmental systems not to mention the capital markets upon which their beneficiaries depend for prosperous and fulfilling lives, is, I would argue, simply unrealistic. The more realistic question is why, when, and how EPS concerns should appropriately be considered, evaluated, and acted upon by trustees. In this reflective chapter I will addresses this question in three parts. • What is the goal of investments made on behalf of beneficiaries? • When is it appropriate to consider and act on EPS issues? • How is it appropriate to act on EPS issues? Before addressing these questions, the chapter summarizes briefly the historical evolution of the debate about the proper role of ethical, political, and sustainability concerns in investment. Those familiar with this history may wish to skip directly to Part Two below.

PART ONE: A BRIEF HISTORY OF THE EPS ASPECTS OF INVESTMENT Ethical considerations have been part of debates about investment as far back as the 18th century when John Wesley, founder of the Methodist movement, preached that you should “gain” all you can with your money “without hurting either yourself or your neighbor, in soul or body” (1872 edition). In the early 1970s, socially responsible or ethical investors took to task companies involved in war, discrimination, and environmental pollution. In the 1980s, they were joined by institutional investors participating in the worldwide South Africa divestment movement motivated by a desire to do no harm (i.e., not profit from apartheid) and to bring about political

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change (i.e., apartheid’s dismantlement).2 The 1980s also saw a number of public pension funds in the United States seek to improve the local economies in which their beneficiaries were living by launching “economically targeted investment” (ETI) funds that supported local affordable housing and small businesses development.3 These institutional investment policies and practices, with their ethical and political overtones, provoked fierce criticism from some in the mainstream investment community. These criticisms arose within the context of a growing concern about potential corruption and abuse in the management of the rapidly growing public and private pension funds, and hence their increasing power and influence. From as early as the 1960s, self-dealing and other conflicts of interest by pension fund trustees had made these dangers clear.4 This concern about abuse was in part responsible for the 1974 passage of the Employee Retirement Income Security Act which directed the trustees of corporate pension funds insured by the Federal government to take into account in investment decisions only factors related to “the interests of participants and beneficiaries in their retirement income.” In 1994, the U.S. Department of Labor issued a bulletin, clarifying this law. The Department has construed the requirements that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives.5 (Emphasis added)

The fear was both that trustees might use the assets of these pension funds for their self-interest or to promote personal political agendas and that they might fall under the influence of unscrupulous politicians, corporate managers, or purveyors of Wall Street products hoping to capture these assets and use them for purposes other than the preservation of beneficiaries’ retirement income. These critics often characterized ETIs, as well as social investment policies such as South Africa divestiture, as politically influenced investing in which trustees treated pension fund assets as “‘free’ money or money belonging to someone other than the beneficiaries” and used those funds to promote their own personal “political” interests (see, e.g., Romano, 1993). They also argued that these investments resulted in sub-optimal riskadjusted portfolio-level returns. While critics were arguing that ethics and political considerations had no place in the decision-making of financial fiduciaries, the powerful vocabulary of sustainable development was introduced into the investment

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world in part through the Brundtland report, which famously advocated “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987). Sustainability advocates cast financial decision-making in the framework of a triple bottom line with planet (environment), people (society), and profits (finance) as its three pillars. The sustainability theme, along with concerns about corporate governance, attracted increased attention from institutional investors during the 1990s. By the 2000s, many had begun to consider the incorporation of environmental, social, and governance (ESG) data into their investment processes to enhance portfolio returns. Because they believed these considerations helped financial performance they saw no conflict with fiduciary duty.6 By the 2010s the Principles for Responsible Investment (PRI) a coalition of asset managers and owners committed to the principle that ESG data can help securities selection by providing information about unrecognized risks and rewards had over 1,000 signatories controlling more than $30 trillion in assets. In addition PRI signatories expressed the belief that the use of ESG data in investment decision-making “may better align investors with broader objectives of society.”7 As we enter the second decade of the 21st century, the debate about the role of ethics, politics, and sustainability in investment is far from resolved. Some argue that consideration of ethics has a rightful and necessary place in the exercise of fiduciary duties. Benjamin Richardson, for example, argues for a revitalization of the commitment to ethical principles by socially responsible investors: While business case SRI [socially responsible investing] is becoming popular, it risks perpetuating business-as-usual and reducing the SRI movement’s capacity to leverage lasting change for environmental sustainability … An ethical view helps decisionmakers to understand and improve human behavior, providing additional grounds to act when, for instance, the financial incentives are deficient. (2009)

Others favor an approach based on the concept of sustainability only. Woods and Urwin (2010) view sustainable investing with its “focus on intergenerational equity and the long term” as a legitimate approach for pension fund trustees with “much to add to pension fund investment,” but believe that investing that focuses “on the promotion of ethically sound corporate behavior through techniques such as negative screening and engaged ownership” is “generally undesirable from a fiduciary’s perspective.” Still others promote the incorporation of ESG data solely in the context of stock valuation, with an increasing number of mainstream

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investment houses from Goldman Sachs to Unicredit having developed systems for integrating ESG data into stock valuation models.8

PART TWO: WHY, WHEN, AND HOW ETHICAL, POLITICAL, AND SUSTAINABILITY CONCERNS PLAY A ROLE IN INVESTMENT DECISION One source of confusion in the debate about the role that ethics, politics, and sustainability play in investment is the unrealistic assumption that the “financial” and nonfinancial implications of investment can be separated or put differently, that it is possible to make investments that have only financial impacts and implications. A more realistic assumption is that ethical, political, and sustainability impacts inevitably occur as the result of many, if not all, investment decisions and are inseparable from these decisions. The proper question for trustees is not if they can successfully separate the world of investments from a world involving ethics, politics, and sustainability, but when and how it may be appropriate to act on these EPS considerations.

What Is the Goal of Investments Made on Behalf of Beneficiaries? When beneficiaries entrust their assets to the care of trustees, they have a reasonable expectation that these assets, and the ability of these assets to generate income, will be preserved through prudent management. This goal has been a continuing theme in case law over the years. In the seminal ruling on the duties of trustees in the 1830 case Harvard College v. Amory, the courts instructed trustees “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested”9 (emphasis added). This principle was reaffirmed on into the 20th century in such documents as the 1959 Restatement of the Law Second, Trusts, issued by the American Law Institute, which stated that the duty of financial fiduciaries is “to make such investments and only such investments as a prudent man would make of his own property having in the view the preservation of the estates and the amount and regularity of the income to be derived” (Halbach, 1991 1992) (emphasis added).

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If the goal of trustees were to consist solely of returning to beneficiaries the exact same assets that were entrusted to them, their task would be simple. Assets placed in a safebox would be returned to beneficiaries unchanged at the appropriate time. The job of trustees, however, is more complicated. Assets entrusted to them may not be preserved if they decline in relative value. That is to say, there may be changes in the value of one asset class relative to another (the value of real estate increases or decreases relative to gold); one security relative another within an asset class (one property or one stock becomes worth more or less than another); or in the purchasing power of the assets and income derived from these assets (a given amount of cash can’t buy the same goods and services that it could last year). To preserve their beneficiaries’ assets and income, trustees need to understand what is happening in the world outside the safebox and manage those assets within the safebox appropriately relative to the outside world. As one legal scholar has noted, “The prudent investor rule views ‘safety’ or ‘preservation’ of trust capital as ordinarily including an objective of protecting purchasing power from the risks of inflation” (Halbach, 1991 1992, p. 1172). Inflation or put differently, the deflation of the financial value of beneficiaries’ assets can come from the deterioration of various conditions in the world outside the safebox (i.e., the portfolio) that involve ethical, political, or sustainability considerations. The cost of drugs may rise due to political factors unique to the pharmaceutical industry. Water bills may increase disproportionately due to political and sustainability developments affecting this increasingly scarce resource. Property and casualty insurance may skyrocket due to emerging climate change concerns. The cost of retirement housing may rise due to security factors. Weakened governments or bankrupt corporations may no longer be able to pay their share of retirement benefits. The deterioration of conditions in the world in which beneficiaries live can be the cause of an inflationary devaluation of their assets. Beneficiaries will feel that their assets and income have been well preserved if, when they regain possession of them from trustees, the financial value of these assets and their ability to realize benefits in the world is at least as great as when they entrusted them to these trustees. They will see the management of their assets and its income as a failure if both the financial value of their portfolio and income and the ability of these assets and income to realize benefits have deteriorated. If the financial value of their portfolios and its income has been preserved but their ability to realize benefits in the world deteriorates, or vice versa, the results will have been mixed from beneficiaries’ point of view.

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Both the returns of portfolios internal to the safebox and the conditions in the world external to that safebox are material for trustees in achieving their long-term goal of preserving or enhancing assets. For beneficiaries, however, only one of four different outcomes can be viewed as a complete success. That is to say, a fiduciaries duty can be said to be an unqualified success if the assets in the safebox have been preserved and the ability of those assets to retain their value in the world outside has similarly been preserved. If trustees can be held responsible for the management of the financial returns of the portfolios into which they have invested beneficiaries’ assets, can these investment decisions also be held responsible for conditions of the world in which their beneficiaries live to any meaningful extent? Those arguing that finance can be kept separate from EPS considerations do so fundamentally on the grounds that trustees of individual portfolios do not and cannot meaningfully affect conditions in the world of their beneficiaries. This position involves what Keith Johnson terms an “artificially bounded perception of reality.”10 That is to say, it assumes that, for trustees, reality does not extend beyond their portfolios. Trustees taking this position choose not to acknowledge that in today’s world there are many similar trustees with many similar portfolios making many similar investment decisions on behalf of many similar beneficiaries. Collectively, these trustees are responsible for the management of tens of trillions of dollars of assets. As of 2012, the worldwide cumulative value of pension fund assets in the 13 largest financial markets alone totaled some $30 trillion.11 Sovereign wealth funds were also among the largest institutional investors in the world with approximately $5.3 trillion in assets under management.12 Trustees also oversee the investment of additional assets held within the huge mutual fund, bank trust, and insurance industries. We now live in what can be reasonably termed a “fiduciary economy” one in which the vast majority of financial assets in the world are invested by trustees in their fiduciary capacity.13 Investment decisions made collectively by these trustees have enormous impact on the world in which their beneficiaries live. These trustees’ investment decisions can exacerbate, or help address, problems in the complex financial, social, and environmental systems that make up today’s world’s economy. They can destabilize the world of finance, creating volatility and profit-extracting short-termism, or they can help it operate with a long-term perspective that preserves and creates shared wealth. They can exacerbate shortages of natural resources and climate change-related disasters, or they can help preserve and sustain the natural wealth upon which the world depends for prosperity and even

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survival. They can disrupt or destroy local economies or they can help preserve and build them. To preserve and enhance their beneficiaries’ assets in the context of a fully bounded perception of this reality, rather than one artificially bounded at the portfolio level, trustees must understand how their investment decisions can collectively, if not singly, help preserve and enhance these systems. Those who believe they can do their job by focusing solely on maximizing risk-adjusted portfolio returns relative to a benchmark or matching that benchmark at low cost without involving EPS considerations are in effect asserting that they can preserve the objective value of the assets entrusted to them without reference to that outside world. By artificially restricting the goal of investment to beating or matching the market at the portfolio level, trustees may make beneficiaries feel good in the sense that they know if their portfolios have performed better (or worse) than those of their peers or that they have saved on fees while doing as well as others. Trustees, however, ought also to strive to preserve the objective well-being that their beneficiaries can derive from their assets and income once they are returned to them. Unless they do so, trustees will find themselves ignoring questions such as: • Have investments in major pharmaceutical companies whose stocks perform well contributed to a rise in the cost of drugs that beneficiaries will not be able to bear? • Have investments in highly profitable residential real estate properties operated by slum landlords contributed to the deterioration of cities in which beneficiaries live? • Have investments in natural resources or chemical firms that are profitable today created costly environmental liabilities from ozone depletion to climate change that will prove incalculably costly for future beneficiaries? • Have investments in agricultural commodities futures contributed to the rise of price of wheat and rice around the world that takes food out of the mouths of the poor, including beneficiaries? • Have investments in companies involved in the manufacture of nuclear weapons or whose business facilitates the international spread of nuclearweapons technologies made the world a less safe place for beneficiaries to live in? • Have investments in companies that avoid paying their fair share of taxes so weakened governments that they must cut substantially the retirement

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benefits and medical coverage of the very beneficiaries for whose retirement trustees are making these investments? • Do outsized money-management fees for hedge funds, private equity firms or other service providers contribute to the corrosive inequalities of wealth that are eating away at the social fabric of our society today? James Hawley describes questions of this type as addressing concerns about the “risk-adjusted income” of beneficiaries.14

When Is it Appropriate to Consider and Act on EPS Issues? Assuming that trustees recognize that it can be appropriate to take ethical, political, and sustainability concerns into consideration, how are they to know which of the myriad issues that arise in this complicated world are appropriate for consideration and under what circumstances? It is a classic conflict of interest for trustees to use beneficiaries’ assets for their own financial benefit. Similarly, it would be inappropriate for trustees to use beneficiaries’ assets to promote self-interested ethical beliefs, political affiliations, or sustainability agendas that would accrue benefits to themselves rather than to their beneficiaries. Trustees will inevitably have personal, subjective opinions about EPS issues, just as they have personal, subjective opinions about how to conduct their own finances. However, they can, and should, set aside these personal biases, while at the same time exercising reasoned judgment about the objective validity of the EPS considerations they take into account and the objective ability of these considerations to preserve beneficiaries’ assets and income. If an EPS issue has, through broad debate and reasoned discussion what the economist Amartya Sen refers to as the process of “public reasoning” achieved a reasonable level of consensus then it can be regarded by trustees as having objective validity.15 To promote one’s own personal views, consultation with others (i.e., public reasoning) is not necessary. Ideas that are not simply a reflection of one’s personal biases, by contrast, can stand up to the test of informed debate in the broadest possible forums. Examples of this type of informed debate are the global dialogues that have resulted in approval of international treaties and norms such as the United Nations Declaration of Human Right, the International Labor Organization’s core conventions on labor rights, the Treaty on the Non-Proliferation of Nuclear Weapons, and similar standards.

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A second means of identifying objective considerations is scientific evidence, an approach that can be particularly helpful for sustainability issues. For climate change, for example, although the complications of international politics have to date limited adoption of treaties on reductions in greenhouse gas emissions, a broad scientific consensus exists on the relationship between these emissions and global warming. Similarly, scientific research has established the harmfulness of tobacco, leading to World Health Organization guidelines on the marketing of tobacco products.16 In addition, trustees can look to such widely recognized goals and aspirations as those embodied in the United Nations’ Millennium Development Goals as objective guides to identify positive goals that can benefit the world in which their beneficiaries live. Underlying such positive considerations is the principle that along with the accumulation of wealth comes a “unidirectional” obligation to create positive opportunities for those without such resources. As Sen describes it, Mutual benefit, based on symmetry and reciprocity, is not the only foundation for thinking about reasonable behavior towards others. Having effective power and the obligations that can follow unidirectionally from it can also be an important basis for impartial reasoning, going well beyond the motivation of mutual benefits.17

Furthermore, trustees have an obligation to preserve the trust that beneficiaries place in the institution of the fiduciary itself. As Edward Waitzer points out, we are now living in a “fiduciary society” where we are increasingly interdependent and must trust the expertise of others, and consequently those with fiduciary expertise must act in ways that preserve that trust. The rise of the fiduciary society, in this sense, is a classic nonzero-sum game, where every player can benefit, but only so long as these players co-operate with one another. If fiduciaries breach their duties and beneficiaries lose trust in fiduciary services and sever their relationships with fiduciaries, the game fails and everyone loses. (Waitzer & Saro, 2013)

One implication of this argument is that trustees in their fiduciary capacity should not make decisions that would shake beneficiaries’ trust in them even these decisions might appear to be in beneficiaries’ “pecuniary interests” narrowly construed. Such trust may be shaken in situations where an intuitive disconnect exists between trustees’ assertions that their investment decisions make financial sense at a portfolio level and beneficiaries’ perception that these same decisions are impoverishing the world in which they live. School teachers, for example, might lose faith in the trustees of their retirement funds who have invested in the manufacturers

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of the handguns that are terrorizing or killing their students, even if or especially if these investments are profitable. Jon Elster has pointed out a number of ways that self-interested individuals might nevertheless promote their personal agendas while appearing objective and impartial. First, there are many conceptions of impartiality, some appealing to individual rights, others to the notion of fairness or to choice behind the veil of ignorance. In any given case, the implications for action may be extremely diverse … . Second, every political decision of any importance is intertwined with questions of social causality on which very diverse positions can be defended with a certain degree of plausibility … Thus an agent would have to be either very inept or very unfortunate not to be able to find some combination of normative principles and causal chains that would allow him to present his passion or his particular interest in an impartial light. (2009)

Elster cites two “constraints” that can help assure that those claiming impartiality do not promote self-interests at the expense of others. The first is that of consistency. If trustees incorporate broadly accepted norms or standards into their investment processes, they should do so consistently. The second is what Elster calls the “constraint of imperfection” by which he means that one’s personal desires cannot appear to be too closely aligned with one’s impartial decisions. That is to say, trustees should not cherry-pick a limited number of EPS concerns aligned with their personal concerns, while leaving aside all others. Recognizing that EPS concerns may be objectively helpful in preserving or enhancing the ability of assets and income to provide benefits in context of the world in which beneficiaries live does not mean that trustees will always act on that recognition. For example, trustees have a duty to assess the potential impact of EPSrelated actions on the preservation or enhancement of the financial value of the funds in their beneficiaries’ portfolios. If they believe that an action contemplated is likely preserve or increase the financial value of these portfolios, evaluating EPS-based actions poses no challenges. If they believe these actions have the potential to negatively affect the financial value of their portfolios, trustees will want to consider the extent of that possibility carefully. That sufficient diversification can, in various circumstances, be achieved to permit competitive returns while allowing EPS considerations to play a role in buy/sell decisions has been demonstrated by Lloyd Kurtz and Dan DiBartolomeo. In a 2011 study they found that, after adjusting for risk factors, a longstanding U.S. social investment index that used EPS criteria to disqualify approximately half the companies in the Standard & Poors’

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500 Index generated returns statistically indistinguishable from the S&P 500 over an 18-year time period (Kurtz & DiBartolomeo, 2011). Trustees will also want to consider the potential effectiveness of contemplated actions. The more likely the action is to be effective in preserving or enhancing the stability, economic prosperity or environmental sustainability of the worlds in which beneficiaries live, the more inclined trustees may be to pursue it. EPS considerations likely to be broadly effective in this regard include, for example, investments in access to telecommunications, health care, information technology, and financial services for those at the bottom of the pyramid, with their ability to produce widespread economic and social benefit. Trustees will also want to consider the resources available to them to put potential actions into effect. The number of EPS considerations on which trustees might act is vast. These actions require varying commitments of often scare resources. Trustees might choose, for example, to join well established, broad-based coalitions of investors addressing EPS issues, such as CDP (formerly the Carbon Disclosure Project) where resource commitments are minimal relative to the coalition’s potential effectiveness.

How Is it Appropriate to Act on EPS Issues? Having acknowledged that at times EPS concerns arise as part of investment decision-making and that action on these EPS concerns can be appropriate, trustees then need to consider the range of actions available. Requests for additional disclosure of EPS-related data are among the simplest of these actions. This approach is particularly appropriate when the specifics of companies’ EPS policies and practices are not disclosed; companies have not fully analyzed the implications of various EPS issues for their operations; or further data is needed to compare companies’ EPS records with those of their peers. Data obtained through these requests at relatively little cost to trustees can then serve as the basis for dialogue with companies, comparative assessments of the companies’ performance, or stock valuation. Dialogue and engagement with companies on EPS issues is a second type of action that trustees might consider. Through engagement they can seek to alter corporate managements’ policies and practices in ways that help preserve the ability of their beneficiaries’ assets to provide benefits in the world in which they live. Trustees can undertake such engagement

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either independently or in conjunction with others. Dialogue and engagement require the establishment of trust between corporations and investors before they result in productive action, an often time-consuming process. A third category of action that trustees might consider involves the use of standards setting, ratings, and rankings, often undertaken in conjunction with stock valuation or buy/sell investment decisions. A number of variations on this approach to encouraging changes in corporate behavior are currently used. • Standards based on internationally accepted norms. This approach encourages companies to reach or exceed minimum absolute standards of broadly recognized ethical behavior in matters of EPS concern. The FTSE4Good series of responsible investment indexes, for example, bases its criteria for company selection on broadly recognized norms and standards in areas such as human rights, the environment, stakeholder relations, vendor standards, and bribery. If companies meet criteria indicating compliance with these norms, they are included in the FTSE4Good indexes. Periodically the thresholds for meeting these criteria are raised, encouraging continuous improvement.18 • Standards based on best-in-class ratings and rankings. This approach relies on companies’ competitive instincts to be considered best among their peers on matters of EPS concern and uses that instinct to draw their attention to indicators of environmental and social excellence specific to their industries. The Dow Jones Sustainability Indices, for example, use a scoring system for corporate performance on environmental, social, and economic issues to rate and rank corporations. It then includes in its sustainable investment indices the top 10 percent of companies by score in the rankings within each industry.19 • Integration of ESG information into stock valuation. The ESG-integration approach relies on the principle of efficient asset allocation and companies’ concern about maintaining their stock price to drive corporate management to incorporate ESG considerations into their daily operations. Signatories of the Principles for Responsible Investment, for example, have stated that they “believe that environmental, social, and corporate governance issues can affect the performance of investment portfolios” and therefore seek ways to integrate this data into their stock valuation, stock selection, and portfolio construction processes.20 • Impact investment. In this approach, investors “intentionally” seek a combination of financial and social returns from projects that may serve the bottom of the pyramid or other sectors of society not typically served

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by conventional investments. Impact investors encourage detailed measurement of the positive investments outcomes (e.g., job created, energy efficiency attained, assets accumulated, etc.) and promote the creation of companies with the mission of serving all stakeholders.21

CONCLUSION Because the investment decisions of financial trustees take place in the context of a world in which their beneficiaries live, ethical, political, and sustainability considerations inevitably arise. Their investment decisions will therefore have, to varying degrees, ethical, political, or sustainability implications for these beneficiaries. Trustees should acknowledge and understand these implications and consider when and how it is appropriate to act upon them. As they work to preserve or enhance their beneficiaries’ assets and income in the context of the financial, economic, social, and environmental systems within which their beneficiaries live and upon which they depend for fulfilling and prosperous lives, trustees may rely in part on broadly accepted norms, standards, and scientific consensus to objectively assess considerations of these implications. If in their best judgment it is appropriate to act on these considerations, their actions should be commensurate with the levels of concern raised by these issues, should be potentially effective, should not unreasonably affect financial performance, and should not require excessive expenditure of resources.

