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Are ‘Ethical’ or ‘Socially Responsible’
Investments Socially Responsible?
Sirkku Hellsten
Chris Mallin
ABSTRACT. In this article we discuss whether it pays to
invest ethically. Our aim is to examine corporate social
responsibility from philosophical, moral and practical
points of views. We focus on two main issues related to
ethical investments. Firstly we discuss the moral dilemma
of how capitalism has changed its shape in today’s world
and from ‘blaming the business’ there is a general attempt
to use the markets to promote ethics values and corporate
social responsibility. Secondly, we analyze the growth of
ethical investment funds in the UK today, and their
performance, and highlight some of the institutional
investors involved in the management of ethical funds.
We discuss whether ethical investments really succeed in
reducing the conflict between profit-making and social
responsibility as they promise or whether they use com-
mercial rhetoric and market mechanism to merely sell us
our own perceived values back. We conclude that the
paper has a key contribution in setting the scene for future
research in an area that is evolving and of fundamental
importance to companies, investors and various stake-
holder groups.
KEY WORDS: ethical investment, socially responsible
investment, corporate governance, business ethics
Introduction
In this article we shall discuss whether it pays to invest
ethically. We use the terms ‘ethical investments’ and
‘socially responsible investments’ interchangeably
(given that the former term is widely used in some
parts of the world, and the latter term in other parts).
Our aim is to examine corporate social responsibility
from philosophical, moral and practical points of
Dr.Sirkku Hellsten is presently working as Cousellor for Gov-
ernance and Human Rights at the Embassy of Finland in
Nairobi. She is on leave of absence from the University of
Birmingham, where she is Reader in Development Ethics at
the Centre for the Study of Global Ethics. Before that she
spent four years as Coordinator for the Philosophy Programme
for the Philosophy Unit/Department of Political Science at
the University of Dar es Salaam, whilst also conducting
research as Senior Research Fellow in an international
development ethics project funded by the Academy of Finland.
She also holds the title of Docent of Social and Moral Phi-
losophy at the University of Helsinki, Finland. Dr Hellsten
has undertaken numerous research projects in the fields of
bioethics, social justice, development ethics and human rights
in various parts of the world and she is also an editor for the
Journal of Global Ethics.
Chris Mallin is Professor of Corporate Governance and Finance,
and the Founder and Director of the Centre for Corporate
Governance Research, at Birmingham Business School, the
University of Birmingham, UK. She was the Rapporteur on
the Independent Inquiry established by the NAPF on ‘UK
Vote Execution’. She is a member of the International
Corporate Governance Network(ICGN) and has been on
two of the ICGN’s working parties established to draft
guidelines on international corporate governance principles,
and on global voting. She is a member of the ICGN Cross-
Border Voting Practices Committee, and a member of the
UK’s Shareholder Voting Working Group chaired by Paul
Myners. She is also a member of the Canada-Russia Cor-
porate Governance Program Advisory Council; an Advisory
Group Member of the Japan Corporate Governance Research
Institute; and a member of the Academic Advisory Board of
the Centre for Research in Public & Private Governance,
Universidad del Cema, Buenos Aires, Argentina.She was a
Director (2000–2006), and Chair of the Audit and Risk
Management Committee (2004–2006), of the Aston
Reinvestment Trust (chaired by Sir Adrian Cadbury) which
was launched in 1997 as a pioneer of social investment and
has become the leading local community finance initiative in
the UK. She is the Editor of ‘Corporate Governance: An
International Review’. She has published widely on corporate
governance issues in both academic and professional journals,
and has been invited to present her research at many confer-
ences in the UK and overseas, both academic and practitioner.
Her book ‘Corporate Governance’ was published by Oxford
University Press in December 2003.
Journal of Business Ethics (2006) 66: 393–406 Springer 2006
DOI 10.1007/s10551-006-0001-x
views. We shall focus on two main issues related to
ethical investments. Firstly we shall show that the
moral dilemma of capitalism has changed its shape in
today’s world and from ‘blaming the business’ there is
a general attempt to use the markets to promote
ethics values and corporate social responsibility.