NOTES 1. A specific definition of the terms ethics, politics, and sustainability (EPS) is not proposed here, recognizing that precise definitions of these terms are broadly debated and varied. Instead these terms are used to capture to a broad class of issues that in this debate are often referred to as “nonfinancial.” Nonfinancial as a term purports to distinguish one set of concerns that is, qualitative issues related to ethical traditions, legal concepts of justice, fairness and negligence, debates about public policy, the preservation and enhancement of the natural environment, and the like from a second category that is, quantitative measurements associated with the financial aspects of company profits, stock and portfolio returns and the like. EPS is used here to refer to that broad class of issues sometimes referred to as nonfinancial.

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2. For an account of the South Africa divestment movement, see Massie (1997). 3. For an argument in favor of this use of pension assets, see Rifkin and Barber (1978). 4. For an account of one example, see Walsh (2004). 5. Department of Labor, Interpretive Bulletin §2509.94-1 (29 CFR 2509.94-1). 6. See, for example, Freshfields Bruckhaus Deringer (October 2005). Also known as the “Freshfields Report.” 7. From the preface to the PRI’s Six Principles. Retrieved from http://www. unpri.org/about-pri/the-six-principles/. Accessed on May 3, 2013. 8. For an account of many of these varied initiatives, see, for example, Lydenberg (2012). 9. 9 Pick. (26 Mass.) 446 (1830). 10. Keith Johnson heads the Institutional Investor Legal Services team at Reinhart Boerner Van Deuren s.c. Correspondence with the author, April 25, 2013. 11. See http://www.towerswatson.com/en/Press/2013/02/Global-pension-fundassets-hit-record-high-in-2012. Accessed on May 1, 2013. 12. See http://www.swfinstitute.org/fund-rankings/. Accessed on May 2, 2013. 13. For an account of the role of institutional investors in this world of fiduciary capitalism, see Hawley and Williams (2000). 14. James Hawley is a professor at the St. Mary’s University Graduate Business Program and Director of the Elfenworks Center for the Study of Fiduciary Capitalism. Correspondence with the author, April 28, 2013. 15. For a discussion of public reasoning, see Sen (2011). 16. See the World Health Organization’s website at http://www.who.int/tobacco/ tobacco_free_youth/home.html. Accessed on March 23, 2013. 17. Sen (op. cit., p. 207). 18. For details on the FTSE4Good’s inclusion criteria, see http://www.ftse.com/ Indices/FTSE4Good_Index_Series/Downloads/FTSE4Good_Inclusion_Criteria.pdf. Accessed on March 7, 2013. 19. For details on the Dow Jones Sustainability Indices rating and ranking processes, see http://www.djindexes.com/sustainability/. Accessed on March 7, 2013. 20. See the website of the Principles for Responsible Investment for details on their six basic beliefs at http://www.unpri.org/about-pri/the-six-principles/. Accessed on March 7, 2013. 21. For a description of impact investments as an asset class see J. P. Morgan Global Research Impact Investments: An Emerging Asset Class at http://www.rocke fellerfoundation.org/uploads/files/2b053b2b-8feb-46ea-adbd-f89068d59785-impact. pdf. Accessed on March 7, 2013.

ACKNOWLEDGMENT I would like to thank James Hawley, Tessa Hebb, Keith Johnson, Adam Kanzer, Ce´line Louche, and Jay Youngdahl for their insightful comments and suggestions on drafts of this chapter.

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REFERENCES Elster, J. (2009). Reason and rationality. Princeton, NJ: Princeton University Press. Freshfields Bruckhaus Deringer. (2005, October). A legal framework for the integration of environmental, social and governance issues into institutional investment. London: UNEP Finance Initiative. Halbach, E. C. Jr. (1991 1992). Trust investment law in the third restatement. 77 Iowa Law Review, 77, 1151 1185. Hawley, J. P., & Williams, A. T. (2000). The rise of fiduciary capitalism: How institutional investors can make corporate America more democratic. Philadelphia, PA: University of Pennsylvania Press. Kurtz, L., & DiBartolomeo, D. (2011). The long-term performance of a social investment universe. The Journal of Investing, 20(3), 95 102. Retrieved from http://www.iijournals. com/doi/abs/10.3905/joi.2011.20.3.095 Lydenberg, S. (2012). On materiality and sustainability: The value of disclosure in the capital markets. Cambridge, MA: Initiative for Responsible Investment. Retrieved from http:// hausercenter.org/iri/wp-content/uploads/2010/05/OnMateriality_Final.pdf Massie, R. K. (1997). Loosing the bonds. New York, NY: Nan A. Talese. Richardson, B. J. (2009). Keeping ethical investment ethical: Regulatory issues for investing for sustainability. Journal of Business Ethics, 87, 555 572. Rifkin, J., & Barber, R. (1978). The north will rise again: Pensions, politics and power in the 1980s. Boston, MA: Beacon Press. Romano, R. (1993). Public pension fund activism in corporate governance reconsidered. Columbia Law Review, 93(4), 795 853. Sen, A. (2011). The idea of justice. Cambridge, MA: Harvard University Press. Walsh, M. W. (2004). Teamsters find pensions at risk. New York Times, November 15. Waitzer, E. J., & Saro, D. (2013). Public fiduciaries and public responsibilities: Emerging themes in the law. Rotman International Journal of Pension Management, 6(2), 28 37. Wesley, J. (1872). The use of money. Sermon 50. Retrieved from http://wesley.nnu.edu/johnwesley/the-sermons-of-john-wesley-1872-edition/the-sermons-of-john-wesley-chronologically-ordered/. Accessed on May 10, 2013. Woods, C., & Urwin, R. (2010). Putting sustainable investing into practice: A governance framework for pension funds. Journal of Business Ethics, 92, 1 6. World Commission on Environment and Development (WCED). (1987). Our common future. Report of the World Commission on Environment and Development. Published as Annex to General Assembly document A/42/427, Development and International Co-operation: Environment, August 2, WCED, Oxford, UK.

SRI IN SOUTH AFRICA: A MELTING-POT OF LOCAL AND GLOBAL INFLUENCES Stephanie Giamporcaro and Suzette Viviers ABSTRACT Purpose The anti-apartheid movement represented a cornerstone for socially responsible investors in the 1970s and 1980s driven by the willingness to promote lasting social change. What happened next in terms of socially responsible investing (SRI) in the free South Africa? This chapter explores the local development of SRI in South Africa post-apartheid. Design/methodology/approach An in-depth literature review combined with a content analysis 73 SRI funds’ investment mandates were undertaken to investigate the local development of SRI in South Africa over the period 1992 2012. Findings Mechanisms of local divergence and global convergence have both shaped the phenomenon of SRI in South Africa. SRI in South Africa represents a melting-pot of societal values anchored in a local developmental and transformative political vision, some local and global Islamic religious values, and worldwide SRI and CSR homogenisation trends.

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 215 246 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007009

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Originality/value This chapter is the first attempt to outline the mechanisms of local divergence and global convergence that have moulded SRI in a democratic South Africa. Keywords: South Africa; Code for Responsible Investing by Institutional Investors in South Africa; broad-based black economic empowerment; HIV/AIDS; impact investing

INTRODUCTION Socially responsible investing (SRI) in the United States was historically employed by activists and independent financial firms to promote social responsibility, justice and fairness (Louche & Lydenberg, 2006). In the United States the first ethical retail fund was established in 1928, followed by several shareholder actions in the 1960s around racial discrimination and the Vietnam War (Alinsky, 1971, p. 175; Heese, 2005, p. 730). It was, however, the anti-apartheid movement of the 1970s and 1980s that led to the first tangible social success of the global SRI movement. The antiapartheid movement represented a cornerstone for socially responsible investors driven by the wish to promote lasting social change. Shareholders in the United States, United Kingdom and Scandinavia divested from firms doing business in South Africa when they failed to comply with the Sullivan principles (Bengtsson, 2008, p. 969; Giamporcaro, 2006, p. 169). These investors made societal concerns, such as human rights and freedom, prevail against the political regime of apartheid (Giamporcaro, 2006, p. 174; Sparkes, 2006, p. 44). From that period onwards, SRI grew dramatically in terms of the amount of assets managed globally. In September 2008, the global SRI market was estimated at approximately h5,000 billion through the aggregation of various calculative efforts of local social investment forums (e.g. the US Social Investment Forum, EuroSIF and SIF Japan). Europe represented 53% of the market in 2008, while the US market represented 39% and the other parts of the world 8%. According to the US SIF, professionally managed assets following SRI strategies stood at US$3.07 trillion at the start of 2010, an increase of more than 380% from US$639 billion in 1995, the year when the first US SIF trends report was compiled (2010 Report on socially responsible investing trends in the United States, 2010). As a result

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of this growth, nearly one out of every eight dollars under professional management in the United States at the end of 2010 (12.2% of the US$25.2 trillion in total assets under management tracked by Thomson Reuters Nelson) was involved in some SRI strategy. Meanwhile, the European SRI market had increased from h2.7 trillion in 2007 to h5 trillion at the end of 2009, and stood at h6.7 trillion at the end of 2011 (2012 SRI Survey, 2012). Professional reports, notably the EuroSIF biannual reports, accurately document differences between SRI definitions, strategies and activities in different countries from one year to the next. Some academic literature on SRI has analysed this diversification movement by comparing different zones of implementation, for example France and Canada, Europe and the United States, Europe and Japan (Boxenbaum & Gond, forthcoming; Louche & Lydenberg, 2006; Sakuma & Louche, 2008). Their conclusion is that SRI in each country develops through a complex interplay of convergence trends (brought on by globalisation) and divergence trends (brought on by the local characteristics of national business systems). Boxenbaum and Gond (forthcoming) demonstrate how, from the same SRI concept, activities and strategies imported from the United States, Canada developed its own tailor-made definitions, strategies and activities geared towards strong social and environmental activists. In contrast, in France the definition of SRI was stripped of the ethical and moral character that was embraced elsewhere in order to encourage the mainstream investment community to adopt the SRI concept and develop their own SRI strategies and activities. Louche (2009) argues that global convergence and local divergence are both necessary for the development of SRI. She adds that if these two mechanisms may be perceived as contradictory, they are actually not exclusive. On the contrary they could feed each other and lead to some successful ‘glocalisation’ results (ibid.). What about the development of SRI in South Africa? How did global convergence and local divergence mechanisms interplay to shape the phenomenon of SRI in South Africa? Did this interplay lead to tangible glocalisation results? Which environmental, social and corporate governance (ESG) concerns have influenced the definition of SRI in South Africa along with its strategies and activities? This chapter aims to explore these questions by firstly giving some general facts on the national business system in South Africa, secondly by looking at the history of SRI in South Africa and thirdly by analysing the SRI market in South Africa in the 21st century through an exploration of the global and local forces at stake.

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SOUTH AFRICA: A COUNTRY OF CONTRASTS Political liberation was achieved in South Africa in April 1994. Almost 20 years later, South Africa is a free country which, not unlike other emerging economies such as Brazil, Russia, India and China, faces serious challenges in terms of social and environmental imbalances. South Africa is, like its BRICS counterparts, involved in fast-paced developmental and economic growth. However, compared to these emerging economic blocks, South Africa is uniquely shaped by its political past and its long-lasting legacy of apartheid. On one hand, the country is a paradoxical mix characterised by some visible developed economy features quite similar to Western countries. On the other hand, the country is facing huge societal backlogs typically experienced in emerging countries. Landing at Cape Town airport gives any traveller a powerful picture of the situation: a world-class airport built for the FIFA World Cup 2010 followed by kilometres of depressing township settlements en route to the city centre. In June 2011, the National Planning Commission released a diagnosis of South Africa’s state of development (National Development Plan 2030, 2011; National Development Plan 2030 Diagnosis report, 2011). The report highlighted what many South African citizens experience in their daily lives: high levels of unemployment; unequal quality of education; insufficient and poorly maintained infrastructure; and the degradation of non-renewable natural resources. These constraints not only threaten the long-term economic growth of the country, but also contribute to the rapid spreading of diseases, notably HIV, as well as uneven and poor quality public services and corruption in both the public and the private sectors. Almost two decades after the first democratic elections, South Africa remains a divided and deeply unequal society trapped in the legacy of apartheid. The financial services industry, which makes a big contribution to employment and economic growth in South Africa, displays many developed-world features (South African Reserve Bank Quarterly Bulletin, 2012). South Africa is characterised by a solid institutional investment market and a well-functioning investment and financial industry. The Johannesburg Stock Exchange (JSE) was created in 1887 to fund the newly established goldmines in Johannesburg, and is currently seen as a sophisticated trading space in tune with the latest financial innovations1 including an SRI index. Both the banking and the non-banking financial industries are highly regulated in South Africa (World Economic Forum Global Competiveness Report 2011/2012, 2012, p. 39). In this regard, the Financial

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Services Board, an independent institution established by statute, plays a critical role. South Africa is Africa’s biggest institutional investment market, with assets under management worth more than ZAR4 trillion (approximately US$500 billion) (Pretorius, 2011). Pension funds represent about half of the assets under management in the country.

THE ROOTS OF SRI IN SOUTH AFRICA: A MIXED SPRINGBOARD OF POLITICAL GOALS AND RELIGIOUS VALUES Although the institutionalisation of SRI practices has been slower in South Africa than in the United States and Europe, the origins of SRI practices in the country can be traced to the early 1990s (Viviers, Bosch, Smit, & Buijs, 2009, p. 2). In 1992, one of the first SRI investors was Unity Incorporation, an investment group co-founded by labour unions. They attempted to transform the companies in which their pension funds were invested by raising labour-related issues of concern in the context of the apartheid struggle. These issues mainly centred, and still centre, on affirmative action as well as fair and safe working conditions (De Cleene & Sonnenberg, 2004, p. 15). Along with the establishment of Unity’s Community Growth Equity Fund in June 1992, the first ethically screened fund, adopting Shari’ah (Islamic) principles, namely the Old Mutual Albaraka Equity Fund, was launched in the same month. Islamic investors typically exclude companies associated with alcohol, gambling, pornography, non-Halaal foodstuffs (such as pork), tobacco, firearms, weapons and entertainment. Shari’ahcompliant funds also exclude most financial institutions because the Qur’an expressly prohibits any association with the charging of interest or usury. In similar fashion, Shari’ah-compliant funds also exclude companies with high levels of financial leverage (gearing), debtors and interest income. The Community Growth Company and its trade union network is still an active and strong actor in the SRI arena in South Africa through its partnership with the Old Mutual Investment Group, an investment manager which held the largest number of active SRI funds under management at the end of 2012 (Old Mutual Investment Group (South Africa) SRI Capabilities, 2012). During the 1990s, SRI funds underpinned by ‘political values’ flourished. In 1994, the first democratic election was followed by the launch of

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the Reconstruction and Development Programme (RDP). This programme acted as an institutional boost to investment infrastructure, community development and black economic empowerment (BEE). Consequently, SRI funds launched in South Africa in the 1990s blossomed around a developmental and transformative investment agenda (Viviers et al., 2009, p. 2). The trend remained steady until the Asian market crisis (1998/1999), but slowed down thereafter due principally to some drastic financial failures leading to the closure of several BEE-orientated SRI funds.

SRI IN SOUTH AFRICA IN THE 21ST CENTURY: A COMPLEX PICTURE Globalisation Forces at Work The 2000 2010 decade was characterised by three global convergence trends which produced varied glocalisation results in South Africa. These include SRI homogenisation and institutionalisation, growth of Islamic financing, and the rise of impact investing as an SRI strategy. These trends are summarised in the appendix and are discussed in more detail in the following section. First Globalisation Force: The Rise of SRI Homogenisation and Institutionalisation Corporate governance, corporate social responsibility, sustainable development and SRI are concepts from the Western world which spread worldwide through practitioners’ efforts and academic literature. South Africa also experienced this homogenisation trend. In 1994, the first report on corporate governance in South Africa (called the King I report) was released. This report was strongly influenced by the British Cadbury report (Eccles, Serafeim, & Armbrester, 2012, p. 5). Although King I was a principlesbased report (rather than regulation), the JSE incorporated key elements of this report into their listings requirement in 1995 on a ‘comply or explain base’ (King Report on Corporate Governance for South Africa 2002, 2013). Following the World Summit on Sustainability in 2002, an updated version of the King report was released (called King II) with a full chapter dealing with sustainability. King II described sustainability as a consideration of the triple bottom line, that is a consideration of companies’ economic, social and environmental performance (Eccles et al., 2012, p. 7).

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King II stressed that the sustainability concept, seemingly coming from the developed world, actually stems from the African value of Ubuntu, which refers to supportiveness, cooperation and solidarity. King II recommended complete transparency in disclosing non-financial issues, and identified key ESG issues on which listed companies should report at least annually (ibid.). Following the release of the King II report, a publication by De Cleene (2002) entitled Corporate Social Responsibility in South Africa was the first academic report dedicated to SRI in South Africa. In 2003, the first SRI fund employing an engagement strategy was launched by Frater Asset Management (now called Element Investment Managers). King II was further institutionalised in 2004 with the launch of the JSE’s SRI Index. The index was the first of its kind in an emerging market, and the first to be launched by a stock exchange. All companies included in the FTSE/JSE All Share Index are eligible for inclusion in the SRI index. A range of ESG criteria are used, against which companies are evaluated on an annual, voluntary basis. These criteria were developed by the JSE in consultation with an independent panel of experts including investment managers, listed companies, sustainability experts, academics and civil society (FTSE/JSE SRI index Criteria, 2013). From 2007 onwards, the JSE’s SRI index has worked in partnership with the oldest ESG information provider in the United Kingdom, Ethical Investment Research Service (EIRIS), to evaluate listed companies. Prior to the launch of the JSE’ SRI index, a local consulting firm, Nathan and Friedland, provided the ESG ratings for the index. In 2002 they launched the frontrunner of the JSE’s current SRI index, called the Nathan and Friedland Sustainability Index. Inclusion in the JSE’s SRI index requires ‘a minimum score’ (Sonnenberg & Hamman, 2006, p. 307). Social and corporate governance inclusion criteria follow a thematic approach to reflect global standards, while accommodating issues peculiar to South Africa, such as BEE and HIV/AIDS. In terms of environmental criteria, companies are classified as high, medium or low impact, based on their activities. Seventy-seven companies were included in the 2012 SRI index, up from a mere 51 in 2003 (FTSE/JSE SRI index Constituents for 2012, 2013). Based on a recommendation of the advisory committee, the JSE does not release company-specific results publicly. This also applies to the names of the companies that did not participate in the annual review or those that failed to qualify for inclusion in the index. The SRI index is a good example of how a strong SRI global trend (i.e. the launch of a plethora of SRI indices and rating agencies) was adapted to the local context (Giamporcaro & Pretorius, 2012; Slager, Gond, & Moon, 2012).

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Although an external provider (EIRIS) is in charge of the ESG screening process, the screening framework was the result of local consultation between the SRI index advisory committee and local businesses. In addition to the developmental and transformative SRI funds in existence, some local investment managers started tracking the JSE’s SRI index (i.e. investing in the companies included in this index). These funds are, therefore, quite similar to many SRI funds launched in continental Europe that screen investment portfolios based on their local SRI indices (Giamporcaro, 2006). SRI terminology, strategies and activities developed further in South Africa from 2004 onwards, according to the second academic report by De Cleene and Sonnenberg, entitled Socially Responsible Investment in South Africa. As in Europe, the vocabulary surrounding SRI was seriously shaken by the launch of the United Nations Principles for Responsible Investment (UNPRI) in 2006, which was mainly characterised by the massive adoption of the vocabulary and concept of responsible investment (RI) by large public institutional investors around the world (Eccles & Viviers, 2011, p. 399; Gond & Piani, 2012). In South Africa, the Government Employees Pension Fund (GEPF), one of the 30 biggest pension funds in the world, signed the UNPRI in 2007, and by doing so played an important role in institutionalising these principles in South Africa (Cranston, 2009; Wildsmith, 2008, p. 140). A partnership between the UNPRI and the Centre for Corporate Citizenship (based at the University of South Africa) led to the publication of The State of Responsible Investment in South Africa (Eccles, Nicholls, & de Jongh, 2007). This opinion survey of SRI among local asset owners, investment managers and professional service partners, further spread the concept of SRI in the local investment industry. In May 2009, the GEPF led the creation of a UNPRI network in South Africa, the third network in the world, after Brazil and South Korea (Investors hail ‘landmark moment’ for responsible investment in South Africa, 2009). The network aimed to ‘raise awareness about the business case for responsible investment in order to persuade more South African pension funds and other asset owners to consider ESG factors in their investment decisions … [and to] capture evolving best practice on how to factor ESG issues into investment processes and to implement the principles in the South African context’. In the space of one year, numerous local investment managers joined the UNPRI network and became signatories of the Principles. Unfortunately, some were influenced by the prospect of winning investment mandates from the country’s biggest institutional

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investor, rather than by a true understanding of the Principles (Crotty, 2011; Giamporcaro, 2011). After a one-year consultation process with investment professionals and governmental bodies (most notably the National Treasury and Financial Service Board), the GEPF released its Responsible Investment Charter in 2010. The Charter fully embraced the UNPRI vision which is embedded in the Principles, namely that ESG considerations should be integrated into investment decision-making with the goal of improving long-term financial return across asset classes. This represented a clear shift from a vision of SRI as a separate investment niche uniquely composed of developmental funds to a more encompassing view of ESG investing. This shift was to be further enacted in an amendment to Regulation 28 of the Pension Funds Act (No. 24 of 1956). At the end of 2009, the proposed amendment suggested that 5% of the pension fund assets that are subject to Regulation 28 should be invested in SRI assets. This suggestion was (interestingly) opposed by the most ardent SRI advocates in the investment management community, on the principle that SRI should not be seen as a separate asset class (Giamporcaro, 2011, p. 128). In March 2011, the amended Regulation 28 was released (National Treasury, 2011) and no longer made mention of the 5% SRI assets that were previously discussed. The new Regulation 28 was more closely aligned to the UNPRI vocabulary and vision regarding fiduciary duty (Freshfield Brukhaus Deringer, 2005; UNEP-FI, 2009). Regulation 28 now states that a fund has a fiduciary duty to ‘act in the best interest of its members whose benefits depend on the responsible management of fund assets. This duty supports the adoption of a responsible investment approach to deploying capital into markets that will earn adequate risk adjusted returns suitable for the fund’s specific member profile, liquidity needs and liabilities. Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character. This concept applies across all assets and categories of assets and should promote the interests of a fund in a stable and transparent environment’. Finally, the Code for Responsible Investing by Institutional Investors in South Africa (CRISA) was launched in July 2011, notably through the leadership of the GEPF. As for the UNPRI, signatories of CRISA commit themselves to report on the manner in which they comply (or fail to comply) with the Principles, almost similarly in every way to the UNPRI. What CRISA does is to bind local investors to the responsible

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investment principles set out in the latest King report (called King III). This report was published in 2009 and targeted big companies as its audience.

Second Globalisation Force: The Rise of Islamic Financing The second global convergence trend relates to the rise of Islamic financing in South Africa. The launch, in 2008, of the JSE’s Shari’ah All Share and Top 40 indices stimulated the development of several new Shari’ah SRI funds in the country. The growth in Islam and Islamic financing is not unique to South Africa (Islamic Wealth Management Report, 2012, p. 21). Although only approximately 2% of the South African population state their religion as Muslim (International Religious Freedom Report 2005, 2005), support for Islam is rapidly growing, especially among black South Africans (Bell, 2004; Itano, 2002). The trend is attributed to Islam’s emphasis on charity and the faith’s focus on lifestyle and social reform. Local asset managers claim that Shari’ah-compliant investing is also gaining momentum among young professionals in South Africa. They attribute this development to the growing range of Shari’ah-compliant investments that have been developed in recent years. ‘They [the young professionals] are discovering the benefits of diversified portfolio options available to them… we’re seeing a big generational change’ (Rise in Shari’ah compliance, 2012). According to one of the largest asset managers in the country, the retirement industry is starting to become a big contributor to the growth of Shari’ah investments in South Africa. In 2012, Oasis Crescent, one of the world’s largest Shari’ah asset managers in the world, launched six new Shari’ah-compliant SRI funds, including portfolios focused on equities, property, income, and life-staging asset allocation, and balanced funds (Collective Investment Schemes, 2013). In a special report on Islamic financing in South Africa, Patel (2012) remarked that the scope for Islamic financing is substantial, as it could be used to ‘encourage small and medium-size enterprise development, provide affordable housing, finance infrastructure projects, facilitate BEE deals, etc. while always ensuring fair, ethical business practices aligned with an increase in real assets and employment’. Interestingly, here Islamic finance is not only described as an exclusionary screening SRI strategy, but also as being strongly aligned with the developmental and transformative agenda of SRI in South Africa.

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Third Globalisation Force: The Rise of Impact Investing Impact investing gained increased prominence after a conference convened by the Rockefeller Foundation in 2007, which deliberated on the means by which social and sustainable investment could be promoted. The conference brought together leading decision makers in the fields of finance, philanthropy and development (Jackson, 2012). An important outcome of the conference was the commitment of US$38 million to supporting and growing the initiative (Jackson, 2012). In 2008, the South African Network for Impact Investing (SAIIN) was launched. This network strives to advance the concept, practice and growth of impact investing in South Africa. In 2009, the Global Impact Investing Network (GIIN) was launched in a joint effort between the Rockefeller Foundation, the US Agency for International Development and JP Morgan, in an attempt to facilitate the development of impact investing as a viable global investment strategy. This effort led to the launch of two specific initiatives, namely the Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS), the former attempting to standardise social measurement frameworks and language, and the latter seeking to assign relative value to the social performance of investments. In 2010, a JP Morgan report analysed the impact investing concept in depth. They indicated that the concept SRI has historically been used to refer to investments in financial securities, particularly equities, using screening strategies. According to the report, impact investing aims to proactively create a positive social impact in investing in ‘the unlisted space’ and more particularly in emerging markets. Impact investing as a strategy can thus be defined as proactively seeking to invest in unlisted securities in order to achieve a desired societal and/or environmental impact that can be measured. In 2011, SAIIN organised its first conference, and introduced the concept of impact investing to local investors. In response to the conference, local SRI researchers suggested that the vocabulary of targeted or cause-based investing strategy which used to define developmental and transformative investment in the unlisted space, be replaced by the terminology of an impact investing strategy, which seemed to more adequately capture its essence (Viviers, Ratcliffe, & Hand, 2011, p. 20). In the same year, Cadiz Asset Management became one of the first South African investment managers to be accredited by the GIIRS,2 followed in 2012 by Mergence Asset Management. In 2012, the second SAIIN conference took place, and

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encouraged international and local players to discuss the promotion of impact investing in South Africa.

Local Forces at Work It could be argued that the South African government’s attempt to promote BEE has had a profound impact on the nature of the local SRI market. Although narrow-based BEE was an attempt to right the wrongs of the past, it only led to the enrichment of a few black Africans, Coloureds and Indians (collectively called blacks). The notion of economic empowerment was thus extended in the Broad-Based Black Economic Empowerment (B-BBEE) Act (No. 53 of 2003). The aim of this act is to distribute wealth across as broad a spectrum of South African society as possible (i.e. across all race and gender groups). Whereas narrow-based BEE measures only centred on equity ownership and management representation, broad-based BEE also seeks to increase the skills sets of previously disadvantaged individuals. The B-BBEE Act furthermore seeks to promote the ‘achievement of the constitutional right to equality, increase broad-based and effective participation of black people in the [South African] economy and promote a higher growth rate, increase employment and a more equitable income distribution; and establish a national policy on B-BBEE so as to promote the economic unity of the nation, protect the common market, and promote equal opportunity and equal access to government services’ (Broad-Based Black Economic Empowerment Act (No. 53 of 2003), 2003). As will be indicated in the following section, the promulgation of the B-BBEE Act influenced both the SRI strategies and investment criteria used by South African asset owners and managers.

Size and Nature of the Local SRI Market At the beginning of the second decade of the 21st century, SRI in South Africa presents a complex and contrasted phenomenon balancing global convergence, local divergence and glocalisation patterns. This complexity is evidenced in the SRI product market, the strategies local SRI investment managers adopt and their clientele. Despite the plethora of voluntary initiatives and the very ambitious regulatory framework that has attempted so far to institutionalise and mainstream SRI in the country, the SRI market is

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RI funds discontinued

RI funds established 12 10 8 6 4 2

Fig. 1.

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1992

0

1992 2012: A Decade of SRI Products in South Africa. Source: Researchers’ own construction based on SRI fund fact sheets.

still quite a marginal one in terms of actual size. Fig. 1 illustrates the number of SRI funds established and discontinued over the period 1992 2012. A fund was classified as discontinued if it closed or merged with another fund during the research period, or if its investment mandate changed to such an extent that it could no longer be classified as an SRI fund. At the end of 2012, 30 investment managers were signatories of the UNPRI, only 24 of whom offered SRI funds. Since only 60 products were marketed as SRI at the end of the research period, it can be argued that SRI in South Africa is indeed very marginal compared to mainstream investments. However, it is a market with many contrasted features in terms of strategies if one considers the retail versus the institutional market. In South Africa, unitised products (mainly unit trusts) are essentially geared to meet the needs of the retail market, whereas non-unitised vehicles cater more for the needs of institutional investors. A breakdown of the SRI strategies employed by local SRI funds is presented in Table 1. SRI Strategies Adopted More than half of the unitised SRI funds in South Africa screen investments are based on ethical considerations (most of which are based on Shari’ah principles). According to Renneboog, Ter Horst, and Zhang (2011, p. 573), exclusionary screens (mainly for tobacco, alcohol, gambling, weapons and pornography) are used by 94% of SRI funds in the United

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Table 1.

SRI Strategies Employed in South Africa.

SRI Strategy

Unitised SRI Fundse N a

Impact investing Impact investing and positive screening Impact investing, positive screening and shareholder engagement Ethical exclusionsb Ethical exclusions and shareholder engagement Shareholder engagementc Positive screeningd Positive screening and shareholder engagement Positive screening, shareholder engagement and impact investing Positive screening, ethical exclusions and impact investing Impact investing, ethical exclusions and shareholder engagement Total

%

NonUnitised SRI Fundsf

Total

N

%

N

%

1

3.6

17 13 1

38.6 29.5 2.3

18 13 1

25.0 18.1 1.4

15 1 3 7 1

53.6 3.6 10.7 25.0 3.6

3

5 2 1

6.8 0.0 0.0 11.4 4.5 2.3

18 1 3 12 3 1

25.0 1.4 4.2 16.7 4.2 1.4

1

2.3

1

1.4

1

2.3

1

1.4

44

100.0

72

100.0

28

100.0

Source: Researchers’ own construction based on the funds’ investment mandates. a Refers to investments in a social and/or environmental purpose-driven company, organisation or enterprise that addresses a social and/or environmental cause by applying market-based strategies in sustainable business models that can deploy and provide both financial returns and social and/or environmental impact. Most of these funds invest in unlisted securities. b Refers to the use of negative screens to avoid investments in morally undesirable countries, industries and companies. c Also called shareholder activism. Refers to shareholders communicating with management on specific ESG issues. Investors can do so through dialogue, by filing resolutions, using their voting rights at shareholder meetings and divesting from companies that fail to transform. This is a long-term process whereby investors seek to influence company behaviour related to their ethical and ESG practices. d Refers to the selection of financial securities that meet a defined set of ESG criteria. e Also called pooled funds. Refers to funds where the asset manager pools the funds of many investors and spreads it across various asset classes. These funds are characterised by multi-client arrangements where the assets are owned by the manager and participatory interests are allocated to the respective clients/investors (Hirt, Block, & Basu, 2006, p. 44). Four main categories of unitised funds are discernible, namely unit trusts, investment trusts, open-ended investment companies and life funds. In South Africa, unit trusts represent the overwhelming majority of unitised funds. f Also called segregated funds. Characterised by an agreement between the asset manager and his/her client, whereby the client specifies certain investment criteria to which the asset manager should adhere (Shepherd, 1987, p. 13). Segregated funds are designed with a particular client’s needs and risk profile in mind. Assets are owned by the entity (e.g. by a pension fund or high net worth individual).

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States, while 38% of SRI funds in the Asia-Pacific Rim countries and Africa use Shari’ah screens. Two thirds of the non-unitised RI funds employ an impact investing strategy, either on its own or in combination with a positive screening strategy. Inspection of the investment mandates of the SRI funds revealed that these strategies focus largely on the promotion of B-BBEE, the development of social infrastructure and fair labour practices. Investment managers such as Futuregrowth Asset Management and Cadiz Asset Management pioneered impact investing in South Africa through investing in unlisted debt instruments. Shareholder engagement on ESG considerations is in its infancy in South Africa. Those asset managers who do engage with investee companies mainly do so on corporate governance issues (Giamporcaro & Pretorius, 2012, p. 28). Investment managers such as Element Asset Management, Investec Asset Management, the Public Investment Corporation and RE/ CM, report on their proxy voting policies and results online (Crotty, 2012). They are, however, the exceptions in the South African investment industry. A study by Winfield (2011, p. 1) reveals that local asset managers are often unfamiliar with the documents and institutions that aim to help them develop and implement strong voting and stewardship policies. There are also very few sources of quality research in South Africa relating to voting items, and relatively little research is generated internally by asset managers. Winfield found that policy documents are typically weak, and do not communicate effectively with clients, internal investment professionals or investee companies. His study further shows that asset managers prefer to engage with investee companies in private prior to the companies’ annual general meetings, rather than openly engaging in discussions at shareholder meetings. A best-in-class SRI screening strategy, whereby investors underweight or overweight their portfolios based on companies’ ESG scores, is nonexistent in South Africa. This is in sharp contrast to France, Switzerland and the Netherlands where this strategy is widely used (EuroSIF European Survey 2010, 2010, p. 9; Giamporcaro, 2006, p. 376; Giamporcaro & Pretorius, 2012, p. 26). In terms of ESG criteria embraced, it is also interesting to note that very few SRI funds are systematically focusing on environmental aspects. This finding is illustrated in Fig. 2. According to Giamporcaro and Pretorius (2012, p. 26), ‘green’ funds are usually the few which have already adopted a broad ESG focus as part of their positive screening strategy, and not a more strictly targeted social

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14 E, S and G 12 Social and corporate governance

10 8

Social and environmental 6 Social

4

2012

2011

2010

2009

2008

2007

2006

2005

2004

2002

2001

1999

1998

1997

Ethical / Moral

1996

0 1995

Environmental

1992

2

Fig. 2. 1992 2012: ESG Focus of SRI Funds in South Africa. Source: Researchers’ own construction based on the SRI funds’ investment mandates.

transformation and developmental agenda. The same situation exists for shareholder engagement practices: a very small minority of SRI investment managers can actually report on past engagement and proxy voting practices around environmental issues (Giamporcaro & Pretorius, 2012, p. 28). Viviers and Firer (2013, p. 217) likewise found that very few SRI funds in South Africa have specific requirements on environmental aspects, and that local asset managers offer very limited SRI options for environmentorientated investors. Clients: Retail versus Institutional The institutional market is usually identified by the investment industry as the cornerstone of SRI growth (Eccles et al., 2007, p. 49; Herringer, Firer, & Viviers, 2009, p. 20; Viviers et al., 2008, p. 26; Wildsmith, 2008, p. 139), while scepticism prevails strongly about any future growth of an SRI retail market besides the Shari’ah market (Giamporcaro, 2011, p. 131; Heathcote, 2011). Despite the strong leadership of the GEPF around the UNPRI (which was followed to date by three other asset owners: a parastatal utility pension fund the ESKOM provident and pension fund, and two insurers SANLAM and SASRIA) and the Regulation 28 framework, the feeling still prevails that most institutional investors in South Africa are far from being sufficiently educated about the topic. The Sustainable Returns for Pensions project, launched in 2012 and funded by the International Finance Corporation in partnership with National Treasury

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and the Financial Service Board, aims to fill this gap by providing training and an ESG toolkit to pension fund trustees (Responsible investment toolkit for responsible fund trustees, 2012). If educating pension fund trustees seems the way to go for investment industry players to achieve the goals set out in Regulation 28, so far, as in many other countries (Richardson, 2011), not a great deal of thought seems to have been given in South Africa to educating final beneficiaries about SRI. Richardson (2011, p. 5), who analysed the legal aspects of the fiduciary duties of institutional trustees and their final beneficiaries, points out that trustees in common law countries are hardly engaging in active relationships with final beneficiaries, principally because fiduciary duty law has traditionally cast the latter in a passive role. He stressed that not much has been done yet by trustees (in the United States) to understand final beneficiaries’ wishes with regard to ESG integration. Academic research in South Africa is only now starting to explore the wishes of final beneficiaries. What final beneficiaries declare they expect from SRI if they are given a voice on the question, is rather surprising. Viviers, Kru¨ger, and Venter (2012, p. 120) firstly found that pension/provident fund members had a relatively low level of understanding of SRI in the South African context. Secondly, the most important investment criteria identified by respondents related to corporate policies and practices pertaining to employees and trade unions. Respect for universal rights and the protection of the natural environment were seen as less important. Qualitative research led by Reddy (2011) on a pool of 35 unionised employees and provident fund members (all working for the same multinational oil and mining company located in Durban) revealed similar results. The main trends identified were a lack of awareness of SRI and a lack of communication between pension fund trustees and beneficiaries on the subject. Lack of trust in trustees’ decisions and in the SRI concept in general, was also strongly voiced. However, when questioned on their willingness to allow contributions to be invested according to ESG criteria, the majority of respondents, when given details on what SRI entails, agreed in principle. Asked about the ESG factors that they would like ideally to see being championed by their investments, respondents ranked climate change and environmental concerns first, followed by social transformation and infrastructure development in previously disadvantaged areas. Ethical concerns were seen as less important.3 These are interesting results, and it is the authors’ opinion that the wishes of final beneficiaries should play a more significant role in long-term SRI decision-making. However, this must not hide the fact that today the

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huge majority of investment professionals, principal officers, employer and employee trustees, final beneficiaries and retail investors are still relatively unaware of SRI, and if they are aware of the concept, their understanding thereof is hardly positive. Many (still) equate SRI with charity, and fear that SRI entails a financial loss.

DISCUSSION AND CONCLUSIONS In South Africa, as in many other countries, SRI means different things to different people and co-exists with concepts such as developmental investment, responsible investment and sustainable investment. Funds are labelled by a bewildering array of names, such as BEE funds, infrastructure funds, developmental funds, SRI funds and Shari’ah funds. Their promoters employ a range of SRI strategies and investment criteria which are not always fully disclosed. An analysis of the relevant literature, local SRI products and local asset managers’ websites clearly shows that SRI in South Africa is a complex and evolving melting-pot which is extremely challenging to define and ring-fence in a delimited perimeter. For the past 20 years, and not unlikely in different geographical zones (Boxenbaum & Gond, forthcoming; Louche & Lydenberg, 2006; Sakuma & Louche, 2008) SRI in South Africa has been influenced both by global isomorphism forces and its local context (see Table 2 in this regard). As in many other countries, these two mechanisms have given birth to glocalised SRI definitions, strategies, activities and investment products. These are constantly evolving under the influence of local and external pressures and various stakeholders’ interests, as well as positioning in the SRI institutional field. Similarly to the US market, political activist and religious values have been critical of the development of SRI in South Africa, while the strong government involvement reminds one of European trends. The local necessity to deal with the legacy of apartheid after 1994 created an SRI movement driven by strong political values and a developmental and transformative agenda. From 2001 onwards, the international movement of diffusion and standardisation around concepts such as corporate governance, corporate social responsibility, sustainability and SRI (Louche, 2009) reached a free South Africa. This trend towards global convergence led to the creation of the JSE’s SRI index in 2004 and the creation of SRI funds tracking the index. It is also through that standardisation

Religious background as well as a desire to redefine the relationship between corporations and societies.

Emphasis on personal values and social purpose.

Retail investors and independent SRI firms (independent of the mainstream financial community). Little government involvement.

Social responsibility. Fairness and justice. Access to capital. Wealth creation. Exclusionary and qualitative screening. Shareholder activism.

Definition

Actors

Vocabulary

US

Japan

South Africa

Transformation. BEE. Infrastructure development. Corporate governance. CSR/SRI/Sustainability. Islamic finance and investment. Responsible investment. Impact investment.

Screening. Eco-efficiency/eco-friendly. Ethics compliance and integrity. Corporate social responsibility. Social contribution.

Sustainability. Eco-efficiency and business case. Triple bottom line investing. Best-in-sector investing. Negative and positive screening. Engagement.

One institutional investor leading the mainstream the financial community to promoting SRI activities. Substantial government involvement. Religious retail investors.

No active retail and institutional investors. Independent SRI firms and financial group affiliated think tank. Little government involvement.

Institutional investors and the mainstream financial community promoting SRI activities. Substantial government involvement.

Emphasis on political purpose, personal values and investment impact.

Emphasis on financial objectives and investment impact.

Emphasis on financial objectives and investment impacts.

Religious background as well A desire to re-invigorate the Political background: a as a desire to redefine the Japanese financial sector desire to correct the economic and social relationship between after the bubble burst. corporations and A desire to demonstrate imbalances created by the apartheid regime. societies. Japanese management legitimacy. Religious background: Islamic values.

Europe

Main Differences in Motivation, Definition, Actors, Vocabulary and SRI Strategies between the United States, Europe, Japan and South Africa.

Historic roots/ motivation

Table 2. SRI in South Africa: A Melting-Pot of Local and Global Influences 233

Exclusionary screening critically important. Positive screening stress judgment. Activism often public and through proxy resolution.

Japan

South Africa

Negative screening rejected. Exclusionary screening on Negative screening not religious principles. Avoidance of companies emphasised. Positive screening and with negative press Positive screening stress impact investing to coverage. quantitative favour companies/or Non-confrontational measurements. projects with a engagement done Engagement often done developmental and through casting votes at behind the scene dialogue. transformative agenda. shareholder meetings. Engagement through behind the scene dialogue and proxy voting.

Europe

Source: Adapted from Sakuma and Louche (2008), Louche and Lydenberg (2006), Viviers et al. (2009) and Giamporcaro (2011, 2012).