Secondly, we shall analyze how ethical investment
funds are doing in the UK markets today. What
growth have they seen and do they outperform
nonethical funds? We discuss whether ethical
investments really succeed in reducing the conflict
between profit-making and social responsibility as
they promise or whether they use commercial rhet-
oric and market mechanism to merely sell us our own
perceived values back. In addition we study the
growth of institutional investor interest in socially
responsible investment; detail the approaches used to
screen investments; and look at some of the evidence
regarding whether socially responsible investment
enhances shareholder return.
1
Public–private partnership and social
responsibility of corporations
Ethics and social responsibility in business and
investments are complex issues. What we usually
mean by ethics is a set of our values that set some
moral guidelines for us. An ethic is then a set of
values and principles accepted by any person or a
group. Our personal and social ethics guide our
behaviour and attitudes, and also inform us of an
appropriate social order/behaviour (concept of jus-
tice, laws, political and economic systems, tradi-
tions). Social responsibility is related to ethical
behaviour and our moral agency that assumes that
we take responsibility of our actions. However, as
Solomon (1993) has pointed out, in business ethical
evaluations have originally been negative since much
of the business transactions are seen to be based on
rational and often self-interested calculation of
maximization of profits rather than socially respon-
sible and ethical actions.
2
This idea of merely self-
interested individuals maximizing their personal
benefits has led to problems in making a distinction
between public and private moralities in connection
with the role of business in a market economy run
democracy. This means that it has not been clear
how much ethics in business should depend on some
general ethical codes that are universally applicable
to any social institutions, how much it should de-
pend on individuals’ personal values and moral
commitments to the social good and how much of it
is merely a contradiction in terms.
Despite the general agreement on the principle of
maximization of profits in business, there has been a
clear demand for more ethical and socially responsible
business in today’s world. Corporations and financial
markets have increasing control on our lives partic-
ularly since the public–private partnership promotion
has led governments to progressively hand over the
production of goods and services to private busi-
nesses. As a consequence we, as ordinary citizens,
(and as customers and consumers, and as owners and
investors) have to rely more and more on the cor-
porations’ commitment to social responsibility. In
relation to this, politically more aware consumers,
customers, and investors are demanding clearer eth-
ical codes for businesses and investment markets
(Mulligan, 1988: 265–269).
In the contemporary world, we are now facing
interesting and differing ethical attitudes towards
business and markets. On one hand, business and
markets as such are no longer condemned as faceless
forces that have nothing to do with morality or are
fully detached from ethical evaluation. On the other
hand, there is a evident and growing concern on
how profit should be thought of in the larger con-
text of productivity and social responsibility as well
as on how corporations as complex communities can
best serve both their own employees and the sur-
rounding society. With the increasing availability of
local and global information, individual people can
now pool their pressure power and demand that the
corporations take their wider social responsibility
seriously. Lack of ethics or loose ethics from the
point of view of corporations may now lead to
customers’ the refusal to buy particular products, to
invest in particular fields of operations or particular
companies, and to choose their competitors with
more clear ethical visions and commitments (Jones,
1998; Riahi-Belkaoui, 1999; Stone, 1997, 13).
Thus, it stems that where the markets used to create
the needs of people, now they need to react to the
values by embracing their social realities. In the fi-
nance markets this trend has led to the emergence of
394 Sirkku Hellsten and Chris Mallin
investment funds which themselves declare that they
follow particular ethical values and moral principles,
but still make profit – or even better –make profit
particularly because of these values.
Given the vast impact of business and in particular
of transnationals on human health, the environment,
working conditions and the economic prospects of
nations, it is not always clear that the industry and
finance self-regulation is sufficient. In the famous
case of the Nestle infant food industry, an estimated
one and a half million babies still die unnecessarily
every year as a result of formula feeding, almost two
decades after the introduction of the WHO/UNI-
CEF Code on the marketing of formula milk sub-
stitutes. We can ask, how effective, therefore, has the
Code been in changing industry behaviour? A key
question has been how to foster a favourable political
climate for the practical regulation of business and
investment and how the citizen action can be a di-
rect part of the attitude change towards social
responsibility in the world of business and finance
(Swiss Third World Action Group, 1998).