SRI strategies

US

Table 2. (Continued ) 234 STEPHANIE GIAMPORCARO AND SUZETTE VIVIERS

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influence that professional and academic publications started to be strongly anchored the vocabulary of SRI. What was previously referred to as ‘BEE funds’ or ‘infrastructure funds’ started to be classified under the SRI banner as funds tracking the JSE’s SRI index. In 2006, the cross-country pressure on public pension funds to embrace responsible investment brought about by the UNPRI (Giamporcaro, 2006) led to increased government involvement. Interestingly, while on the CSR side the field was moving only through voluntary mechanisms advocated by the three successive King reports, on the SRI side the mix of external and local forces led to actual embedding of SRI principles in the local retirement regulatory framework, a first for an emerging country. In line with the regulatory changes, South African retirement funds should now have an investment policy statement which should integrate material ESG concerns across all asset classes, leading local retirement fund trustees (beyond the GEPF and its few followers) to fully embrace these principles and to ensure that this adoption leads to actual practices that can be measured and reported on. These remain difficult issues to address (Crotty, 2011). The Sustainable Returns for Pensions project, which is the result of a partnership between international (International Finance Corporation) and local institutions (National Treasury, Financial Service Board and investment professional bodies), is supposed to bridge the gap in future years. In 2008, the presence of a financially powerful local Muslim community (historically ostracised by the apartheid regime) and worldwide growth in Islamic financing led to the creation of two Shari’ah indices by the JSE. From that period onwards, Shari’ah funds multiplied and became a distinctive local feature of what SRI currently entails in South Africa. Interestingly, the Shari’ah funds are seen by their promoters as broadly aligned to the original developmental and transformative agenda of SRI in South Africa. More recently, impact investing as an SRI strategy seems to have rejuvenated the historical developmental and transformative SRI agenda in South Africa. This strategy originates from US foundations and represents the primary SRI strategy among South African non-unitised SRI funds. Internationally, NGOs, civil society, social entrepreneurs, investment managers, private equity fund managers and other venture capitalists have long grappled with implementing impact investing strategies. If impact investing is indeed a ‘work in progress’ as stressed by Jackson (2012), its local promoters are raising, through cross-country pressure, the political question of how to genuinely achieve an equal and sustainable allocation of investment

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and financial resources. This question is, sadly, extremely relevant for one of the most unequal countries in the world (National Development Plan 2030, 2011; National Development Plan 2030 Diagnosis report, 2011). Based on the above, South Africa appears to have been fertile ground for successful SRI glocalisation. However, four challenges seem to persist. Firstly, it is hard to assert that South Africa built strong local calculative infrastructure capacities around CSR and SRI during the past 20 years as it has happened in continental Europe (Giamporcaro & Gond, 2010; Louche, 2004; Slager et al., 2012). Provision of ESG ratings for the JSE’s SRI index is outsourced to a UK provider (EIRIS) and is not publicly available in detailed form to investment professionals or academics. With the exception of a few cases, investment managers in South Africa have not developed strong in-house SRI analyst teams. It is generally only one or two individuals who are in charge of the firms’ SRI products and activities, even in very big investment groups (Giamporcaro, 2011). However, the creation of local branches of leading international ESG rating houses, such as MSCI and Bloomberg, could diversify and strengthen the ESG rating supply locally in the future. In terms of measuring SRI market trends, the Africa Sustainable Investment Forum (AfricaSIF), created in 2010, does not yet match the work realised by other social investment forums in the world. The second challenge related to SRI in South Africa concerns actual implementation and standardised reporting both on the CSR and SRI sides. Although South Africa has an extremely advanced voluntary initiative and regulatory framework around CSR and SRI, it is still difficult to understand and compare the ESG activities of listed companies and SRI investors. The third question that arises is to know who is legitimately entitled to voice opinions and decide on the scope of SRI in South Africa. With the exception of the Muslim community, retail investors and final beneficiaries of pension/provident funds are not in a real position to voice any specific position on the matter, due principally to a lack of consultation and a lack of SRI supply that could cater for their needs. There is currently a very small group of institutional investors who are firmly guided by their financial service providers and international frameworks, and have the power to influence the shape taken by SRI. Further glocalisation of SRI in South Africa could broaden the societal scope of SRI and change the state of play in the future. It will not only give a voice to a larger group of institutional investors, but also to retail investors and final beneficiaries who are presently voiceless.

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A further challenge is the lack of interest in environmental considerations on the SRI supply side in South Africa. SRI investment managers, when questioned on the current status of SRI, argued that South Africa is an emerging country facing more urgent social challenges than environmental challenges. Some investment managers furthermore claimed that environmental challenges are mainly considered as ‘concerns of the rich’ (Giamporcaro, 2011, p. 128). Are these arguments by investment managers reasonable and justifiable? Answers to these questions are further confounded when considering the rapid changes that have taken place in the European economic and political agendas. Climate change and other environmental issues clearly lost some clout after 2010 when the financial and economic recession hit the region hard. Economic stability and fighting inequality (Weber, 2012) have suddenly become more urgent priorities than going green at all levels of economic life. As the South African economy also had its fair share of economic woes since 2008, local government has realigned some of its priorities in favour of social issues (at the expense of environmental ones). If one, however, takes a long-term sustainable perspective, it is actually rather difficult to disentangle environmental challenges from social challenges. The interconnectedness between nature and society has been publicly recognised by powerful institutional investors such as GEPF in South Africa (Giamporcaro, 2011, p. 133). The current debate around shale gas fracking in the arid Karoo region of South Africa is a symbol of the difficult choices facing policy makers and responsible investors in South Africa. Hydraulic fracturing, or fracking, involves the injection of water, sand and other fluids at very high pressure into a rock formation, creating tiny fissures that allow the natural gas to flow (Hydraulic fracturing, 2013). Chemicals are added to the water and sand mixture which raises serious concerns about the risk of water contamination. Environmentalists claim that fracking poses significant risks for drinking water, threatening human health and the environment (Larsen, 2011). Are responsible investors likely to enter the camp of the proponents of the exploration of the Karoo region, in the name of infrastructure development, BBE and job creation (Vecchiatto & Blaine, 2012), or do they side with the opposite camp which is denouncing shale gas exploitation in terms of the future loss of biodiversity and water resources which will impact rich and poor (Karoo Space Magazine, 2012; Say ‘No’ to Fracking in the Karoo, 2011). How the Karoo issue is politically, economically and culturally dealt with by the public sector, private sector and civil society is likely to shape the future decisions taken by socially responsible investors on the matter.

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This chapter aimed to analyse the development of SRI in South Africa as the interplay between mechanisms of global convergence and local divergence these past 20 years. The findings contribute to the international body of knowledge on SRI that explores the theoretical and empirical interplay of these two mechanisms within an emerging market context. The exercise is somewhat limited as it is impossible to render in one chapter, the depth of a national economic and legal system, but it is hoped that it delivers a useful first-level of analysis of SRI in South Africa of how global convergence and local divergence trends have so far shaped SRI societal concerns in the country. In summary, it can be said that at the beginning of the 21st century, SRI in South Africa is an interesting, but still nascent melting-pot of definitions, strategies, activities and investment products geared to meeting the needs of a diverse range of stakeholders.

NOTES 1. http://www.jse.co.za: The JSE Ltd (‘JSE’) is licensed as an exchange under the Securities Services Act (2004) and is Africa’s premier exchange. It has operated as a market place for the trading of financial products for nearly 120 years. In this time, the JSE has evolved from a traditional floor-based equities trading market to a modern securities exchange providing fully electronic trading, clearing and settlement in equities, financial and agricultural derivatives, and other associated instruments, and has extensive surveillance capabilities. The JSE is also a major provider of financial information. In everything it does, the JSE strives to be a responsible corporate citizen. 2. GIIRS is a project of the independent non-profit B Lab launched in 2007 by business men and private equity investors Jay Coen Gilbert, Bart Houlahan and Andrew Kassoy. It provides currently two main rating products assessing the social and environmental impact (but not the financial performance) of companies and of investment funds. The company rating is a rating of the social and environmental impact of an individual company, including an overall rating, ratings in 15 subcategories, and key performance indicators relevant to the company’s industry, geography, size and social mission. The fund rating is a rating of a fund’s impact based on the aggregated and weighted impact ratings of its underlying portfolio companies, including the aggregated Company sub-category ratings and relevant key performance indicators for the fund, and an assessment of fund manager practices. 3. It has to be emphasised that the fact that COP17 was held three weeks afterwards in Durban in December 2011 after the survey and that these unionised employees were working for multinational oil and mining company could have played here on the importance given to the environmental criteria.

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Renneboog, L., Ter Horst, J., & Zhang, C. (2011). Is ethical money financially smart? Nonfinancial attributes and money flows of socially responsible investment funds. Journal of Financial Intermediation, 20, 562 588. Responsible investment toolkit for responsible fund trustees. (2012). COVER, June, p. 80. Richardson, B. (2011). From fiduciary duties to fiduciary responsibilities for socially responsible investment: Responding to the will of beneficiaries. Journal of Sustainable Investment and Finance, 1(1), 5 19. Rise in Shari’ah compliance. (2012). Voice of the cape, 8 October. Retrieved from http://www. vocfm.co.za/index.php?option = com_k2&view = item&id = 6595:rise-in-Shari’ah-compliance&Itemid = 153. Accessed on 12 January 2013. Sakuma, K., & Louche, C. (2008). Socially responsible investment in Japan: Its mechanisms and drivers. Journal of Business Ethics, 82(2), 425 448. Say ‘No’ to Fracking in the Karoo. (2011). Greenpeace, 9 March. Retrieved from http://www. greenpeace.org/africa/en/News/news/Say-No-to-Fracking-in-the-Karoo/. Accessed on 10 March 2012. Shepherd, A. G. (1987). Pension fund investment. Cambridge: Woodhead-Faulkner. Slager, R., Gond, J.-P., & Moon, J. (2012). Standardization as institutional work: The regulatory power of a responsible investment standard. Organization Studies, 33(5 6), 763 790. Sonnenberg, D., & Hamman, R. (2006). The JSE socially responsible investment index and the state of sustainability reporting in South Africa. Development Southern Africa, 23(2), 305 320. South African Reserve Bank Quarterly Bulletin. (2012). South African Reserve Bank, March. Retrieved from http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/ 4986/01Full%20Quarterly%20Bulletin.pdf. Accessed on 1 June 2012. Sparkes, R. (2006). A historical perspective on the growth of socially responsible investment. In R. Sullivan & C. Mackenzie (Eds.), Responsible investment. Sheffield, UK: Greenleaf. UNEP-FI (United Nations Environment Programme Finance Initiative Asset Management). (2009). Fiduciary duty II: Legal and practical aspects of integrating environmental, social, and governmental issues into institutional investment. Report produced by the Asset Management Working Group, UNEP-FI, United Nations Environment Programme, Geneva. Retrieved from http://www.unepfi.org/fileadmin/documents/fiduciaryII.pdf. Accessed in August 2010. Vecchiatto, P., & Blaine, S. (2012). Minister warns on Karoo ‘benefit for few’. Business Day, 19 September. Retrieved from http://www.bdlive.co.za/business/energy/2012/09/19/minister-warns-on-karoo-benefit-for-few. Accessed on 15 January 213. Viviers, S., Bosch, J. K., Smit, E.vd M., & Buijs, A. (2009). Responsible investing in South Africa. Investment Analysts Journal, 69(May), 1 14. Viviers, S., Eccles, N. S., De Jongh, D., Bosch, J. K., Smit, E. v. d. M., & Buijs, A. (2008). Responsible investing in South Africa Drivers, barriers and enablers. South African Journal of Business Management, 39(4), 15 28. Viviers, S., & Firer, C. (2013). Responsible investing in South Africa A retail perspective. Journal of Economic and Financial Sciences, 6(1), 217 242. Viviers, S., Kru¨ger, J., & Venter, D. J. L. (2012). Ethical, environmental, social and corporate governance criteria A South African perspective. African Journal of Business Ethics, 6(2), 120 132. Viviers, S., Ratcliffe, T., & Hand, D. (2011). From philanthropy to impact investing: Shifting mindsets in South Africa. Corporate Ownership and Control, 8, 25 43.

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Weber, T. (2012). Davos 2012 ends with euro hopes, but amidst economic uncertainty. BBC, 29 January. Retrieved from http://www.bbc.co.uk/news/business-16780931. Accessed on 25 April 2012. Wildsmith, H. (2008). South Africa’s largest public sector pension funds: A collective development role? Corporate Ownership and Control, 5(3), 139 158. Winfield, J. (2011). The landscape of proxy voting at South African asset managers. RisCura, July. Retrieved from http://riscura.com/sites/default/files/case_study_docs/Spoilt VotesHigh_Aug2011.pdf. Accessed on 31 March 2014. World Economic Forum Global Competitiveness Report 2011/2012. (2012). World Economic Forum. Retrieved from http://www3.weforum.org/docs/WEF_GCR_Report_2011-12. pdf. Accessed on 1 April 2012.

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APPENDIX: CHRONOLOGY OF KEY EVENTS DIVERGENCE VERSUS CONVERGENCE Year

Localisation

Globalisation

Glocalisation

1970 In the late 1980s, South Failure by businesses with 1991 African trade unions operations in South mobilise to exert pressure Africa to subscribe to on South African the Sullivan Principles companies to make them led to their immediate exclusion from the stop complying with apartheid rules. United States and European institutional investors’ portfolios. 1992 Creation of the Community Growth Equity Fund: established as a result of trade unions’ refusal to invest their members’ funds in companies that were supportive of the apartheid regime. Creation of the first Shari’ah Fund. 1994 First democratic elections held. Launch of the Reconstruction and Development Program (RDP) gearing for infrastructure and community development and BEE. Asian market crisis. 1995 Launch of 16 SRI funds 2001 adopting positive screening for business and projects gearing for infrastructure and community development and BEE. Launch of one Shari’ah fund. With a more depressed economic environment the flow for infrastructure and BEE funds slows at the end of the period.

Publication of the first King report on corporate governance in South Africa inspired by the UK Cadbury report.

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(Continued ) Year

Localisation

Globalisation

Glocalisation

World Summit on 2002 The Broad-Based Black Sustainable 2003 Economic Empowerment Development held in Act is promulgated by Johannesburg. Parliament. This act provided greater clarity on the promotion of B-BBEE in South Africa. Four SRI funds are established and eight are discontinued (all of the latter focussed on BEE). Launch of one SRI fund focusing on corporate governance and social issue.

Publication of the second King report of corporate governance in South Africa. CSR, sustainability and African leadership concepts are introduced in this updated issue.

2004 Second wave of SRI 2005 funds seven funds are launched using the JSE’s SRI index to implement positive screening on ESG issues.

Launch of the JSE’s SRI index.

2006 Fourteen SRI funds are 2008 launched in the period. A majority declared using the JSE/SRI index to implement positive screening with a strong focus on social and developmental issues.

Launch of the United Nations Principles for Responsible Investment Initiative. Worldwide growth of Islamic Finance.

The Government Employees Pension Fund becomes a PRI signatory. Launch of the South African Network for Impact Investing. Launch of the JSE’s Shari’ah All Share and Top 40 indices.

2009 Fifteen new SRI funds are established. Most of these employ exclusionary screens based on Shari’ah principles.

November 2009: Organisation of the UNEP-FI conference in Cape Town.

Nineteen investment managers and two asset owners are PRI signatories. Publication of the King III report.

2010 GEPF releases its RI charter, first public RI charter for a SA institutional investor.

Launch of the Global Impact Investment network. Creation of GIIR and IRIS.

Launch by GEPF of a South African PRI network.

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(Continued ) Year

Localisation

Globalisation

Glocalisation

2011 Launch of seven SRI with a COP17, the UN Convention on Climate declared broad ESG Change is hosted in focus: rising focus for Durban. broad environmental aspects but with still a strong gear on social and developmental issues. Amendments to Regulation 28 of the Pension Funds Act are accepted by SA Parliament. The preamble creates a regulatory framework for SRI in South Africa.

Launch of the Code of Responsible Investment in South Africa (CRISA). Developed to guide local institutional investors on the implementation of King III Report and the UNPRI. First conference of the South Africa Impact Investment network.

2012 One new SRI fund is launched and is marketed as an environmental impact investment fund. At the end of 2012, there are 60 active SRI funds in South Africa managed by 24 asset managers.

Launch of the Sustainable Returns for Pensions project. As at 31 July 2012, a total of 40 asset owners, investment managers and professional service providers have signed up to the UNPRI. Second conference of the South Africa Impact Investment network.

TO GOVERN AND BE GOVERNED: THE GOVERNANCE DIMENSIONS OF SRI’S INFLUENCE Benjamin J. Richardson ABSTRACT Purpose This chapter assesses the impact of socially responsible investing (SRI) in terms of its role in governance. Governance refers to the rules, incentives, institutions and philosophies for coordinating, controlling and supervising behaviour. The SRI sector purports to be a mechanism of market governance, such as through its codes of conduct and targeting of individual companies by engagement or divestment. Method/approach This subject-matter of the chapter is evaluated primarily through a conceptual and theoretical argument rather than empirical research. Findings Social investors’ capacity to ‘govern’ the market is constrained by gaps and deficiencies in the legal frameworks for the financial economy. Fiduciary law controlling institutional investors is the most important element of this governance framework. The SRI movement is starting to broaden its agenda and strategies to include advocacy for regulatory reform. But the SRI industry has devoted attention to its own

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 247 272 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007010

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voluntary codes of conduct, such as the UNPRI, which do not yet provide a sufficiently comprehensive or robust substitute for official regulation. Social implications Paradoxically, whereas SRI once stood for taking action through the financial economy when governments had failed to act, the sector is also somewhat dependent on the state to provide an empowering governance framework. But state regulation itself may be strengthened by partnership with the SRI industry, such as by utilising its codes of conduct to supplement official legal standards. Originality/value of the chapter The chapter deepens insights into the relationship between the SRI sector as a largely voluntary movement and its legal governance through the state or the market. Keywords: Market governance; fiduciary law; voluntary codes

INTRODUCTION Socially responsible investing (SRI) has pretences to govern the market. It has been opined that social investors can ‘encourage corporations to improve their practices on environmental, social, and governance issues’ (US-SIF, 2012) and that institutional investors ‘occupy an influential position and are capable of achieving many objectives with such financial power’ (Koo, 2008, p. 133). So far, however, few commentators have scrutinised closely the governance impact of SRI (Conley & Williams, 2011); its financial performance and impact garner far greater attention. Concurrently, the SRI sector, as in financial markets generally, is governed by the state, though its legal rules and policies tend to inhibit rather than facilitate responsible finance. Consequently, the SRI movement’s capacity to discipline other market actors’ social and environmental performance remains closely tied to the governance ‘space’ and controls set by the state. Governance should be an important dimension of the debate about the influence of SRI. Governance can be defined broadly in a variety of ways, and in general it refers to the rules, incentives, institutions and philosophies for coordinating, controlling and supervising behaviour. ‘Governance’ is usually associated with the role and operations of the state, yet it can also apply to private forms of authority and patterns of relationships such as that exerted through industry associations and market codes of conduct. Although the SRI movement has become increasingly preoccupied with its

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financial credentials, in order to attract mainstream financial institutions, a lingering tradition in the movement emphasises the role of social investors in disciplining companies and the market to improve social and environmental outcomes (i.e., sustainability or sustainable development). This chapter explores how SRI governs the sustainability performance of the market and how states govern SRI. The thesis is that these issues are intertwined, in that social investors’ capacity to influence or ‘govern’ the social and environmental behaviour of companies and other market actors is constrained to the extent that states do not provide a regulatory and policy framework that at least removes legal obstacles to social investing but more desirably legally stimulates it. Therefore, social investors should not only target the financial economy but also attempt to influence its policy-makers and regulators in order to secure a governance framework that can, in turn, strengthen social investors’ capacity to govern. So far, such efforts have been rather limited but they are increasing in tandem with the SRI industry’s recent propagation of numerous voluntary codes of conduct. Curiously, whereas SRI once stood for taking action through the financial economy when governments had failed to act, the sector remains dependent on the state to empower it. The SRI sector’s aspirations to govern the market may resemble a ‘surrogate’ regulator, complementing or supplementing official regulation. Through divestment, corporate engagement and enactment of codes of conduct, social investors may seek not only to improve their financial performance, they may also exert a style of market control that is often directed to promoting sustainability. To the extent that social and environmental costs and externalities are insufficiently addressed through ordinary regulation, SRI may assume a greater role in the governance role. As Peter Waring and Tony Edwards (2008, p. 137) observe, ‘in the countries without a strong tradition of social regulation, such as the US, SRI is becoming the functional equivalent of such regulation’. Few social investors, however, would conceptualise their role as surrogate regulators because they don’t view themselves as qualified, resourced or authorised to police the market. Only among the minority of deeply ethical investors, such as those associated with religious and activist groups, would one likely find an avowed mission as including to change market behaviour. Some other investors may be willing to play this role where it is to their financial benefit, but likely doubt that they have the means to exert influence. The financial industry has generally seen itself as mostly just passively tied to its clients and borrowers without a mandate to meddle in their policies and practices unless they would jeopardise the industry’s financial

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interests. But the industry’s growing commitment to SRI codes of conduct suggests that some financiers and investors increasingly accept their role as agents of responsible market governance, especially in regard to the financial economy. The next section of this chapter canvasses existing legal reforms for SRI, in order to highlight the presently rather rudimentary and incomplete legal framework. Fundamental legal obstacles to SRI, notably in fiduciary and trusts law, remain largely unresolved. Thereafter, the chapter considers the efforts of social investors to addresses these problems through their advocacy of new public policy and regulatory interventions. Finally, the chapter examines one domain where the SRI sector has most clearly sought to impress its own governance standards on the market, and that is through codes of conduct for responsible lending and investing such as the United Nations Principles for Responsible Investing (UNPRI) and the Equator Principles. Their modest impact leaves the SRI movement’s influence on governance rather muted. This chapter does not examine in detail some other facets of the SRI sector’s attempts to influence the market, such as corporate engagement or divestment strategies, which I have examined more closely in my other writings (Richardson, 2012). Nor does this chapter attempt to explore wider background issues such as the history or definition of SRI, which are canvassed better elsewhere in this book. The focus of this chapter, by contrast, is the interface between official law and the SRI sector’s law-like initiatives. The ensuing analysis focuses on SRI markets and law in Western developed countries; the argument and conclusions are not necessarily applicable to all jurisdictions.

LEGAL REFORMS FOR SRI SRI evolved as a voluntary movement but has struggled to gain prominence in the financial sector partly because of legal impediments in the areas of fiduciary law, securities regulation and corporate governance (Richardson, 2008). These impediments have hindered investors’ consideration of extrafinancial issues that might hurt returns, restricted disclosure of social and environmental information, and hampered corporate engagement. Some economic incentives and legal mandates for SRI have been introduced in recent years, although they are generally too ad hoc and hardly provide a framework for systemic change.