The unsolved philosophical debates on moral
status of corporations and whether corporations (as
such) can be agents of justice, has turned into dis-
cussion about the moral responsibility of the various
stake holders in corporations. The main question has
been whether the corporate social responsibility goes
beyond economic responsibilities to stake holders,
legal responsibilities in obeying the law, and in
general practicing professional ethical and avoiding
harm to philanthropic responsibilities. This highest
level of responsibility would demand the corpora-
tions to be good corporate citizens, which would
include contributing resources to the community
and improving quality of life in a community/soci-
ety at larger.
3
The questions related to this are (a) whether
corporate social responsibility demands philan-
thropic actions or whether the markets themselves
can be used to turn the profits into social invest-
ments; (b) whether being responsible in business
actually increases the profits of all the stakeholders in
the long run.
The suspicious reputation that business and free
markets in general have had originally, at least from
the point of view of social ethics, has turned out to
be also ‘bad business’. When some business execu-
tives and investors at some point in time have cared
only about increasing their investments by 50 per
cent or so as fast as possible with no concern for the
virtues of the company he or she owns, apart from
those liabilities that might render one vulnerable to
expensive law suits, they now have to take the de-
mand of social responsibility seriously if they want
long-term loyalty to their business. This is because,
there has been growing public and legal demands for
corporate regulations and legal restrictions to control
the negative side effects of business and finance
markets in society (Solomon, 1993, 355–359).
However, even if ‘the profit motive’ may always
remain as part of business it does not have to refer to
narrow-minded pursuit of money to the exclusion of
all other considerations and obligations. Today’s
business cannot aim to make a profit at just any cost.
In fact, despite some contrary claims, business has
never been merely for private profit, since it supplies
quality goods and services in a manner that best fits
the community needs. Business has then always been
also about productivity and about public service –
and the profits it makes need to be distributed and
reinvested. (Solomon, 1993, 356–357). Therefore,
the move from the profit motive to the obligations
for the stockholders, the owners/investors and other
stakeholders is not revolutionary. While owners and
investors care about the maximization of their
profits, they increasingly also care about other social
issues that their investments may one way or another
influence (DeGeorge, 1995; Solomon, 1993, p. 357;
Vardy, 1989).
This returns us to modern day’s, modest version of
Smith’s and Mandeville’s (often degraded) ‘greed is
good’ in economic rationality thesis. Here is where
the role of ethical investment is central. Does people’s
willingness to make – and actually require – ethics
from their investors and corporations mean that we are
gradually moving to a new business ethics paradigm in
which business and financial profit seeking can be at
the same time both, moral, in a sense of taking seri-
ously ethical values and considerations, and socially
responsible, that is promoting to the public good be-
yond merely abiding the legal restrictions? (Adams,
1991; Addo, 1999; Christie, 1991; DeGeorge, 1999;
Fryna, 2003; Isbister, 2001; Korten, 1999). This the-
oretical background is relevant to our more practical
studies on the ethical investments in the UK.
Are ‘Ethical’ Investments Socially Responsible? 395
After all, ethical investment funds appear to en-
force the view that we should not think that markets
as such are immoral, and that corporations are evil
institutions that are run by unethical people, but to
be concerned about wider issues in social responsi-
bility in business. Rather the main question about
business ethics and corporate social responsibility has
often been how to make sure the ethical codes are
followed up and how to keep the investment and
markets within socially approved bounds? There are
various means available to enforce social responsi-
bility. The corporation can be fined, it can be ousted
from its charter, its license to do business can be
suspended, and its executives can be packed off to
jail (Stone, 1985, p. 13). But since business itself is an
integrated part of all our social action and societal
structures, the control should combine both internal
and external forces (French, 1984; Jones, 1998;
Richter, 2001).
Social responsibility in business and finance
The term corporate social responsibility is often
understood in two different but partly overlapping
senses: first, it implies corporate policies which de-
mand organizational performance beyond the min-
imum required by law in areas such as consumer
protection, environmental stewardship, occupational
health and safety, discrimination and other labour-
relations practices. Second, it is seen to require
internal compliance systems to ensure that such
policies are put into practice. (Braithwaite, 1985,
p. 39). John Braithwaite, for instance, notes that the
internal compliance system is in the end more
important than the codes of ethics themselves. If the
company sets codes of ethics but has no internal way
to enforce them, then its commitment to social
responsibility is undermined with its own lack of
responsibility and commitment to ethics. Any busi-
ness then in a sense has to be run within an ethical
environment by people who are committed to par-
ticular values and moral principles themselves.
The requirement for ‘corporate social responsi-
bility’ is a concept that has previously irritated par-
ticularly many traditional free market enthusiasts and
prompted a number of bad or misleading arguments.
Perhaps the most famous of these is the article by
Nobel winning economist Milton Friedman in the
New York Times (13 September 1970) entitled
‘The social responsibility of business is to increase its
profits’. Friedman saw the call for social responsi-
bility as socialist tendency hostile towards free
society and free markets. Giving money to charity or
other social causes is akin to stealing from the
stockholders (Friedman, 1970, 32 ff; Shaw, 1988,
pp. 537–543; Solomon, 1993, p. 361). Ethical
investment is not the kind of social responsibility
despised by Friedman, it is not directly giving money
to charity neither does it take up other social causes
outside its business profile, instead it appears to prove
that social responsibility may be part of good busi-
ness and an essential part of making profit these days
– it may even have an important role in being in
business at all (Argandona, 1991, pp. 41–54; Mulli-
gan, 1988, pp. 265–269; Solomon, 1993, p. 361).
Thus, Friedman’s argument against social
responsibility could nowadays be considered partic-
ularly short-sighted from the aspect of marketing.
The managers of corporations evidently have obli-
gations to their shareholders, but they have obliga-
tions to other stakeholders as well if they want to run
successful business and make profit. In particular
they have obligations to consumers and the sur-
rounding community as well as to their own
employees. The purpose of the corporation is to
serve the public, both by providing desired and
desirable products and services and by not harming
the community and its citizens, otherwise its oper-
ation and activities cannot compete in free markets
(Braithwaite, 1985; Jones, 1998; Mulligan, 1986,
pp. 265–269; Solomon, 1993, pp. 361–362; Stone,
1985, pp. 13–14). For example a corporation is
hardly serving its public purpose if it is polluting the
air or the water supply, if it is hogging communal
resources, if it is even indirectly promoting racism,
prejudice, suffering (child-labour), destroying natu-
ral beauty of the environment or threatening the
financial or social well-being of the local citizens.
This is unethical, but does not doing it mean that we
have taken a step towards social responsibility in a
positive sense?
In a way we have returned to the question of self-
interest; is socially responsible action in the end
based on cooperative egoism – which means that we
are protecting business and our profits while pro-
396 Sirkku Hellsten and Chris Mallin
tecting our conscious and moral values and even
promoting the well-being of others – or is it cor-
porate altruism and philanthropy – that is, are we
really being socially responsible and committed to
use our money to promote the public good rather
than to make more money for us? (Stone, 1985, p.
31). Are we really ready to subordinate the normal
profit-defined interest of business for some com-
peting moral values? Is it possible seriously even to
try to set economic values to compete with moral
values? And even if we could, should we? And if
business is to be ethical, who are the agents of social
and moral responsibility? If corporations cannot be
seen as moral persons with responsibilities, how is
the corporate social responsibility divided? In the
UK business world, as reported in Guardian 23.9.05,
there are a number of business people, such as Tom
Hunter and Lord Sainsbury, who donate a sizable
amount to philanthropic concerns. However, this is
still philanthropy by individual actors in business.
When we talk about corporate social responsibility
in a wider sense, we need to take a look at the roles
of all the stakeholders.
Moralizing markets by ethical investment
schemes?
The concept of ethical investment seems to bring
together various ethical concerns in business and
finance. It brings external control in relation to
stock- and stake-holders’ values and it turn capitalist
profit-making to go hand in hand with moral profits.
Here when we talk about ethical investments in fi-
nance markets we are referring to investments funds
and trusts, which claim to be ethical in a sense that
they use negative criteria not to invest in ethically
suspicious companies (companies which use child
labour, do not respect their workers’ rights, produce
fire arms, pollute environment, etc) or they use
positive criteria and promise to invest in companies
that promote the public good and are committed to
social responsibility (thus, their investments directly
or indirectly increase the welfare of the communities
they operate in).