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The broader governance context to SRI in Western countries has involved a realignment of the roles of the state and market, with a shift towards regulatory governance that cedes greater responsibilities to the market and, to a lesser extent, civil society. Legal commentators have labelled this trend as ‘mutual regulation’ (Simmons & Wynne, 1992), ‘responsive regulation’ (Ayres & Braithwaite, 1992), ‘smart regulation’ (Gunningham & Grabosky, 1998) and ‘post-regulatory governance’ (Scott, 2004), among various terms. Regulatory theorists such as Julia Black (2008) have cautioned that these trends may not ensure adequate accountability and legitimacy to enable effective governance. These risks tend to be greatest for the most deregulated regimes, for which ‘there is no one organization which is responsible for issuing the principles, interpreting or revising them’ (Black, 2008, p. 142). The move towards some modest, countervailing expansion of state authority in response to the recent Global Financial Crisis (GFC) suggests that the pendulum is moving in a direction that will better enable these governance gaps to be closed. For now, the SRI-oriented reforms emphasise economic incentives and information disclosure that give investment funds considerable discretion to make the ultimate financial decisions. These SRI standards don’t require policy consensus concerning definitions of ‘ethical’ or ‘socially responsible’. Instead, they procedurally shape the selection and implementation of investments, thereby ostensibly providing more transparency and public accountability. In theory, by modifying financiers’ incentives and knowledge, such process-based standards may stimulate changes in investors’ social values that contribute to sustainability. Among these policy instruments are requirements for investment institutions to disclose their policies for SRI, and policies for exercising their shareholder proxy votes. These transparency reforms were introduced in several European Community members, as well as Australia and New Zealand, and mostly target pension funds.1 Australian superannuation legislation also allows beneficiaries to choose where their monies are invested, thereby enabling social investors to switch to one of the increasingly prevalent SRI funds.2 Another reform, adopted in Canada and the United States, requires mutual funds to disclose their shareholding proxy voting policies and voting records (Canadian Securities Administrators, 2005; Securities Exchange Commission (SEC), 2003). It aims to discourage fund managers from colluding with corporate management, and through a more active proxy process to improve corporate governance. Implementation of some of these standards, however, reveals shortcomings (FairPensions, 2006; UK Social Investment Forum, 2010). Mandated disclosures sometimes result in

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only vague or perfunctory statements that do not illuminate how SRI decisions are effected or their impacts. These process standards have rarely extended to democratising investment policy-making, which remains dominated by financials industry experts such as fund managers and investment consultants (Bogle, 2005, p. 178). Modern corporate and investment regulation remains premised on investors’ playing the role of ‘passive capital’, which is ‘excluded from management of the business’ (Flannigan, 2009, p. 141). Potentially more influential for SRI are economic incentives that alter the cost benefit calculations of financiers in favour of sustainable development. The leading example is probably the Netherlands’ Green Project Directive,3 which several studies credit as having materially boosted the Dutch SRI market (KPMG, 2002; Vereniging van Beleggers voor Duurzame Ontwikkeling, 2005). The Directive offers taxation deductions for investments in environmentally approved projects, such as renewable energy and sustainable agriculture. Another pioneering example is the New Markets Tax Credit Program, established by the US Congress in 2000 to boost investment in businesses and property projects in low-income communities. The program offers federal tax credits to individual and corporate investors who make equity investments in specialised financial institutions called Community Development Entities (US Department of Treasury, 2012). Conversely, economic incentives can be introduced to discourage environmentally unsound projects. For instance, liability on lenders for pollution problems connected to their borrowers was once enforced by US courts under the so-called ‘Superfund’ legislation,4 and its seemingly drastic effects in dampening lending to the chemical industry and other particularly polluting sectors contributed to modification of the scheme in 1996 to insulate lenders from potential liability (Domis, 1996; Greenberg & Shaw, 1992). Concomitantly, some parallel reforms pertaining to general business corporations may benefit social investors. Notions of ‘enlightened shareholder value’ or ‘stakeholder capitalism’ are guiding the renewal of corporate governance. The measures range from the nuanced reformulation of directors’ duties in the UK Companies Act 2006 to the more prescriptive corporate social responsibility (CSR) provisions in India’s new Companies Act 2013. Enhanced transparency measures have also been applied extensively in some company laws, such as requirements for firms to report their environmental impacts and performance (Case, 2005). These measures can help social investors differentiate between corporate laggards and leaders. They could also directly benefit financial institutions structured as corporations, such as banks and insurance companies. Some proponents of

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SRI have even suggested that the ‘enlightened shareholder’ approach to corporate governance, as exemplified in the UK legislation, could serve as the touchstone for a new fiduciary standard for trustee funds. According to FairPensions (Berry, 2011, p. 6): Section 172 of the Companies Act 2006, which requires company directors to ‘have regard’ to the longer-term and wider consequences of their decisions, provides a useful model. This model preserves the primacy of fiduciaries’ duty to their beneficiaries, but recognises that beneficiaries’ long-term interests may often be best served by an enlightened approach.

Similar inspiration for reforming the fiduciary finance law can be found in US law. In the United States, many states’ corporate legislation allows governing boards to consider the interests of other stakeholders (beyond shareholders) and to favour long-term business strategies over short-term profits. At least 40 states have enacted statutes that expressly authorise corporate management to consider non-shareholder as well as shareholder interests, although only one state mandates such consideration (Hale, 2003). However Delaware the leading US state jurisdiction for incorporation of businesses has not enacted such a ‘constituency statute’. On the other hand, Delaware courts, as in other US state courts, have recognised that shareholders are not the sole beneficiaries of fiduciary duties, and that management has the discretion to take a long-term perspective in promoting the success of the company (e.g. the cases of Unocal, 1985 and Paramount Communications, 1989). These considerations to take a more holistic and long-term outlook should surely carry even more weight within financial institutions such as pension plans and insurance companies that invest on behalf of numerous beneficiaries who see durable returns. The fiduciary and trusts law framework governing institutional investors has so far hardly been transformed beyond a few modest reforms (Richardson, 2013). Financial intermediaries often have fiduciary responsibility and associated obligations to invest prudently in the interests of their fund’s members. In common law systems, these constituent elements of fiduciary finance law are primarily the duties to: (i) act loyally in the interests of beneficiaries/principals; (ii) treat them even-handedly or impartially; (iii) treat them with the care, skill and prudence expected of similarly placed professionals; and (iv) act in accordance with the prevailing law and any governing instruments deed (such as the trust deed). These legal obligations can hinder SRI in the institutional fund sector to the extent that SRI is perceived as financially imprudent or otherwise disadvantageous to the beneficiaries of a financial trust. This hindrance weakens in the case of retail funds marketed

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explicitly for SRI purposes, of which there are many, because the contractual relationship between investors and fund managers creates a consensual relationship for SRI. There has been substantial academic research and debate about the fiduciary and trusts law parameters of SRI in the past decade (Freshfields Bruckhaus Deringer, 2005; Richardson, 2013). As SRI has shifted from its narrow, faith-based ethical investing traditions, towards a more comprehensive framework for addressing social and environmental externalities and promoting sustainability, commentators increasingly believe that SRI makes business sense and therefore is potentially congruent with fiduciary finance law. In other words, the issues addressed by social investors may be ‘financially material’. This materiality fortifies as a longer term perspective of investment is taken, because over sufficiently lengthy periods of time many externalities such as climate change or loss of biodiversity eventually generate economic costs that can hurt fund beneficiaries. Despite this shift in the understanding of SRI and its implications for fiduciary law compliance, governments remain generally taciturn to modify fiduciary duties to explicitly acknowledge the legitimacy of SRI. Most would share the dated view of Ireland’s Law Reform Commission (2008, p. 141) that ‘legislative intervention to allow trustees to follow an ethical investment policy should not be made, and this should remain a matter for the terms of the trust instrument’. A few exceptions to this attitude exist, notably in Canada and South Africa. In 1995 the province of Manitoba amended its trustee and pension fund legislation to allow trustees to consider non-financial criteria in their investment policies so long as the investment decisions are generally prudent.5 In 1988 Ontario enacted the South African Trust Investments Act to protect funds taking an ethical investment stance.6 Where a majority of beneficiaries supported the move, the Act permitted trustees to divest or to reject investments in companies conducting business in South Africa without infringing their fiduciary duty. This reform is notable because it authorised divestments despite any possible adverse effect on investment returns. In South Africa itself, a seminal innovation was the amendment to its pension fund law in 2011 to alter the trustee duty of prudent investing by requiring all funds ‘before making an investment … [to] consider any factor which may materially affect the sustainable long-term performance of the asset including, but not limited to, those of an environmental, social and governance character’.7 The pioneering regulation governs private and public pension plans. Its practical effect is yet to be determined, and it is

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unclear what sanctions would apply if a fund neglected the new standard, but it signals to the South African investment community the legal legitimacy of environmental and social considerations. These novel legislative measures from Canada and South Africa have significance in the context of comprehending the nature of fiduciary investment standards. The fact that the legislatures in these jurisdictions felt compelled to allow trustees to consider non-financial criteria may imply that those considerations do not otherwise meet prudential investment norms. Conversely, they may be construed simply as measures to clarify and provide trustees with greater certainty regarding the common law position. The Canadian legal provision is couched in negative terms, indicating that a trustee will not breach fiduciary duties by considering non-financial factors, and unlike the South African precedent it does not behove trustees to invest ethically or responsibly. Together, they arguably reflect an emerging new sentiment about the nature of what constitutes ‘prudent investment’ and the relevance of ESG factors. Explicit legal duties for SRI have so far been confined to public financial institutions, notably sovereign wealth funds and public sector pension plans in Norway, New Zealand, France and Sweden (Richardson, 2008, pp. 308 375, 2011). The Norwegian Government Pension Fund-Global, the New Zealand Superannuation Fund and the French Pension Reserve Funds have legislative mandates to practice SRI and have been hailed for their progressive approaches (United Nations Environment Programme Finance Initiative & UK Social Investment Forum, 2007). The Norwegian fund’s SRI decisions are guided by a Council of Ethics that makes recommendations to exclude companies or other investments tainted by human rights violations, gross corruption, severe environmental damage or general violations of fundamental ethical norms. The US pioneered SRI restrictions, primarily in the form of prohibitions or restrictions on state and municipal pension plans from investing in certain jurisdictions, namely South Africa, Sudan and Northern Ireland, due to human rights concerns (Dhooge, 2006; Richardson, 2013). These examples have focused narrowly on discrete ethical issues and avoidance of financial ties rather than mandating active investing for sustainable development. This negative orientation is also reflected in the bans imposed by a few states against specific undesirable investments; Belgium, for example, prohibits investing in companies that produce or distribute cluster bombs (Netwerk Vlaanderen, 2007). A rare positive investing obligation is South Africa’s direction to its financial industry to support black economic justice. The Black Economic Empowerment Act of 2003 incorporates a Financial Sector Charter to facilitate accessible

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banking and other financial services to black people and by channelling investment into targeted sectors of the economy.

SOCIAL INVESTORS’ ADVOCACY FOR POLICY AND LEGAL REFORMS The sparse regulatory framework for SRI, especially in relation to private investors, has encouraged some social investors to move beyond just targeting the market to try also to influence market regulators. Investors’ attitudes to law and official policy are an important metric for assessing the integrity of their SRI practices. David Vogel (2005), a leading American commentator on this issue, stresses that the definition of CSR must include not only what companies do voluntarily but also the position they take with respect to public policy. Thus, a business that opposes public authority initiatives to strengthen industry-based responsibility perhaps should not be considered socially responsible. Once self-regarded as an alternative to official regulation, the SRI sector increasingly concedes the need for state intervention, such as reforms to corporate governance to facilitate shareholder activism, improved financial incentives and environmental reporting standards to enable investors to scrutinise firms’ sustainability performance (Hebb & Wo´jcik, 2005, p. 1971). The financial sector’s dependence on the state is most acute in pricing climate change-related behaviour and impacts, which may necessitate carbon taxes or cap-and-trade schemes to help cost greenhouse gas (GHG) emissions (Labatt & White, 2007). Many other economic sectors also rely to various degrees on state support; what is unique and curious about the SRI sector is that it arose precisely in response to the lack of state support. In other words, it catered to investors who believed there had been moral failures by government that required they take the initiative. The emerging trend of investors and financiers engaging with regulators is evident in several jurisdictions. In Australia, several banks made submissions to the federal government’s Garnaut Climate Change Review (2011) about the proposed introduction of a carbon emissions trading scheme, and some such as Westpac explicitly advocated it to ensure an efficient carbon pricing mechanism (Bowman, 2010, p. 463). In Canada, the Social Investment Organization (SIO), which represents most of the country’s SRI industry, and the Shareholder Association for Research and Education (SHARE) lobbied provincial and federal government for reform,

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particularly for greater disclosure of SRI policies by pension funds (O’Neil, 2009). In 2011, they influenced the Ontario government to declare its intention to adopt a British precedent to oblige occupational pension funds to disclose their SRI policies (though not adopted at the time of writing) (Ellmen, 2011). Earlier in 2001, the SIO and other Canadian SRI groups, including Michael Jantzi Research Associates (now known as Sustainalytics) and Ethical Funds, successfully campaigned for revisions to the Canada Business Corporations Act to reduce barriers to filing shareholder proposals on SRI issues (MacLeod, 2008, p. 148). In the United States, major public sector pension funds such as the California Public Employees’ Retirement System (CalPERS) in early 2010 successfully petitioned the SEC to issue guidance to improve companies’ disclosure of climate change investment risks (SEC, 2010). Not all such efforts, however, are successful; the UKSIF proposed an amendment to the Financial Services and Markets Act 2000 to include the provision of environmental financing within the Financial Services Authority’s mandate, a proposal resolutely rejected by British politicians (UKSIF, 2009). At an international level, where some soft-law standards for SRI may be set, social investors are also voicing opinion. Northwest and Ethical Investments (2012) (also known as Ethical Funds) in March 2012 wrote to the Office of the High Commissioner for Human Rights in response to the call for input for the UN Secretary-General’s report on implementation of the John Ruggie Guiding Principles on business and human rights throughout the UN system. It asked that the concept of fiduciary duty be added to the list of influential areas of policy and business law that require review with a human rights lens. Another example is the work of United Nations Environment Programme Finance Initiative (UNEP-FI), which has sought to alter the narrative of how fiduciary duties affect institutional investors, such as through commissioning the 2005 Freshfields report, which as noted earlier helped encourage a more liberal interpretation of fiduciary duties that accommodates SRI when ‘financially material’. Shareholder campaigns are one means by which social investors sometimes seek to achieve these changes at the policy or regulatory level. Michael MacLeod and Jacob Park (2011) describe collaboration among institutional shareholders on issues such as climate change as ‘investordriven governance networks’. Two quite successful examples from the United States, both focusing on environmental issues, have been organised by the Coalition for Environmentally Responsible Economies (Ceres), addressing climate change, and another, coordinated by the Investors Environmental Health Network, targeting hydraulic fracturing.

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In engaging companies, investors and policy-makers, Ceres’ climate campaign highlights the simmering risks to shareholders from global warming in four areas: litigation, regulation, physical damage and reputation impacts. Among its strategies, Ceres coordinates the filing of shareholder resolutions, and networks and engages with targeted firms, institutional investors and government agencies. The number of climate-related shareholder resolutions filed in the United States has grown from 25 in 2004 to 109 in 2011, of which about half went to vote, and many were led by major public pension funds and labour groups (Cook, 2012). Voter support for these climate resolutions has fluctuated between 7.68 per cent and 19.5 per cent on average each year between 2004 and 2011 (FundVotes, 2012). In her analysis of the Ceres’ climate campaign and other examples, Jackie Cook (2012, p. 26) reveals that ‘that resolution filing with broad investor appeal and linked to a policy agenda can achieve change beyond targeted companies’. The impact on the policy agenda arose because ‘management is forced to publicly defend its position when activists use the SEC-mediated proxy process’ (Cook, 2012, p. 29). Shareholder resolutions published in proxy materials become part of the public record, and the issues contained therein are brought to the attention of securities regulators. Concomitantly, their impact on the policy agenda can be amplified when shareholder activists utilise other channels of influence, including ‘participation on policy committees, meetings with politicians and regulators and the production of research with policy implications’ (Cook, 2012, p. 30). One specific regulatory objective of the Ceres campaign was reform of SEC’s disclosure regulations. With support from major public sector pension funds such as CalPERS, from 2007 to 2009 the campaign petitioned the SEC to oblige public companies to disclose how climate change might affect their shareholders’ investments (Riddell, 2008). In January 2010, the SEC responded favourably by releasing new interpretative guidance on existing SEC disclosure regulations relating to climate change.8 This guidance is an important step towards regulators’ recognising the materiality of climate change disclosures (Allen, Jamison, & Bennett, 2010). The Canadian oil sands industry is another climate concern for investors that has involved Ceres. It is among the most carbon-intensive and environmentally polluting industries worldwide and increasingly are perceived to pose business risks. The investor activism against it has been led by the Vancouver-based SHARE and Ethical Funds, as well as the Pembina Institute, a Canadian research and policy advocacy body focusing on sustainable energy solutions. Their research identifies the litigation and regulatory risks that oil sands ventures face in relation to both environmental

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law and aboriginal rights. These risks are presently poorly understood or quantified. A report by SHARE (Barrios & Putt, 2010, p. 10) concluded that ‘investors currently do not have enough information to assess whether significant reclamation liabilities are being deferred by companies into the future’. In Canada, Ethical Funds has been leading corporate engagement and investor awareness-raising on oil sands risks, as well as participating in governmental policy consultations. In 2009, it published an insightful report explaining the investment risks of oil sands projects (Northwest and Ethical Investments, 2009). In recent years, Ethical Funds and other shareholder activists such as the Dogwood Initiative have also filed several shareholder resolutions in the Canadian oil and gas industry to raise such concerns. For example, resolutions filed at Enbridge over 2010 to 2012 requested more disclosure on the financial risks relating to its Northern Gateway pipeline proposal that plans to transport bitumen to the west coast for international export (Berkow, 2011). Unfortunately, explains Cook (2012, p. 42) ‘shareholder actions remain largely uncoordinated’, and there have been no discernable policy or regulatory changes due to the campaign targeting oil sands operations. The Canadian Securities Administrators (CSA) (2010) has since issued environmental reporting guidance to clarify obligations under existing securities legislation to disclose material risks relating to environmental matters. But unlike the SEC’s example, climate change isn’t identified by the CSA as a specific issue for disclosure. The CSA’s reporting guidance flowed from an Ontario Securities Commission review of corporate environmental disclosures practices and incorporates advice from a submission by the Climate Change Lawyers Network (2009) supported by others, including Ceres. The voice of social investors in regulatory reform can easily be drowned out by the more numerous, mainstream financial actors who typically have other concerns such as fear of increased legal compliance costs. They may even actively seek to thwart responsible financing laws. In 1996, the American banking industry pressured Congress to amend the ‘Superfund’ legislation to immunise itself from lender liability suits for the costs of remediating contaminated lands.9 The mutual fund industry in North America fiercely resisted regulations in the mid-2000s to make fund managers disclose how they vote shareholding rights belonging to beneficiaries (Davis, Lukomnik, & Pitt-Watson, 2006, p. 73). Extraordinarily, in the wake of the GFC, which exposed systemic failings in the banking world and capital markets, many financial institutions that were happy to accept government bailouts baulked at many of the proposals to tighten regulatory oversight

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(Grant & Wilson, 2012). For example, Barclays opposed on cost and efficiency grounds some of the recommendations of the Vickers’ report to reform the vulnerable UK banking sector, including to increase banks’ ability to absorb financially losses and to minimise risks by requiring ‘ringfencing’ between retail banking and investment banking (Barclays, 2011; Independent Commission on Banking, 2011, pp. 6 7). Another example is the highly unreceptive attitude of JP Morgan Chase (2010) to the 2009 proposals of the Basel Committee on Banking Supervision aimed at strengthening the resilience of the banking sector. These anecdotes help us understand why legal reforms to promote SRI that have emerged in some countries since 2000 have generally just tinkered with the underlying problems of the financial economy that impede sustainability. The market-based and informational reforms that alter the procedures of SRI decision-making stop short of seriously facilitating or obliging SRI. Ambitious SRI reforms have been reserved for public financial institutions, such as sovereign wealth funds, but only in a minority of jurisdictions.

GOVERNING THROUGH THE MARKET: SRI CODES OF CONDUCT One response of social investors to the gaps and weaknesses in state regulation of the financial sector, especially in a transnational setting, has been to devise its own framework for market governance through codes of conduct. One might, however, view the SRI sector’s efforts less charitably as a ploy to stave off more stringent state regulation over which investors would have less control. The codes of conduct, all of which are voluntary, purport to overcome a major limitation of the scope and ambition of SRI in its traditional emphasis on just targeting discrete issues such as tobacco, weapons or apartheid. The codes also may help address significant collective action problems in financial markets that hinder social investors from cooperating to address systemic, big-picture issues such as climate change. At their best, the SRI’s sector’s codes of conduct help to coordinate, standardise and facilitate action. Mostly drafted by financial institutions, though sometimes also by or with governments, non-governmental organisations (NGOs) or individuals, such codes have proliferated in recent years. The trend began with the Sullivan Principles, crafted by the Reverend Leon Sullivan in 1977 for corporations doing business in South Africa; adherence

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to the code was taken into account by divestment campaigners. Because such codes are only voluntary they may attract considerable interest from mainstream financial players. Some commentators hail the trend as highly beneficial. Megan Bowman (2010, p. 448) asserts that ‘voluntary action by the banking industry has potential to facilitate climate change mitigation and the transition to a low-carbon economy’. Kate Miles (2008, p. 948) believes ‘voluntary codes for the financing sector are making a positive impact’, including ‘through the rejection or modification of environmentally damaging projects, the raising of environmental awareness amongst the financing sector … and the harmonization of lending standards’. Conversely, the codes may suffer from lax compliance controls and a lack of standards concerning financial markets’ broader structure. While individual codes may target specific environmental concerns (e.g. climate change), specific actors (e.g. institutional investors) or methods of accountability (e.g. greater transparency and disclosure), the systemic constraints that the financial economy poses to sustainability are not as well acknowledged. The SRI codes utilise a variety of methods, structures and objectives that can be broadly categorised into two types normative and process approaches though a single instrument may combine both. Some are mainly normative frameworks that enunciate substantive principles and guidance on desirable performance; they include the Collevecchio Declaration on Financial Institutions10 and the UNPRI.11 Process standards, enabling the assessment, verification and communication of performance, constitute a second approach to governing the market. A relevant example is the Equator Principles that govern project finance.12 Process standards don’t dictate social and environmental outcomes but rather establish procedures such as environmental reporting that may spur improvements in signatories’ performance. Table 1 lists existing SRI codes. Most entries explicitly address the financial sector or SRI, while two examples the Ceres Principles and the Sullivan Principles have wider application to the business community. In addition, there are numerous voluntary standards for CSR and corporate governance that indirectly or implicitly touch the financial sector (Cragg, 2005). While financial entities are not commonly signatories to these CSR codes, they may assist social investors by providing information about best practice standards in a particular industry sector, as well as insights into the behaviour of individual companies. Some codes deal generally with CSR in any business context, while others focus exclusively on specific sectors: the former type includes the International Organization for Standardization’s (ISO) Social Responsibility 26000 standard, UN Global Compact and OECD Guidelines for Multinational Enterprises, while the

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Table 1.