There has been a considerable increase in the
number of ethical funds/trusts in the UK over the past
two decades. Here we take just few as an example to
pinpoint what they consider to be an ethical manner
in which to operate. ‘The Ethical Investment
Cooperative’, for instance, states itself to be a demo-
cratically run organization which provides clients
with quality ethical, financial planning advice in a
manner that gives clients a chance to say what happens
to their investments and that helps them to change
corporate attitudes. (http://www.ethicalmoney.org/),
‘Profit with Principles’ offer services that meet their
clients’ ethical and financial needs (http://
www.profitwithprinciple.co.uk/), ‘Ethical Invest-
ment’ offers the opportunity to gain a healthier return
on your money by supporting companies that the
public feels to benefit the society and the environment
whilst avoiding the companies whose activities people
dislike. (http://www.ethicalinvestments.co.uk/).
‘Barchester Green Investment’ notes that money can
be consciously directed towards worthwhile ends and
does not have to be ‘the root of all evil’. (http://
www.barchestergreen.co.uk/cinvest.asp).
The Ethical Partnership Ltd., (http://www.the-
ethical-partnership.co.uk/services.htm), for its part,
asks you to put your money where your morals are
and to invest according to your beliefs. Their neg-
ative criteria for investment typically promises not to
invest in environmentally damaging practices, trad-
ing with oppressive regimes and countries with poor
human rights records, pornography and offensive
advertising, gambling, tobacco and alcohol products,
unnecessary exploitation of animals, unsafe products
and services, genetic engineering, abortions and
embryonic research, armaments. Their positive cri-
teria seek to invest in firms which make a positive
contribution to society: products and services which
are of long term benefit to the community, con-
servation of energy and natural resources, environ-
mental improvements and pollution control, good
relations with customers and suppliers, high em-
ployee welfare standards, organic farming and foods,
strong community involvement, good equal
opportunities records, respect for the sanctity and
dignity of human life, openness about their activities.
In addition there are investment funds tied to reli-
gious values and belief systems, Islamic and Christian
funds, which base their interpretations of ethics and
desired social impact on particular, chosen sets of
beliefs and values. (examples in the UK, see also
Mallin et al., 1995)
Are ‘Ethical’ Investments Socially Responsible? 397
In current financial markets, the ethical invest-
ment funds appear to have found a way to reduce
the conflict between profit making and ethical
considerations about social responsibility. Trade as a
profit making enterprise can now be consistent with
our ethical values and moral commitments, it can
even be used to spread and even to export these
values to those who might have different ideas of
what is to be considered ethical or socially respon-
sible behaviour from the corporations and operations
the funds are investing in.
However, whether we believe that ethical
investment funds provide an innovative and ethically
– as well as economically – sound way to combine
business with morality or whether we remain scep-
tical that they are merely a new marketing technique
to buy our money, the main problem that those
investing in these funds have to deal with is the
question of how to measure social responsibility?
Whose values are we to invest in and at what costs?
What kind of social responsibility are we talking
about? Are our ethical considerations really consis-
tent with the social consequences of our investment
decisions?
We can also ask what the real difference between
ethical investments for profit and investing in busi-
ness that has other self-interest than profit-maximi-
zation, businesses ranging from charitable
corporations to business corporations that are sup-
posed already to have assimilated non-profit con-
straints – such as prestige, expansion, community
service, sponsorships and so on. There is room for
more analysis in regard to such institutions: could we
not just directly substitute for subordination of
profits to some dominant interests and values? Yet
another issue is whether we can sacrifice some other
values in order to realize our main cause or goals.
Consider the problem of a charity when a corpo-
ration wants to be socially responsible but in order
for it to realize its aims, say to deliver food to the
needy in Africa, it must bribe local officials. (Stone,
1985, fn. 22, p. 37).
At this point, it is probably worth summarizing
the key points that we have made from our earlier
discussion. The moral dilemma of capitalism is lar-
gely misplaced in today’s culture; ‘social responsi-
bility’ of business can be defined in a number of
ways philosophically, morally and practically; mea-
suring social responsibility remains a major chal-
lenge; and that ethical/socially responsible investing
is a major business in the UK, USA, and Europe, for
example, in the UK alone there has been more than
a ten-fold increase in ethical investment in the last
decade.
Given the growth of ethical investment, let us
now move from the theoretical to the practical as-
pects and examine why ethical investment is a fast
growing area, what links it has with corporate
governance, what techniques fund managers use to
determine which shares (stocks) are appropriate for
inclusion in an ethical portfolio, and how the per-
formance of ethical funds compares to non-ethical
funds.
From theory to practice: Ethical investments
and corporate governance in the UK
We want to next discuss how the ethical theory fits
in today’s markets practice. Despite the above ethical
issues that still need to be studied further, the insti-
tutional investors have increasingly become aware of
the benefit of ethical investments. In practice again
the terms ethical and socially responsible are used
interchangeably, but we should be cautious whether
we really refer to the same values by both terms. Is
what we consider ethical also socially responsible in a
wider scale and from the point of view of whom?
This is particularly important since institutional
investors have become increasingly aware of the
benefits of being ‘socially responsible’. The questions
remain, have they also became more ethical? And
whose ethics are we promoting in the end?
As noted earlier these benefits of social responsi-
bility in business are on a number of fronts: client
demand, corporate citizenship, and potential eco-
nomic benefits. The OECD (1998) corporate gov-
ernance report stated ‘in the global economy,
sensitivity to the many societies in which an indi-
vidual corporation may operate can pose a challenge.
Ever more not just enlightened and more demand-
ing public and individual clients and customers but
also investors in international capital markets expect
corporations to forego certain activities – such as use
of child or prison labour, bribery, support of
oppressive regimes, and environmental disruption –
398 Sirkku Hellsten and Chris Mallin
even when those activities may not be expressly
prohibited in a particular jurisdiction in which the
corporation operates’. Mallin (2004) states it is key to
the development of SRI that the large institutional
investors in both the UK and the US have become
more involved and willing to screen potential
investments as appropriate. Increasingly this ap-
proach is fuelled by client demand for SRI. A
number of pension schemes in the UK, including
British Coal and the Universities Superannuation
Scheme, have asked their fund managers to take
ethical and social issues into account in their
investment strategy (p. 80). A further motivation for
SRI is highlighted by the OECD (1998) ‘in
accommodating the expectations of society, corpo-
rations must not lose sight of the primary corporate
objective, which is to generate long-term economic
profit to enhance shareholder (or investor) value.
The Advisory Group recognises that, over the long
term, acting as a responsible corporate citizen is
consistent with this economic objective’.
The growing awareness of SRI and the involve-
ment of the government means that institutional
investors are become increasingly active in this field,
often, by setting up special funds or screening
existing and potential investments. The value of UK
ethical funds increased substantially in the last decade
rising from £792 million in 1994 to £5.5 billion at
end of 2004 (EIRIS, 2004). EIRIS estimated that
this represented some half million investors. It is
expected that this growth will continue.
An important development in the UK was that
from 3rd July 2000, pension fund trustees have had
to take account of SRI in their Statement of
Investment Principles. This change means that
pension fund trustees must state ‘the extent (if at all)
to which social, environmental or ethical consider-
ations are taken into account in the selection,
retention, and realization of investments’ (amend-
ment to Pensions Act 1995). Therefore pension fund
trustees are required to state their policy on social,
environmental and ethical issues, and if they don’t
have a policy in place then this provision would also
highlight that fact Mallin (2004) p. 81. Perhaps
reflecting this change in UK law, and also the
growing interest in SRI, is a feature of the EIRIS
website entitled ‘How Responsible is Your Pen-
sion?’ whereby individuals can access details of var-
ious pension funds and their policies to try to reach
their own answer to that question.
Strategies for SRI
EIRIS undertakes independent research covering
over 2500 UK, US, Continental European, and
Asia-Pacific companies. EIRIS has identified three
basic strategies for SRI.