SRI-Related Codes and Standards.

Code

Principal Sponsor

Global Sullivan Principles

Reverend Leon Sullivan

Ceres Principles

Coalition for Environmentally Responsible Economies (Ceres) United Nations Environment Programme Finance Initiative (UNEP-FI)

UNEP Statement by Financial Institutions on the Environment and Sustainable Development Carbon Disclosure Project (CDP) London Principles of Sustainable Finance Collevecchio Declaration on Financial Institutions Equator Principles

Year Established 1977 (redrafted 1985) 1989 1997

Rockefeller Philanthropy Advisors

2002

UK Department of Environment and Corporation of London Coalition of NGOs

2002

Multinational banks and the World Bank’s International Finance Corporation Ceres

Investor Network on Climate Risk Action Plan Eurosif Transparency Guidelines European Social Investment Forum (Eurosif) UN Principles for Responsible United Nations Investment (UNPRI) ClimateWise Principles Global insurance companies Carbon Principles Consortium of US banks Climate Principles Climate Group UK Stewardship Code UK Financial Reporting Council Natural Capital Declaration UNEP-FI, Global Canopy Programme, and Getulio Vargas Foundation Principles for Sustainable UNEP-FI and insurance industry Insurance

2003 2003

2003 2004 2005 2007 2008 2008 2010 2011 2012

latter includes Responsible Care (designed for the chemical industry) and the Extractive Industries Transparency Initiative (McKague & Cragg, 2007). Some CSR codes also manifest as environmental management systems (EMSs) to provide frameworks for organisations to routinely manage their environmental and social impacts. Of the two main international EMSs the European Community’s Eco-Management and Audit Scheme (EMAS) and the ISO 14001 standard neither is particularly well suited to capturing the environmental or social footprint of financiers because they

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tend to focus on specific projects or activities rather than the disparate impacts transmitted through financial relationships (Richardson, 2002). The SRI codes may beneficially coordinate action on shared concerns, facilitate exchange of information and best practices, and build a network for peer pressure to minimise unscrupulous and unethical financing. Some codes have been heavily subscribed to; most notably, as of March 2014, the UNPRI boasted approximately 1,300 signatories, including many mainstream actors. As for influencing corporate behaviour the ultimate indicator of success evidence is less verifiable. The most successful demonstrated effect has been greater disclosure of corporate ESG performance, such as pursuant to the CDP, which crucially enables social investors to better discriminate between corporate leaders and laggards on GHG emissions and to apply pressure accordingly. Transparency standards may also foster reflection and learning among participants about their practices and impacts, in turn stimulating positive behavioural changes (Kolk, Levy, & Pinkse, 2008). The most successful codes based on anecdotal evidence appear to possess two attributes: they were drafted through multi-stakeholder processes, and they are embedded in wider institutional regimes for on-going dialogue, education and monitoring. These forms of ‘civic regulation’, as some commentators describe them (Vogel, 2008), are providing frameworks for business and non-profit NGOs to work collaboratively. The UNEP-FI perhaps best exemplifies these traits, and it has garnered considerable support from many investors.13 Research by John Conley and Cynthia Williams (2011) on the Equator Principles, which apply to bank-based project financing, suggests the Principles have generally improved the culture among lenders; and they identify the presence of NGO watchdogs as instrumental in operationalising the Principles. Scrutiny by NGOs has involved a number of groups and encompassed several SRI codes. BankTrack, a Dutch-based umbrella organisation of NGOs pooling their advocacy on financial issues, has been among the most vociferous watchdogs, especially in regard to the Equator Principles, and it has issued numerous reports that document the compliance efforts of individual financiers as well as that critique the SRI codes themselves (BankTrack, 2012). Friends of the Earth and Worldwide Fund for Nature (WWF) are long-standing environmental NGOs that have in recent years increasingly targeted the financial sector as an impediment to the shift to sustainability. The US shareholder advocacy group Ceres, as discussed earlier in this chapter, is another important NGO that increasingly targets the financial sector. Focusing particularly on climate change, Ceres has

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campaigned against investments in oil sands and hydraulic fracturing (MacLeod & Park, 2011). Another important facet of the supervisory function of NGOs has been to draft alternate SRI standards and codes, which serve not only as an alternate governance regime for willing investors but also provide a normative benchmark with which to judge the quality of industry-initiated codes. The Collevecchio Declaration on Financial Institutions, drafted by a confederation of 2003, is the best example of an alternate governance regime for SRI. Such presence from the NGO community is important because the voluntary nature of SRI codes raises doubts about their potential for credible governance of financial entities (Gibson, 1999; Wood, 2006). The extensive academic literature on this subject need not be repeated here, other than to stress that voluntary instruments tend to lack independent monitoring and enforcement mechanisms, do not contain robust performance metrics to evaluate compliance and are not certifiable. Consider British Petroleum (BP), to illustrate: despite a reputation as being ‘green’ it was listed on the Dow Jones’ Sustainability Index and was a signatory to the UN Global Compact BP was responsible for the Deepwater Horizon explosion in 2010 that spawned massive environmental and economic costs, including to the company itself (Balmer, 2010). Apart from the quality of codes’ standards, seminal factors that shape the quality of implementation are the presence of independent monitoring of signatories’ commitments and sanctions against poor performance. A further dimension to assess the quality and impact of SRI codes is their substantive content: some posit rather open-ended, discretionary goals while others are quite prescriptive. Some impose generic performance targets (e.g. to prevent pollution or minimise adverse environmental impacts) while others are specific (e.g. to reduce GHG emissions by a specific quantity and within a specific timeframe). A good example of the more prescriptive approach is the Collevecchio Declaration, while the UNPRI reflects the more discretionary, general style. More stringent standards have drawbacks; investors have shunned the Collevecchio Declaration, drafted by NGOs. Investors usually favour more discretionary and procedural-based standards, such as self-reporting. While transparency measures can have beneficial effects, they probably won’t induce major changes in investors’ underlying goals, especially if there is no independent auditing and verification. Also, codes differ in their degree of specificity; some contain brief aspirational declarations, as in the London Principles of Sustainable Finance, while others posit near-byzantine rules and performance indicators, such as EMAS. The significance of such differences is that the less

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specific codes may not be self-executing without additional effort to define their working requirements. In terms of their governance impact, the SRI codes are also notable for their global reach. Most are pitched as universal standards for an international market, and in this regard they purport to fill a significant lacunae in official intergovernmental regulation of the global financial economy. Globalisation, spurred by technological advances and market deregulation, has greatly accelerated the mobility of financial capital across national borders. Globalisation can distance financiers from the social and environmental sequelae of the companies they fund, hinder nuanced consideration of such impacts on a case-by-case basis and widen the sources of capital for companies, thereby enabling polluters to find alternatives to any ethical investors who shun them.14 These trends have concomitantly diminished the capacity and willingness of states to govern financial markets, though the GFC has politically strengthened the case for re-regulation. A further distinctive trait of some recent SRI codes is their focus on climate change. The most broadly based is the Climate Principles: A Framework for the Financial Sector, which was adopted in 2008 to provide a ‘common global standard of best practice not only to assist the finance sector in managing its own climate impact but also to assist the sector in supporting its clients and stakeholders in managing their own impacts’.15 The Principles were devised by the Climate Group, a confederation of NGOs, business and public sector members, in dialogue with some 20 financial institutions. Unlike most SRI codes, the Climate Principles contain provisions tailored to specific parts of the finance industry. The insurance sector is expected to advise clients on climate risks and GHG mitigation technologies, while investment banks should facilitate financing of low-carbon technologies and GHG reduction projects, as well as assess the climate consequences of their investments. For financiers of projects that emit least 100,000 tonnes of carbon dioxide equivalent annually, the Climate Principles expect them to request that their clients ‘quantify and disclose’ GHG emissions associated with the project, to ‘monitor and report GHG emissions annually in accordance with internationally recognised methodologies’ and to ‘evaluate technically and financially feasible options to reduce or offset project-related GHG emissions’ (article 2.7). The Climate Principles thereby provide more concrete performance standards than most SRI codes, and the Climate Group monitors compliance and publishes performance reviews. Finally, it should be noted that SRI codes can engender wider governance consequences and interact with the formal legal system in subtle ways.

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Simply because participation in a code is voluntary doesn’t mean that the code, once accepted, lacks legal consequences. It may be legally binding by virtue of contracts among participating institutions; a bank may include in its contract with a borrower a term that the parties adhere to the Equator Principles’ provisions regarding environmental assessment. A code may also have consequences for regulatory compliance; for example, Denmark’s Financial Statements Act provides that an investment institution’s requirement to report annually on its social and environmental performance may be met if it has submitted a progress report in connection with its accession to the UNPRI.16 This example illustrates an important potential wider role for SRI codes as mechanisms of market governance that supplement or collaborate with state-based regulation. Thus, SRI’s market-based governance should not necessarily be seen as an alternative to state governance but rather as a potential partner that can extend the reach and impact of the law.

CONCLUSIONS An analysis of SRI’s impact must include its role in governing the market. Paradoxically, whereas SRI once stood for change when governments failed to act, the SRI industry’s ability to flourish and be a force for social and environmental improvement now requires a helping hand from the state itself. Of course, there is nothing unique about the importance of government support for businesses or entire economic sectors, such as firms that receive public assistance or largesse through subsidies, related expenditures, regulation and tax policy. Examples include the oil and gas industry, the transportation sector, and radio and television networks. But the situation for SRI was different precisely because the movement arose historically as an attempt to govern and exert influence when governments had failed to act: the South African divestment campaign being the quintessential example. In other words, the existence of the movement was premised on the absence of government support. While this chapter has highlighted ways in which social investors still purport to govern the market, it has also illustrated their growing reliance on governments to govern. Curiously, if perfect environmental and social regulation of the productive economy existed, such as robust controls on carbon polluters that reduced the threat of climate change, SRI would lose much of its

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justification. We wouldn’t need social investors to correct market failures, because governments would have already done the job. SRI would likely retreat to its original domain as a means for individuals and eleemosynary institutions to advance their own ethical preferences, such as shunning companies that produce intoxicants or operate casinos. While such ‘perfect’ regulation is not attainable, it certainly could be improved by targeting the financial economy in order to convey more socially responsible financial signals to the real economy. To be a better governor of the market, the SRI sector must pay more attention to securing public policy and regulatory reforms to stimulate sustainable development in the financial economy. While the SRI sector thus far is not a credible alternative to official regulation, social investors are at least beginning to appreciate the importance of robust regulation for achieving their goals. For instance, 268 global investors issued a public statement prior to the 2010 UN climate change conference in Cancun, calling attention to the fact that current regulation of GHG emission reductions fails abysmally to limit climate change to reasonably safe levels (United Nations Environment Programme Finance Initiative (UNEP-FI) and UKSIF, 2010). Similarly, in the lead-up to the recent Rio + 20 global environmental conference, United Nations Environment Programme Finance Initiative (UNEP-FI) and UKSIF (2012, p. 2) declared that ‘governments of the world have a unique opportunity at Rio + 20 to create an enabling environment for the financial sector’ and that ‘[p]olicy and regulatory clarity, certainty and reliability are essential for us, as financiers, investors, and insurers, to play our role in advancing sustainable development’. One of these priority areas is reforms to corporate and securities law, such as mandates for corporate environmental reporting and greater shareholder rights, to enable social investors to be more informed and have greater leverage. The SRI sector is thus gradually recognising that promoting sustainability is not just a matter of voluntary action and education; it also requires partnership with government through legal reform (Thamotheram & Wildsmith, 2007). This chapter is not the place to delve further into the kinds of legal reforms that could make a difference to SRI. I have outlined a reform agenda in my other writings on this topic, but suffice to say that the most pressing goal is to redefine the notion of fiduciary responsibility of funds from one that focuses only on the exclusive financial interests of private beneficiaries to a new standard that accommodates long-term sustainable investing for the public benefit (Richardson, 2013). Such a reform should at least be adopted for all public sector funds such as sovereign wealth funds in order to set an example for the markets.

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NOTES 1. For example, UK’s Occupational Pension Schemes (Investment) Regulations, 2005: cl. 2(3)(b)(vi)-(3)(c); Australia’s Corporations Act, 2001 (Cth), s. 1013D(1)(l); France’s Projet de loi sur l’e´pargne salariale, February 2001, No. 2001-152, arts 21, 23; and New Zealand’s KiwiSaver Act, 2006, s. 205A. 2. Superannuation Legislation Amendment (Choice of Superannuation Funds) Act, 2005 (Cth). 3. The scheme was revamped and extended in 2002 and 2005: Regeling groenprojecten buitenland, Staatscourant 1, 2 January 2002, 31; Regeling groenprojecten, Staatscourant 131, 1 July 2005, 13. The Dutch ‘green investment’ taxation privileges will be phased out by 2014. 4. Comprehensive Environmental Response, Compensation and Liability Act, 1980, Pub. L. No. 96-510. 5. Trustee Act, SM 1995, s. 79.1; Pension Benefits Amendment Act, SM 2005, s. 28.1(2.2). 6. RSO 1990 (repealed in 1997). 7. Pension Funds Act, 1956: Amendment of Regulation 28, 2011, s. 2(c)(ix). 8. SEC, ‘SEC issues interpretive guidance on disclosure related to business or legal developments regarding climate change’, 27 January 2010, http://sec.gov/news/ press/2010/2010-15.htm 9. Asset Conservation, Lender Liability and Deposit Insurance Protection Act 1996, Pub. L. No. 104-208, ss. 2501-04 10. See http://www.foe.org/camps/intl/declaration.html 11. See http://www.unpri.org 12. See http://www.equator-principles.com/index.shtml 13. See http://www.unepfi.org 14. Chinese banks, for instance, have been accused of predatory lending: ‘EIB warns Africa may suffer as Chinese banks move in’, Environmental Finance, March 2007, www.environmental-finance.com/2007/0703mar/news.htm#on2 15. Climate Group, http://www.theclimategroup.org/programs/the-climateprinciples 16. Act amending the Danish Financial Statements Act (‘A˚rsregnskabsloven’), 2008. s. 99a(7).

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PART V CONCLUSION

SRI IN THE 21ST CENTURY: DOES IT MAKE A DIFFERENCE TO SOCIETY? Ce´line Louche and Tessa Hebb ABSTRACT Purpose This chapter interrogates the idea that Socially Responsible Investment (SRI) is ‘making the world a better place’. It explores the issue of the societal impacts of SRI by addressing five main questions: (1) Is SRI a viable solution to society’s problems? (2) What are the impediments and limits to SRI’s ability to make a difference in society? (3) Where is ‘ethics’ in SRI? (4) How do we measure societal impacts of SRI? and (5) What is the future of SRI? Methodology This chapter is a reflective piece debating the societal impacts of SRI. For the purpose of this chapter, a focus group was organised and interviews were conducted involving both academics and practitioners. Findings The chapter highlights and discusses several items that can either enhance or on the contrary hinder the societal impacts of SRI. Some of them are related to understanding of SRI, some concern the practice of SRI, while others are more of an epistemological nature.

Socially Responsible Investment in the 21st Century: Does it Make a Difference for Society? Critical Studies on Corporate Responsibility, Governance and Sustainability, Volume 7, 275 297 Copyright r 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 2043-9059/doi:10.1108/S2043-905920140000007011

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Based on the discussion, we propose three points of leverage that can enhance the capacity and ability of SRI to create change. Research implications The chapter is a call for more research on the societal impacts of SRI. Research in SRI has dominantly focused on the technicalities of the activity and the financial implications, but has hardly touched upon the question of the societal impact. Practical implications There are three primary managerial implications highlighted in this chapter: rethink the notion of fiduciary duties, strengthen the interaction between asset owners and asset managers, and encourage changes in public policy. Keywords: Socially Responsible Investment; societal impacts; ethics; future of SRI

One of the most striking claims of the Socially Responsible Investment (SRI) industry is the claim that SRI ‘makes a difference’ to society. How many times have we seen SRI advertising statements such as ‘Investing for good’, ‘Investing for a better world’ or ‘Making a profit while making a difference’. Although the prospect of ‘making a difference’ has a strong appeal to the many who are concerned about social and environmental issues, in this concluding chapter we want to challenge this idea. The issues of societal impacts have been too often neglected or ignored. The focus has been mainly on the financial performance or the technicalities of SRI, important but self-limiting. The difficulty as well as the beauty of the societal impact question is its complexity. The various authors in this book have touched upon the complexity of understanding and assessing the societal impacts of SRI. In this concluding chapter, we address five questions that have served as the corner stone of the book. The objective of this chapter is to launch a discussion to be taken up and debated by researchers and practitioners. It seeks to answer each question, but leaves open debate that can be regarded as areas for further research. SRI emerged in its modern form in the 1970s. Issues like the antiVietnam war movement, the civil rights movement, concerns about the equality for women, the Apartheid crisis in South Africa were key drivers for investors and activists to engage in active corporate ownership. In this early stage of SRI, the intention was to create change and have a positive impact in society. Led by socially concerned groups such as faith

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organisations, consumer activists, SRI was used as a tool to raise political and ethical concerns and create pro-social change. When asked if divestment played a role in ending South African Apartheid, Nelson Mandela answered ‘undoubtedly’. From the 1970s to today we have seen a rapid evolution of SRI. It has not only managed to maintain itself as a movement (Arjalie`s, 2010) but also to grow and penetrate the sphere of mainstream investment. We have witnesses the UN-backed Principles for Responsible Investment with approximately 1,200 signatories representing $32 trillion of assets under management (as of February 2013). The Principles for Responsible Investment, launched in 2006, is a symbolic representation of the broad diffusion of SRI. As Karl Marx said, once the idea has gripped the masses it becomes a material force, that is, it can lead to change in material life. Has SRI reached such a level of the critical mass to create real and lasting positive change? SRI has become more sophisticated in its approach, tools and practices. It not only includes exclusion screens but also a whole set of strategies, techniques and activities such as environmental, social and governance (ESG) integration, shareholder engagement, best in class stock selection. It also consists of wide range of products such as SRI funds, impact investing, green real estate or microfinance. SRI criteria have significantly developed to encompass a wide range of issues related to social, environmental, governance and ethical concerns. In 40 years, SRI has gained breadth, maturity and popularity although the growth of SRI was contested only two decades ago. Some saw in SRI a trend that would pass after a few years. In 2013, SRI seems to be here to stay despite the fact that we may not know how it will look in a few years’ time. After several decades of research on SRI, we feel the time is now ripe to raise and address some essential questions related to the impact of SRI. Can we be as certain as Nelson Mandela in the 1980s that SRI in its current forms and practices has a positive impact on society? The objective of this chapter is to help us to explore this question. It is organised around a series of five questions: 1. Is SRI a viable solution to societies’ problems? 2. What are the impediments and limits to SRI’s ability to make a difference in society? 3. Where is ‘ethics’ in SRI? 4. How do we measure societal impacts of SRI? 5. What is the future of SRI?

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These questions were instrumental in bringing this book to life. From the start of our journey they brought us together with common concerns, and guided us in shaping and designing this volume. Our intention was to raise questions that would provoke reactions and discussions; that would awaken certain sensitivities and frustrations; that would foster debate. We do not pretend to provide full and complete answers to these five questions. Our objective is simply to start a discussion that will hopefully be taken up by researchers and practitioners in the SRI field and beyond. We believe these questions are essential for SRI to continue to develop. Our concern is not only about growth of SRI in terms of number of funds or asset under management, but rather growth in terms of societal impacts. For the purpose of this concluding chapter we organised a one hour focus group that was held on 3 October 2012 during the PRI-CBERN Academic Conference held at York University, Canada. Thirteen participants took part in the focus group representing a mix of practitioners and academics involved and knowledgeable in the field of SRI. Following the focus group, three interviews were conducted, each lasting one to one and a half hours. The list of participants in the focus group and interviews is given in Appendix B. The focus group and interviews were organised as a discussion around the five questions detailed above. We provided statements to which participants could react. The objective was not to intervene but rather to let individuals express their own ideas and views. The focus group and interviews were recorded and transcribed. Those discussions provided key inputs in writing this concluding chapter. Although the views expressed in the chapter are solely our own, participants of the focus group and people we interviewed significantly shaped and influenced our answers. We are deeply thankful for their inputs and openness, their willingness to share with us their knowledge and opinions and to engage in what is a challenging and ongoing discussion. See Appendix B for full list of participants.

IS SRI A VIABLE SOLUTION TO SOCIETIES’ PROBLEMS? Does SRI contribute to solving fundamental problems in society or is it simply and solely a means to appease some critics while we continue investment activities as usual? Or in other words, is SRI a viable solution to societal problems?