• Three basic strategies for SRI:
• Engagement – identify areas for improve-
ment in the ethical, social, environmental
policies of the companies invested in, and
encourage them to make improvements.
• Preference – fund managers work to a list of
guidelines which trustees prefer companies
invested in to meet.
• Screening – trustees ask for investments to
be limited to companies selected (screened)
for their ethical behaviour. May be ‘positive’
or ‘negative’ screening.
Engagement
Engagement involves identifying areas for improve-
ment in the ethical, social and environmental policies
of the companies invested in, and encouraging them
to make those improvements. This can be done by:
• The investor telling the companies their pol-
icy and letting them know how it affects
their decisions to invest in a company or re-
spond to takeovers and share issues.
• The investor trying to persuade the company
via regular meetings to improve their prac-
tices on issues such as employment practices,
recycling, and pollution reduction.
• Offering to help them formulate their own
policy. This might be done through existing
corporate governance voting policies by
extending them to include ethical issues.
Preference
Fund managers work to a list of guidelines which
the trustees prefer companies invested in to meet.
Are ‘Ethical’ Investments Socially Responsible? 399
Then they select investments or portfolio weigh-
tings in them, taking into account how closely a
company meets, or sets about meeting, these
parameters. This approach also enables the investor
to integrate ethical with financial decision-making;
in cases where two companies get a similar rating
against traditional financial indicators, they can be
compared against the investor’s ethical indicators,
and the company with the better all-round perfor-
mance selected.
Screening
Trustees ask the fund manager to limit their
investments to a list of companies selected (screened)
for their ethical behaviour. They may be companies
whose conduct is viewed positively, such as those
with good employment practices or those taking
active steps to reduce levels of pollution. Or they
may be selected for not indulging in certain ‘‘nega-
tive’’ practices or proscribed industries.
Research by EIRIS (2004) involving a survey of
top fund managers in the UK found that some 73%
use engagement. In terms of screening, EIRIS have
recently (August 2005) introduced an Ethical Fund
Selector which enables investors to check on the
ethical policies and approach taken by the growing
number of ethical unit trusts.
Institutional investors’ policies
A number of institutional investors already have
policies in place regarding SRI. The policies may be
a separate SRI policy or incorporated as part of the
institutional investors’ wider corporate governance
policies. Several of the largest UK institutional
investors have made statements on SRI. Friends
Provident stated ‘we will be using our influence as
an investor to encourage companies to improve the
way they (investee companies) manage environ-
mental and ethical issues’. Friends Provident’s ap-
proach is called the Responsible Engagement
Overlay (reo) and it is aimed at improving the
behaviour of the companies they already invest in.
Hermes Pensions Management Limited is a
leading UK institutional investor with a portfolio of
some £30bn invested in more than 3000 companies
worldwide. In late January 2001, Hermes revised its
corporate governance policies and called on UK
companies to ‘manage effectively relationships with
its employees, suppliers and customers, to behave
ethically and to have regard for the environment and
society as a whole’. Whilst asking companies to
disclose their policies on an annual basis, Hermes
asks that the Remuneration Committee in each
company, when setting incentive pay, to consider
the effect on the company’s performance of social,
environmental and ethical matters. There should be
a credible system for verifying the accuracy of social
disclosures, and directors should take social issues
into account when assessing risk. The statement is-
sued by Hermes had the backing of eight investor
institutions who expected to incorporate it into their
policies.
In 2002, Hermes introduced the Hermes Prin-
ciples. Hermes advocate that companies should be
able to demonstrate that their investment decisions
are sound and also demonstrate ethical behaviour.
In the section on social, ethical and environmental
aspects, Hermes has two principles, i.e., principles
9 and 10. Principle 9 states ‘Companies should
manage effectively relationships with their
employees, suppliers and customers and with
others who have a legitimate interest in the
company’s activities. Companies should behave
ethically and have regard for the environment and
society as a whole’. This principle identifies the
importance of considering both stakeholder views
and having regard to social responsibility aspects.
Principle 10 states ‘Companies should support
voluntary and statutory measures which minimise
the externalization of costs to the detriment of
society at large’. This principle discourages com-
panies from making business success at the expense
of society at large.