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SRI: Only an Element of the System SRI has sometimes been presented as the solution to all problems, raising high, and somewhat unfair, expectations on this activity: ‘sometimes expectations are placed on us to solve problems that we did not even claim to be responsible for’ (one of the interviewees). However, at best SRI is one actor among many others that can create and contribute to change. It has some capabilities to create change especially within the financial community, but one cannot expect SRI to change society on its own. Johnsen (2003) warned about the ‘Nirvana fallacy’ in which SRI often falls, that is comparing the real world with an imaginary and idealistic world. This discussion raises two important issues. The first is the importance of collaboration and partnership. As it has often been argued, cross sector partnerships have become an integral and necessary part of CSR (Jonker & Nijhof, 2006; Seitanidi & Crane, 2009; Waddock, 1989). Collective actions enhance the ability of actors to solve problems and achieve objectives. The second issue is the need for a systems approach. SRI should not be considered as an individual and disconnected activity. A systems approach helps to ‘manage the interrelationship rather than linear cause-effect chains and seeing processes of change rather than snapshots’ (Senge, 1990). If SRI is considered and managed separately, it may lose critical capacities and abilities to create change. By applying the concept of systems thinking and considering SRI as one element of a whole system, viable solutions to society’s problems will be made possible. We need to understand the dynamic complexity of SRI rather than the detailed complexity of the parts in order to be successful and have positive societal impacts. Managing and considering the relationship between SRI and the broader system is as important as SRI in itself.

It All Depends on the Definition Answering the question of SRI’s viability is both challenging and tricky. Indeed ‘it all depends’: the way SRI may be defined influences the answer to the question. In their 2009 article, Sandberg, Juravle, Hedesstro¨m, and Hamilton (2009) raised the issue of heterogeneity and ambiguities. They have identified heterogeneity on four levels: definitional, terminological, strategic (i.e. how should non-financial concerns that are material to investors be integrated in the investment process) and practical (i.e. the level where strategies are translated into the investment criteria).

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Depending where one positions oneself on the SRI spectrum, the notion and understanding of impact may be very different both in its intentionality and in its definition. Indeed the rational and intention behind SRI choices can vary greatly. At one end of the spectrum, often referred to as ‘ESG integration’, the focus is on materiality and risk issues, while the other end, referred as ‘SRI’, the focus is on achieving ethical impacts. The degree of intensity and intentionality of the investor is very different from one end of the spectrum to the other. As a result the impacts of SRI can vary greatly. ‘One cannot expect the same societal impact from a microfinance fund and real estate investing although both are SRI products’ as one of the interviewees highlighted. Another aspect that influences the way SRI is being defined and practiced is the legal system, whether it is under the common law or civil law jurisdiction. For example in common law countries a retirement fund cannot have a political or ethical view. As a result of the wide variation in SRI, talking about whether or not it creates social change is not straight forward. SRI heterogeneity offers both advantages and disadvantages. For example heterogeneity may be a factor that slows down collective actions. On the other hand it can be perceived as an asset needed to address the type of issues SRI deals with, ones where there is no consensus or one size fits all solution. Heterogeneity may also be a way to stimulate debate and engage in dialogue (Louche & Lydenberg, 2011).

Unclear Goals of SRI: What Does it Want to Reach? Next to and probably related to the variety of SRI definitions another issue in assessing the viability of SRI to make large societal changes is the unclear goal of SRI. One of the interviewees identified three main rationales in SRI: (1) the business case or investment case where ESG factors are considered as valid components of investment decisions because of their materiality; (2) the reputation and licence to operate case where SRI helps the financial institution to maintain or regain a good CSR reputation; and (3) the client case, where SRI is about delivering what the client wants in investment. In none of these three cases is instrumental social change part of the goal of SRI. As a result, we may want to add a fourth rational which would be the societal impact case where SRI is being considered because of the positive social and environmental change it (may) create in society. Ideally of course we would like SRI to integrate all four rationales.

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Ticking a box is often enough to be part of the SRI community, without having the intention of contributing to a more sustainable financial system. Most clients’ needs can be met without changing the world. The investment case can easily be demonstrated without making a difference. Often offering an SRI option serves to take the pressure off the investment industry that might otherwise face much greater criticism. As a result, SRI may fail to address the most important societal issues and may in fact participate in maintaining the status quo and to some extent avoid rocking the boat. If social change was an important focus of the early stage of SRI, the intentionality of changing the world may have been slightly diluted as the industry has matured. The focus seems to have moved instead to reaching a critical mass of investors, an approach that is often termed mainstreaming. Although mainstreaming is probably necessary to create change, it should not hide a number of essential questions on the purpose of SRI: What type of outcomes and impacts are we looking for through the practice of SRI? Is SRI about a cleaner environment, more diversity in corporations, increasing social justice, or is it about justifying the current financial system and avoiding its critics or is it about both?

WHAT ARE THE IMPEDIMENTS AND LIMITS TO SRI’S ABILITY TO MAKE A DIFFERENCE? What are the impediments for SRI to make a difference to society? What are the limits of SRI in its capabilities to create change? Are there some characteristics and features that hinder SRI in its societal impacts?

Stuck at the Micro Level SRI tends to focus on the micro level that is pushing individual companies to improve their social and environmental performance. This is true for both screening approaches and engagement processes. Very little attention is being paid to the macro level such as policy making which would serve to influence laws or the sector level which would help to shape sectoral initiatives and programmes. Historically the focus has been on the behaviour of individual companies or in some cases aimed at a small subset of a sector. By embracing the macro level, for example shaping laws and financial regulation, SRI could gain capacity to create change and make a difference.

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But for that to happen the SRI community needs to be more daring and tackle the bigger systemic problems which are often complex. With SRI stuck at the micro level, it raises the question of the capacity of the SRI community to enter in such debates. Some collective actions are starting to emerge, such as the Corporate Sustainability Reporting Coalition (CSRC). Nonetheless that is only a start and more is necessary to create change.

A Partial View SRI actors do engage on specific issues with companies but those issues remain one element among many others within a company. The SRI community is facing the challenge of perceiving only a small and limited aspect of what is going on in the company. Having a comprehensive view seems impossible as corporations are often large, complex and global. One can only get a partial view of the problems. Therefore and as one of the interviewees noted, ‘SRI remains small and powerless in the world of great wealth and power’. We need to be careful in assuming that in itself it is institutionally empowered to make fundamental change. If the ideal goal of SRI is to challenge the market and focus on the real economy, we should investigate whether SRI is powerful enough to make a change. It is going to be hard to answer this question because we must look for different benchmarks, for different measures of value. However just because SRI has not yet been taken up at the global scale doesn’t mean it cannot have an impact.

Constrained by the Business Case SRI has developed around the ‘business case’. A large part of the SRI literature has focus on demonstrating the link between SRI and financial performance. These studies tend to suggest that SRI has become a discretionary choice for investors to follow only if there is a compelling business case (Richardson & Cragg, 2010) rather than being guided purely by environmental, social and ethical concerns. The business case approach, which we recognise is key in mainstreaming SRI and reaching a critical mass, may well be a self-limitation for SRI. If SRI attracts attention only to the extent that investors see social and environmental issues as financially material, it means that SRI becomes relevant only when those issues provide tangible financial risks or opportunities.

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This raises an important and complex empirical question, which has not yet been resolved. This question hinges on the issue of ‘what is materiality’. Research may well want to address the question of the implications of the business case approach. As one interviewee said ‘the business case has reached the limits of its effect’. It has been very instrumental in the development and take-off of SRI, but today it may, in some cases, undermine the sort of structural change SRI should strive for.

WHERE IS ‘ETHICS’ IN SRI? Some say that ‘ethics’ is absent from the concept of SRI as it is just another market segmentation technique. It was one of the Cowton’s criticisms of SRI as early as 1994: At one level, ethical investment can be seen as just another product innovation that helps widen choice …. The irony is that its occurrence can be explained in pure, profitseeking capitalistic terms, as financial institutions seek to influence and exploit their environment in the interests of profitability/ Thus individual investors, potentially at least, have their values met or satisfied by institutions/people who do not share these values at all, whose sole motive might be to make more money. (Quoted in Sparkes, 2001)

The most recent practices and writing on SRI tend to avoid the notion of ethics despite the fact that historically SRI was built on ethical concerns. One of the most striking changes has probably been the change of name: from ‘ethical investing’ to ESG or responsible investment. Although ‘ethics’ seems to disappear from the vocabulary, this does not necessarily mean it is not relevant and considered in the SRI field. Ethics has been and we believe remains today an important feature of SRI. ‘There is no way to get rid of the ethical dimensions. That would be an illusion’ (an interviewee). Ethical systems are needed as they provide a guideline. Accepting the notion of ethics is also recognising that the many ethical dilemmas in SRI can probably not be treated with merely a cost benefit approach. One of the risks is to consider ethics as merely a ‘toolbox’ while, from our perspective, the notion of ethics is essential in raising questions and thereby considering the various nuances of complex situations like bribery, human rights, climate change and many others. We would like to argue that building the ‘business case’ around SRI or emphasising the notion of ‘materiality’ is not a way of denying the notion of ethics but rather a way of building a coherent justification for SRI

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(Kurucz, Colbert, & Wheeler, 2008). Rather than ethics being the central concern here, the debate is more related to logics of justification which is characterised by the divide between economic and ethical justifications. The debate about the notion of ethics in SRI is an important debate as it raises the question of what SRI is all about. The exclusion of ethics emphasises a uni-dimensional activity, disconnected from societal debates, while the inclusion of ethics reflects the interconnection between SRI and society and the multidimensionality and dynamic interest of SRI, taking responsibility for a greater common good (Driver, 2006; Kurucz et al., 2008). The Danger of Personal Ethics Some of the interviewees argued that personal ethics might be a hindrance to mainstreaming SRI. Personal ethics leads to Sparkes’ question (2001): ‘whose ethics?’. Moreover considering personal ethics may lead to many contradictions and conflicts. On what grounds should tobacco or alcohol be excluded? Although such exclusions may be regarded as the ‘old’ SRI, in 2012 it was still an important practice among SRI funds (Eurosif, 2012; Social Investment Forum, 2012). Rather than focusing the discussion on personal ethics, it may be more relevant for SRI to consider a higher level of abstraction that is what Donaldson and Dunfee (1999) refer to as ‘hypernorms’. Hypernorms are trans-cultural values that include fundamental concepts of rights and societal good common to most major religions, or countries. The values they represent are by definition acceptable to all cultures and all organisations. Hypernorms are consistent with fundamental international rights such as the right to freedom of physical movement, the right to freedom of speech and association, and many other international norms. Those hypernorms are less likely to be contested. These norms are important because they form the macro-social contract within which ‘moral free space’ is allowed for communities to develop their own norms. Ethics and hypernorms are essential to SRI but the danger is falling into and imposing personal ethics where there are conflicting and competing claims. Capacity to Exercise Judgement According to one of the interviewees, one of the key principles of SRI is its capacity to exercise judgement. As Louche and Lydenberg (2011) argued, the activity of SRI is based on the notion that investing is not a neutral

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activity and certainly not neutral from the ethical point of view. SRI differs from regular investing in the sense that it recognises that ‘any investment has impact on society and the environment and it accepts its responsibility to evaluate that impact and to direct it, as much as reasonably possible, to societally productive ends’ (Louche & Lydenberg, 2011). Although it should not be confined only to SRI, one of the key and fundamental questions that needs to be addressed here is: how should investing and finance in general serve society? In other words it is requiring investors to exercise active judgement, to think and reflect on the way investment creates (or destroys) value for society.

MEASURING SOCIETAL IMPACT The issue of impact measurement underscores the conflict embedded in SRI. On the one hand it is essential to measure performance of these funds both financially and in terms of positive ESG changes that result from SRI. Such quantification is necessary to more fully integrate SRI in mainstream financial models and financial analysts’ mindsets. Yet for many, the fundamental societal changes sought by SRI cannot be fully understood if only measurable and quantifiable data is considered. Because of the ethical dimension of SRI some changes, while critically important from a societal point of view, may not result in financial outperformance or may take a long time (even decades) to demonstrate positive returns. It can be argued for example that the slave trade did indeed make profit for investors, but was fundamentally wrong. Not all positive social, environmental and governance (ESG) changes can be argued simply from the perspective of the business case.

Measurement as Part of Mainstreaming To have broad societal impact, SRI requires significant new investment to be made over time. Failing that, it remains a small niche that allows individual investors to feel good about their investment, without any significant impact on companies and indeed society at large. This means that SRI needs to become increasingly mainstream. In order to achieve this goal, the commonly held misperception that taking ESG into account means an automatic sacrifice of financial return, must be countered. Refuting this

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claim can only be accomplished through the measurement of SRI results. To date most of SRI measurement has centred on financial return to the investor. Under the rubric of ‘doing well by doing good’, the ‘doing good’ aspect of the SRI mantra has been assumed rather than measured. In the early days of SRI (1980s) significant energies were spent demonstrating that SRI investment choices outperformed the market as a whole. Through this period the SRI approach most commonly used was divestment from companies deemed to harm society. Most common divestment strategies included tobacco, nuclear energy, pornography, weapons and alcohol production. Such approaches reflected the history of SRI from the early days of the Quakers in the 1700s to the South African anti-Apartheid era of the 1970s and 1980s. Since companies were to be excluded from the investment portfolio, little energy was spent on measuring the impact of such divestment on company and more broadly societal outcomes. As it turns out most divestment has little impact on companies’ cost of capital, with investors willing to step in to buy when social investors sell (Hong & Kacperczyk, 2006). The major impact of SRI divestment campaigns is to companies’ reputations and ultimately on their ESG materiality disclosure requirements. While divestment allowed the individual investor to exercise ethical choices on where to invest, mainstream finance, deep in the embrace of the Efficient Market Hypothesis (Fama, 1965; Samuelson, 1965), took as given that any attempt to restrict diversification in a portfolio would automatically sacrifice financial return. One of the most active SRI organisations, the US Social Investment Forum, produced annual reports and academic studies that demonstrated that in fact SRI outperformed the broader market through this period. To back this claim the standard metric used was the financial performance of SRI funds tracked against the performance of major financial market indices such the S&P 500. Indeed many of these SRI funds were able to consistently ‘beat’ the market through this period by avoiding investment in tobacco during a prolonged decline in this sector. However, in spite of these facts, mainstream analysts continued to eschew any divestment in a standard investment portfolio (see particularly Kurtz and DiBartolomeo (2011) on this point. They back test the performance of the KLD 400 Social Index over a 20-year period 1990 2010 and find no significant difference between it and that of the S&P 500). In the 1990s SRI began to utilise a broader range of strategies to effect positive societal changes. These strategies included selecting companies with ‘best of sector’ ESG attributes. It also included positive engagement with companies in the investment portfolio on ESG issues, voting proxies,

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mounting minority shareholder campaigns and dialogue with company management rather than divesting from companies when ESG concerns were raised. While divestment remains one of SRI’s strategies, it is no longer the primary SRI approach. Because SRI seeks positive change in corporate behaviour through these new approaches, a new set of metrics were required. It was not enough to demonstrate financial performance of SRI and assume that positive societal impacts would occur as a result. Rather SRI funds now had to track the ESG factors of the companies they invested in and the engagements they were undertaking in order to demonstrate the positive impact of the funds. This change spawned a new field of ESG measurement. Such measurement is essential for both selecting companies deemed to be ‘best of sector’ and for engaging companies perceived as industry laggards. At first this area was dominated by niche players utilising multiple metrics to score companies on their ESG performance. Small firms with deep ESG knowledge such as Kinder, Lydenburg and Domini (KLD), Jantzi Research, Innovest and Deminor provided such data to investors. They also helped develop sustainable indices of best of sector firms to facilitate SRI index investing. Adopting these positive SRI strategies propelled SRI towards the mainstream. SRI assets in the United States alone grew from $500 billion in 1995 to $3.7 trillion by 2012 (US SIF, 2012). Once again measurement of impact was not directed to the results of taking ESG into account on the broader society, but rather on the financial impact of taking ESG into consideration for the investor. It is the financial performance of firms with higher ESG and CSR standards that is measured by the industry. That said, ESG ratings and sustainability indexes have grown in popularity over this past decade. Companies are increasingly seeking to raise their standards and more importantly raise their rankings within these indices. The positive societal impact of raised ESG and CSR standards by companies is assumed rather than measured. Rapid consolidation took place in the ESG measurement industry from 2008 to 2010 with large mainstream players such as MSCI and Bloomberg buying up smaller boutique firms. Equally important these large players legitimised the need to take ESG factors into investment decision-making. By placing these metrics on financial analysts’ terminals they have begun the process of mainstreaming SRI through readily available information and a new found importance attributed to higher ESG and CSR standards. As noted by pension expert Keith Ambachtsheer (2003), if SRI is truly successful, like the Cheshire Cat all that will be left after its integration in the mainstream is the grin.

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What to Measure: Implicit versus Explicit CSR? But mainstreaming SRI is not without conflict. While ESG factors have played a prominent role in investment selection in the past 10 years, the ethical component of SRI has taken a back seat. ESG factors are linked to long-term risk in a portfolio and therefore measure the explicit CSR behaviour of firms. Yet it can be argued that the most important aspect of firm behaviour for broad societal impacts is implicit CSR (Matten & Moon, 2008), which goes unmeasured and unaccounted for in standard metrics. Implicit CSR consists of values and norms while explicit CSR consists of formal policies and rules within the companies. Although explicit CSR is important and necessary, implicit CSR is key as it addresses both the behavioural component and value dimension of the firm. Most often explicit CSR attributes are measured quantitatively, while implicit attributes require qualitative measurement. Quantitative metrics continue to be valued as objective truth by most financial analysts, while qualitative measurements are assumed to be subjective and often viewed with deep scepticism by mainstream finance. While SRI is busy embracing the mainstream, it may be in danger of losing its essential ability to signal large social concerns to the general citizenry as it has in the past.

Some Exceptions The exception for SRI social impact measurement can be found in community investing and microfinance also known in recent years as impact investing or themed investing. This third pillar of SRI generated its own set of metrics and measurement of impact in the past few years. Because this SRI strategy intentionally seeks both positive community impact and financial return, its dual mandate has spawned several sets of metrics designed to measure social impact. Many impact investors embrace social return on investment (SROI) derived from standard financial practice. This approach utilises financial proxies as a way to measure and quantify outcomes and impacts. In addition, recent efforts have been made to establish a common rating system for impact investing. The Impact Reporting and Investment Standards (IRIS) is designed to provide a common framework for defining, tracking and reporting on the performance of impact investments. The issue of measurement and the development of measurement tools remain important research areas which need to be further explored. Existing studies have only started to address those questions. However

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measurement models play an essential role in the development of SRI especially because it participates in shaping the activity and the practices. Examples such as community investing and microfinance are exceptions and are still in their infancy. The measurement issue raise a more general question about what can be realistically expected of investors and their role in society. SRI is a leverage point used to raise company standards.

THE FUTURE OF SRI What then is the future of SRI? The findings in this volume suggest that SRI has made a difference to society. Like the canary in the coal mine, SRI signals changes in society’s values and attitudes. These include a demand for increased corporate social responsibility, heightened environmental concerns and greater awareness of human rights issues. SRI challenges convention and seeks a higher standard from corporations. It uses the rights of shareholders to address fundamental issues. It agitates against the status quo. But SRI also contains a fundamental conflict that both advances and hinders its effectiveness. While it must be embraced by the mainstream in order to advance its goals, simultaneously it wants to agitate from outside the system to push it even further. In order to achieve the goal of mainstreaming, SRI promises positive change that is costless to the investor, in other words an utopian outcome. While the goal of change agents, driven by values, is to remain as an agent provocateur always ready to shake up the system from the outside. Mainstream versus Niche As detailed in the opening of this volume, SRI contains two essential attributes. The first is that it takes ESG factors into consideration in investment selection. This aspect of SRI, also known as Responsible Investing (RI), is predicated on the business case embedded in ESG considerations with concerns for long-term risks to investors. This approach utilises positive engagement including best of sector stock selection, corporate dialogue and shareholder advocacy. In this perspective, SRI and RI investors are active owners and their objective is to raise the ESG standards of the firms they invest in. What differentiates SRI from RI is its second defining characteristic. In addition to ESG considerations, SRI also takes ethical values into

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consideration. SRI seeks fundamental change in society and applies its ethical standards to investment selection. SRI’s bifurcated nature is both its strength and its weakness. Taking ESG considerations into account in investment selection is indeed increasingly becoming mainstream. When $32 trillion of assets under management sign up to a set of RI principles (the UN-backed Principles for Responsible Investment)1 it is fair to say that such an approach is now generally accepted behaviour. The entrance of MSCI and Bloomberg into this arena with ESG information now readily available on every financial analyst’s desk is further proof that such an approach is now more or less mainstream. Increasingly ESG considerations just make common sense. When major floods, heat waves, snowstorms, hurricanes and tornadoes hit whole continents, we begin to connect the dots between climate change and our investment portfolios. Make no mistake, mainstreaming ESG factors in investment decision-making and corporate behaviour seeks to generate positive outcomes and if successful would make a difference to society. However a key aspect of the RI mantra is that there is no trade-off for taking ESG into account in investment decision-making. We have all heard that you ‘can do well and do good’ through SRI. As a result taking ESG factors into consideration does not challenge the status quo of the financial system, but rather reinforces it. Such an approach suggests that shareholders have primacy in our economic system with other stakeholders less valued. The very nature of mainstreaming gives the drive behind ESG more breadth but less depth. Once mainstream, clever marketing professionals sense an opportunity to create new financial products that attract a broader audience. In survey after survey the vast majority of investors suggest that they would like to take ESG and SRI into account, ‘to the extent that it doesn’t detract from financial performance’. Investors are more than happy to include ESG factors as long as they are costless. But can real and meaningful change in society be costless? Australian academic Jack Grey took up this question recently in a provocative essay, ‘The Misadventures of an Irresponsible Investor’ (2012). He argues that RI is not costless, that the amount of time and energy devoted to ESG issues by investors, particularly pension fund investors, far outweighs the potential impact of this mainstream approach on corporate behaviour. While tongue in cheek, this article does raise some interesting questions, not from the vantage point of ‘irresponsibility’ of the investor, but rather from the perspective of what potential impact investors can have on companies when they ask for ‘costless’ change. Such a request almost

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begs for a ‘greenwashing’ response from corporations, who talk the talk of CSR to placate the demands of investors while continuing business as usual to meet their insatiable appetite for quarterly returns. While important, mainstreaming ESG considerations in investment decision-making is not the only means to achieving positive corporate change. The growing acceptance of this investment approach signals a broader change in society to address environmental and social issues. That said, there are many actors involved in this change: consumers, employees, customers, NGOs, advocacy groups and elected representatives all have a part to play. The expectations we place on investors to ‘make a difference to society’ must be realistic and reflect their role as one of many actors in society at large. The second attribute of SRI with its focus on values and ethics suggests that there will always be an element of SRI that runs counter to the mainstream. Here SRI stands firmly outside the financial system and agitates for fundamental change. Such change may not generate positive financial returns, it may not reinforce a business case for SRI, but it is deemed right and just, and necessary for society. This second attribute of SRI pushes SRI away from the mainstream and towards the edges of the financial system. As a result, SRI remains a small player in the market. To some extent SRI investors who embrace its ethical dimensions are proud of their niche role and values-based position even if it costs them financially to stand behind their principles and keeps SRI on the fringes of the financial industry. This raises the age-old question, which is the more effective approach to create change? Is it from inside the system which requires mainstream approval embedded in an acceptance of the status quo with gradual improvement for society? Or is it from the outside, with a small band of agitators, who push society to overthrow the status quo for a fundamentally new system. This question has been argued by philosophers from the beginning of time and is well beyond the scope of this volume to provide an answer. We suggest that within the financial system, making a difference to society requires a healthy dose of both approaches. As a result the very bifurcated nature of SRI, while creating tension for those in the ‘movement’, actually provides a route for positive change.

Three Points of Leverage As we go forward SRI must look for leverage points within the current system to create positive change. The aftermath of the Global Financial Crisis

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(2008) provides one such opportunity. Increasingly, doubts are being raised as to the role the Efficient Market Hypothesis should play in investment decisions. While underpinning financial markets since the 1960s, weaknesses in our current system have led to a greater valuing of ESG factors previously considered extraneous in investment decision-making. There is a greater emphasis on reducing risk in investment portfolios. Such a shift raises new fiduciary questions for institutional investors who remain the dominant players in our financial system. Sovereign wealth funds, pension funds, mutual/unit funds, insurance companies and banks must now rethink their responsibilities to their beneficiaries that include bringing ESG factors into consideration. That said, the issue of ethics remains a difficult one for most fiduciaries. For individual investors, personal ethics in investment decision-making are absolutely appropriate. But individual investors are a small and declining segment of all public markets. For the fiduciary, now the dominant market player, the situation is more complicated. Ethical issues require judgement and often seek to address fairness between completing claims. The fiduciary is not in the position to provide such adjudication. While individuals are guided by their own moral judgement, fiduciaries need societal norms to provide guidance. These norms are often embedded in recognised and generally accepted codes of conduct such as the UN Declaration of Human Rights. The societal norms that underpin fiduciary duty advance over time and provide an opportunity for SRI to influence not just individual investors but institutional investors as well. The second point of leverage for SRI lies in the interaction between asset owners and asset managers. Here SRI must draw on its strength within the mainstream. To be truly effective as force for positive change, asset owners must begin incentivising asset managers to take ESG factors into greater consideration. Up to now mainstream responsible investors have been successful in encouraging investment managers to tick boxes that signal their intent to take these factors into account. Investment managers may even become PRI signatories if it means an increase in their mandates. But their commitment to ESG integration tends to stop here and little meaningful change has resulted from these box ticking exercises. If large institutional asset owners began to select investment managers based on their level of commitment to ESG it would have a significant positive impact on the financial system as a whole. The third point of leverage is encouraging changes in public policy that codify new societal norms and raise corporate ESG standards. SRI must engage in public policy debates and actively participate in shaping the

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policy agenda going forward to help create systemic change. This includes changes in corporate regulations and encouragement of new partnerships between investors and government in the area of community and impact investing. So, will SRI influence society in the 21st century? This volume highlights many areas of positive change for society that have resulted from SRI. Some changes are slow and incremental, others take hold quickly. SRI will need to be bold going forward. It must advance an inspiring vision for society and for investors, championing areas such as climate change, human rights and anti-corruption. But as famously quoted by Nelson Mandela, should SRI continue to be a force in the future? Undoubtedly, yes!

NOTE 1. As of 1 June 2013.

ACKNOWLEDGEMENT We would like to thank all the people who contributed to this chapter: the participants of the focus groups and the interviewees whose names are provided in Appendix B and a special thanks to Heather Hachigian who helped us taking notes during the focus group.

REFERENCES Ambachtsheer, K. (2003). Is SRI Bunk? The Ambachtsheer Letter. Toronto: KPA Advisory Services Ltd. Arjalie`s, D.-L. (2010). A social movement perspective on finance: How socially responsible investment mattered. Journal of Business Ethics, 92, 57 78. Cowton, C. (1994). The development of ethical investment products. In A. Prindl & B. Prodhan (Eds.), Ethical conflicts in finance. Oxford: Blackwell. Donaldson, T., & Dunfee, T. (1999). Ties that bind: A social contracts approach to business ethics. Boston, MA: Harvard Business School. Driver, M. (2006). Beyond the stalemate of economics versus ethics: Corporate social responsibility and the discourse of the organizational self. Journal of Business Ethics, 66(4), 337 356. Eurosif. (2012). European SRI study 2012. Retrieved from http://eurosif.org/images/stories/ pdf/1/eurosif%20sri%20study_low-res%20v1.1.pdf

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Fama, E. F. (1965). The behavior of stock market prices. Journal of Business, 38, 34 105. Grey, J. (2012). Misadventures of an irresponsible investor. International Journal of Pension Management, 5(2), 2 21. Hong H., & Kacperczyk M. (2006). The price of sin: The effects of social norms on markets. Sauder School of Business Working Paper. Retrieved from http://papers.ssrn.com/sol3/ papers.cfm?abstract_id = 766465. Accessed in April 2013. Johnsen, B. D. (2003). Socially responsible investing: A critical appraisal. Journal of Business Ethics, 43, 219 222. Jonker, J., & Nijhof, A. (2006). Looking through the eyes of others: Assessing mutual expectations and experiences in order to shape dialogue and collaboration between business and NGOs with respect to CSR. Corporate Governance: An International Review, 14(5), 456 466. Kurtz, L., & DiBartolomeo, D. (2011). The long term performance of a social investment universe. Journal of Investing, 20(3), 95 102 Kurucz, E. C., Colbert, C. A., & Wheeler, D. (2008). The business case for corporate social responsibility. In A. Crane, A. McWilliams, A. Matten, J. Moon, & D. Seigel (Eds.), The Oxford handbook on corporate social responsibility. Oxford: Oxford University Press. Louche, C., & Lydenberg, S. (2011). Dilemmas in responsible investment. London: Greenleaf Publishing. Matten, D., & Moon, J. (2008). ‘Implicit’ and ‘Explicit’ CSR: A conceptual framework for a comparative understanding of corporate social responsibility. Academy of Management Review, 33(2), 404 424. Richardson, B. J., & Cragg, W. (2010). Being virtuous and prosperous: SRI’s conflicting goals. Journal of Business Ethics, 92, 20 39. Samuelson, P. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial Management Review, 6, 41 49. Sandberg, J., Juravle, C., Hedesstro¨m, T., & Hamilton, I. (2009). The heterogeneity of socially responsible investment. Journal of Business Ethics, 87(4), 519 533. Seitanidi, M., & Crane, A. (2009). Implementing CSR through partnerships: Understanding the selection, design and institutionalisation of nonprofit-business partnerships. Journal of Business Ethics, 85(2), 413 429. Senge, P. (1990). The fifth discipline: The art and practice of the learning organization. New York, NY: Doubleday. Sparkes, R. (2001). Ethical investment: Whose ethics, which investment? Business Ethics: A European Review, 10(3), 194 205. US SIF. (2012). Report on sustainable and responsible investing trends in the United States. Washington, DC: US Social Investment Forum. Waddock, S. (1989). Understanding social partnerships. An evolutionary model of partnership organisations. Administration & Society, 21(1), 78 100.

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APPENDIX A: STATEMENTS SRI is an attempt to appease some critiques but does not bring solutions to the fundamental problems. SRI is sometimes presented as a solution to problems created by the capitalistic ultra-neoliberal system. SRI brings an alternative that does not only rely on pure economic performance but a broader understanding of performance including social, environmental and ethical aspects. Moreover SRI, with a stakeholder approach, has for objective to create value for a broad range of stakeholders rather than only the shareholder. However, one may argue that SRI is not addressing the problems but rather bringing solutions to appease the critics and thereby misses its chance to create change. SRI as means to fundamental change. Rather than bringing alternative models and tools, does SRI simply try to conform to existing models to gain legitimacy? SRI has significantly grown in size and number of actors involved. Growth is essential for SRI to reach a critical mass and thereby have the capacity to influence norms and standards in mainstream finance. While the first SRI players (the niche) paved the way to experiment and show alternatives to solve problems affecting investment activities, the development of a critical mass for SRI provides the necessary step for mobilising a broader range of actors and professionalising SRI. However through its growth has SRI been captured by mainstreams financial and lost its capacity to be critical? Is it now principally about conforming to fit the existing and recognised financial tools and models rather than bringing alternatives? SRI as a tool to change practice and behaviours in the financial sector. Can SRI change business practices and behaviours of actors of the financial sector or of clients? The focus of SRI has been mainly on companies to try to create awareness and change towards sustainable development. Has SRI neglected other key stakeholders such as retail clients and financial analysts? If it does not address the whole value chain, SRI will not be able to create change. The ethical dimension of SRI is a major barrier to have SRI mainstreamed. Should SRI be disconnected from ethics? The pioneers of SRI are religious groups. Although SRI has evolved, it still remains influenced by its religious roots. For example, exclusionary criteria like weapons and gambling are rooted in religious principles. Moreover SRI raises many ethical questions related to fairness and justice in both its exclusionary and best in class approach. However ethical issues are difficult topics to discuss in finance. It therefore makes SRI very unpopular within the financial community and creates an important barrier for SRI to be adopted by mainstream financial analysts or financial institutions.

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SRI has unintended consequences which instead of stimulating change towards sustainable development may hinder it. For example: SRI is exerting pressures on companies to report and therefore encourage greenwashing. SRI is standardising CSR and thereby discouraging innovative and creative initiatives by companies. One of the objectives of SRI is to change corporate behaviour to make them more responsible and sustainable. To do that SRI is pushing for more transparency and thereby more reporting. In order to fit investors requirements companies publish more CSR-related information, but one may wonder if it really contributes to behaviour change. Or in other words, is SRI creating the wrong pressures on companies and stimulating greenwashing rather than more fundamental change. That is one of the potential unintended impact of SRI, there may be others. SRI is based on the idea that societal impacts can be measured. Should SRI be based on the idea that there is much more that what can be measured? Social, environmental and ethical issues are most probably not fully understood if one consider only measurable and quantifiable data. However the evolution of SRI models goes towards quantification in order to better fit financial analysts models and mindset and thereby may miss an important part of the information. SRI is based on explicit CSR while the most important part is within the implicit part of CSR. Can implicit CSR be measured with our current models? Explicit CSR refers to corporate policies and actions that assume and articulate responsibility for some societal interests. Implicit CSR refers to corporations’ role within the wider formal and informal institutions for society’s interests and concerns. Implicit CSR normally consists of values, norms and rules while explicit CSR consists of formal policies and rules within the companies. Although explicit CSR is important and necessary, implicit CSR is key as it addresses the behavioural component and value dimension. Without evaluation of the implicit CSR, one cannot appropriately evaluate the CSR commitment of the company. However is SRI adequately equipped to assess the implicit part of CSR?

The Future of SRI What is the future of SRI? Will these practices become increasingly integrated into standard financial practice and SRI as a separate entity will no longer be required? Has SRI made enough of a difference to warrant future use of this approach. Who will advance SRI and why? Will there always be a role for ethical considerations, beyond the strict business case for SRI?

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APPENDIX B: PARTICIPANTS LISTS (FOCUS GROUP AND INTERVIEWS) Afshin Mehrpouya, HEC, FranceDana Krechowicz, Sustainable Prosperity, Ottawa, Canada Benjamin Richardson, University of British Columbia, Canada David Wood, Initiative for Responsible Investment, USA Eugene Ellmen, Social Investment Organization (SIO), Toronto, Canada Heather Hachigian, University of Oxford, UK James Gifford, Principles for Responsible Investment (PRI) Initiative, UK Jim Hawley, Saint Mary’s College of California, USA Kevin Ranney, Sustainalytics, Toronto, Canada Laurie Lawson, York University, Toronto, Canada Mariela Vargova, Rockfeller Financial, New York, USA Christel Dumas, ICHEC Brussels Management School, Belgium John Maiorano, University of Toronto, Canada Reinhard Paulesich, Vienna University of Economics and Business, Austria Rob Lake, Principles for Responsible Investment, London, UK Steven Lydenberg, Domini Social Investment, Initiative for Responsible Investment, USA Tristina Sinopoli, MaRS Centre for Impact Investing, Toronto, Canada

ABOUT THE EDITORS Ce´line Louche is an associate professor at Audencia Nantes School of Management, France. She teaches and researchers in the areas of sustainability and corporate responsibility. Her work builds from organizational, network and strategic analyses to understand how businesses transform towards sustainability. Before joining academia, she worked as Sustainability Analyst for Responsible Investment at the Dutch Sustainability Research institute/ Triodos in The Netherlands. Tessa Hebb is the Director of the Carleton Centre for Community Innovation, and Executive Director of 1125@Carleton, Carleton University, Canada. Her research focuses on Responsible Investment and Impact Investment is funded by the Social Sciences and Humanities Research Council, Government of Canada. Dr. Hebb is a member of the steering committees of the UN-backed PRI Academic Network, the Heartland Network, Canadian Business Ethics Research Network, the Canadian Social Investment Organization and the Impact Investing Policy Collaborative. She has published many books and articles on responsible investing and impact investing policies including the volumes Working Capital: the Power of Labor’s Pensions; No Small Change: Pension Fund Corporate Engagement; and The Next Generation of Responsible Investing.

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ABOUT THE AUTHORS Ben Bradshaw is an Associate Professor of Geography at the University of Guelph in Ontario, Canada. His nine-year old research program on the mining sector’s use of company community agreements, typically called Impact and Benefit Agreements (IBAs), has sought to investigate their origins, effectiveness, and relationship to regulatory systems. He is the originator of the IBA research network (see www.impactandbenefit.com), which brings together academics, regulators, Aboriginals, executives, and consultants for the purpose of identifying and addressing knowledge and practice gaps. Marieke de Leede is ESG Officer at Kempen Capital Management since March 2013. She previously worked for SNS Asset Management where she was responsible for integrating non-financial investment criteria in the impact investment funds. Before she was a member of the ESG Research team at SNS Asset Management. Marieke obtained a master in International & European Law (Radboud University Nijmegen, the Netherlands) and a master in International Human Rights Law (Lund University, Sweden). She is specialized in human rights and business. Christel Dumas is a PhD Candidate at Gent University where she will earn her doctoral degree in 2015. She is a teaching assistant at ICHEC Brussels Management School where she teaches financial mathematics. Prior to her doctoral work at Gent University, she worked for a corporate governance rating agency. Her thesis focuses on the mainstreaming of responsible investment from a convention theory and institutional theory perspective. Stephanie Giamporcaro is a Senior Lecturer at the University of Cape Town Graduate School of Business (UCT GSB). She received a PhD in Social Sciences from Paris la Sorbonne on the social construction of the Sustainable and Responsible Investment (SRI) market in France in 2006. From March 2009 to December 2010 she pursued post-doctoral research on SRI at the UCT School of Economics. She is currently involved in research and teaching on impact investment and sustainable and responsible investment. 301

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Ronald Grzywinski was the co-founder and Chief Executive Officer of ShoreBank Corporation, the first and largest certified Community Development Finance Institution in the United States. From 1973, ShoreBank invested in disadvantaged communities, created the nation’s first environmental bank and provided management advisory services to Grameen, BRAC and other local development banks in Asia, Africa and Eastern Europe. He has been the recipient of numerous honors including the Theodore Hesburgh Award for Ethical Business Practices from the University of Notre Dame. Heather Hachigian is a PhD candidate at the University of Oxford, School of Geography and the Environment. She is also a research assistant on the Responsible Investment Community University Research Alliance Award, funded by the Social Sciences and Humanities Research Council, Canada. Prior to studying in Oxford, Heather completed a Master of Arts (Public Policy and Administration) at Carleton University, Ottawa. During this time she was a research assistant at the Carleton Centre for Community Innovation. Mary Houghton was one of the four co-founders of ShoreBank Corporation and is a director of several financial institutions: Basix and an affiliate in India and Citizens Bank, Vancity Credit Union subsidiary in British Columbia. She is a director of Women’s World Banking, Calvert Foundation and the Grassroots Business Fund and Steering Committee advisor for the Global Alliance for Banking on Values. She was a graduate of the School of Advanced International Studies of Johns Hopkins University and a Visiting Scholar there in 2011. Harry Hummels is a Professor of Ethics, Organisations and Society at Maastricht University. He has written on Impact Investing, Responsible Investing, Corporate Responsibility, Organizational Ethics and the Philosophy of Work. He is a fellow of the university’s European Centre for Corporate Engagement (ECCE) and associated with the Initiative for Responsible Investments at Harvard’s Kennedy School of Government. Harry is also co-managing director of SNS Impact Investing and European Liaison of the Global Impact Investing Network. Ben Jacobsen is a PhD candidate at La Trobe University, Melbourne, Australia, under the supervision of Associate Professor Gordon Boyce. His study will examine the potential of shareholder activism on climate change. Ben is a staff member of James Cook University where he teaches finance. His Masters of Economics research explored policy options for mitigating

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farming impacts on marine protected areas. He leads a teaching research project redesigning finance curriculum for online teaching. He is a member of the PRI academic network. Steve Lydenberg is a Partner at Strategic Vision for Domini Social Investments. For over three decades he has been active with various organizations including KLD Research & Analytics. He is author of “Reason, Rationality and Fiduciary Duty” and “On Materiality and Sustainability: The Value of Disclosure in the Capital Markets” as well as several books on responsible investment including Corporations and the Public Interest: Guiding the Invisible Hand (Berrett-Koehler), and with Ce´line Louche Dilemmas in Responsible Investment (Greenleaf). Michael R. MacLeod is an Associate Professor of Politics and International Studies at George Fox University in Oregon, USA. He has BA and MA degrees from Queen’s University (Kingston, Canada) and a PhD from George Washington University (Washington, DC). His research focuses on the evolution of corporate social responsibility as part of emerging global governance and has written extensively on the rise of modern socially responsible investment. Caitlin McElroy is a Research and Teaching Fellow at the Smith School, University of Oxford. She holds a BA from the University of Pennsylvania in History and Environmental Studies, an MSc in Nature, Society and Environmental Policy (with Distinction) from the University of Oxford, and a DPhil in Economic Geography from the University of Oxford (2012). A Clarendon Scholarship supported the Dphil. Caitlin’s research addresses the governance of resource extraction. Emmanuelle Michotte is a graduate teaching assistant and a PhD candidate at Universite´ Libre de Bruxelles. She provides teaching support in organizational sociology, leadership, and human resources management. Her thesis investigates the relationships between discourses of corporate social responsibility and the conditions for the legitimacy of capitalism. Austin G. C. Onuoha is the Executive Director of the Africa Center for Corporate Responsibility in Nigeria. He is the author of From Conflict to Collaboration: Building Peace in Nigeria’s Oil-Producing Communities. He has conducted several research projects both in Africa and abroad on different subjects especially on Corporate Social Responsibility (CSR). Currently he is a research fellow at the Netherlands Institute for Advanced

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Study in Humanities and Social Science and is designing a CSR-mediation facility that will focus exclusively on company/community conflicts. James Post holds the John F. Smith, Jr. Professorship in Management at Boston University. He is a co-author of Redefining the Corporation: Stakeholder Management and Organizational Wealth. In 2010, he received the Aspen Institute Faculty Pioneer for Lifetime Achievement Award in the field of business and society. Benjamin J. Richardson is a Professor of Environmental Law at the University of Tasmania, Australia, and previously he held the Canada Research Chair in Environmental Law at the University of British Columbia, Vancouver. His scholarship specializes in the legal and public policy dimensions of socially responsible finance. His publications include the books Socially Responsible Investment Law (Oxford University Press, 2008) and Fiduciary Law and Responsible Investing (Routledge, 2013). Nicholas J. C. Santos is an Assistant Professor of Marketing at Marquette University, Wisconsin, USA. He is a Jesuit priest originally from Pune, India, and has academic degrees in business, philosophy, and theology and practical experience in for-profit and non-profit organizations. His research interests include marketing strategies for impoverished markets, business ethics, business and society, corporate social responsibility, and social entrepreneurship. He has published in the Journal of Public Policy & Marketing, Journal of Business Ethics, Journal of Macromarketing, Business and Politics among others. John Sealey is the Provincial Assistant for Social and International Ministries for the Chicago-Detroit and Wisconsin Provinces of the Society of Jesus (Jesuits). Jesuits number over 17,000 members worldwide, the largest male religious order in the Catholic Church. They are probably best known for their work in education, spirituality and the promotion of justice. Serving the Midwest Jesuits, John works on designated social concerns, shareholder advocacy and cooperation with Jesuits overseas, particularly those in Eastern Africa, Northeast India and Peru. Suzette Viviers is a Professor in the Department of Business Management at Stellenbosch University, South Africa. Her PhD focused on the financial performance of responsible investment funds in South Africa over the period 1992 2006. She mainly teaches financial and investment management. Her research centers on various aspects of responsible investing, sustainability and business ethics. She has supervised numerous postgraduate

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students and serves on the Research Ethics Committee of Stellenbosch University. Fiona Wilson is an Assistant Professor of Strategy, Sustainability, and Social Entrepreneurship at the Peter T. Paul College of Business & Economics at the University of New Hampshire. She serves as a Faculty Research Fellow at UNH’s Sustainability Institute and Carsey Institute. She has authored a number of papers and book chapters on social ventures. Prior to her academic career, she held senior-level roles in forprofit, non-profit and government organizations in the United States and Europe.