Recognition of the growing importance of SRI
was also evidenced by the Association of British
Insurers (ABI, 2003) with the publication of its
disclosure guidelines on SRI. The main focus of the
guidelines is the identification and management of
risks arising from social, environmental and ethical
issues that may affect either short- or long-term
business value. The flip side of this is that appropriate
management of these risks may mean opportunities
to enhance value. To this end the guidelines rec-
400 Sirkku Hellsten and Chris Mallin
ommend that the board should receive adequate
information to make an assessment of the signifi-
cance of social, environmental and ethical matters
that are relevant to the business; that there are
appropriate systems in place for managing this type
of risk including ‘performance measurement systems
and appropriate remuneration incentives’. Further-
more the guidelines state that the company’s policies
and procedures for managing this type of risk should
be disclosed in the annual report, and not in any
separate summary accounts nor on a dedicated social
responsibility website.
The UK Social Investment Forum (UKSIF) is an
active force in promoting the adoption, and pro-
pounding the virtues, of SRI in the UK. Its mem-
bers encompass a wide range of interested parties
including fund managers, organizations, companies
and individuals.
Reporting on corporate social responsibility
Gray et al. (1987) identified many of the accounting
and accountability issues associated with corporate
social reporting. Given the emphasis now being
placed on socially responsible investment, it is not
surprising that corporate social responsibility (CSR)
has gained more prominence in recent years along
with an emphasis on the company’s board for its
responsibility for relations with its stakeholders.
Cadbury (2002) states ‘the broadest way of defining
social responsibility is to say that the continued
existence of companies is based on an implied
agreement between business and society’ and that
‘the essence of the contract between society and
business is that companies shall not pursue their
immediate profit objectives at the expense of the
longer-term interests of the community’.
A number of stock market indices of companies
with good corporate social responsibility (CSR)
have been launched in recent years. These include
the Ethibel Sustainability Index and the Domini
Social Index although perhaps the two most well-
known are the FTSE4Good Indices and the Dow
Jones Sustainability Indices (DJSI).
The FTSE4Good was launched in 2001 and is
designed to reflect the performance of socially
responsible equities. It covers four markets: the UK,
US, Europe and Global. It uses criteria for judging
CSR based on three areas: human rights; stakeholder
relations; and the environmental impact of a com-
pany’s activities. When developing these criteria, the
FTSE4Good drew on various international guide-
lines and statements including the United Nations
Global Compact, the OECD Principles for Multi-
national Enterprises, the Global Sullivan Principles,
the CERES Principles, the Caux Roundtable Prin-
ciples, and the Amnesty International Human Rights
Principles for Companies. There are four tradable
and four benchmark indices that make up that
FTSE4Good index series. A committee of inde-
pendent practitioners in SRI and CSR review the
indices to ensure that they are an accurate reflection
of best practice.
The DJSI are aimed at providing indices to
benchmark the performance of investments in sus-
tainability companies and funds. DJSI describes
corporate sustainability as ‘a business approach that
creates long-term shareholder value by embracing
opportunities and managing risks deriving from
economic, environmental and social developments.’
Components are selected by a systematic corporate
sustainability assessment and include only the leading
sustainability companies’ worldwide, thereby pro-
viding a link between companies that implement
sustainability principles and investors who wish to
invest in that type of company. Areas which receive
higher weighting in arriving at the corporate sus-
tainability assessment criteria include corporate
governance; scorecards and measurement systems;
environmental performance; and external stake-
holders.
Does SRI enhance shareholder value?
An important facet of SRI is whether there is a
beneficial effect on shareholder value (the value of
the investment). Clearly the OECD (1998) believes
this to be so as they state that ‘acting as a responsible
citizen is consistent with this economic objective [of
generating long-term economic profit to enhance
shareholder (or investor) value].’
There have been a number of studies which have
looked at the performance of SRI funds but there
has been no definitive outcome one way or another
Are ‘Ethical’ Investments Socially Responsible? 401
as to whether SRI funds outperform non-SRI funds.
Kreander (2002) provides a useful summary of these
as shown in Table I.
Recently Kreander et al. (2005) evaluated the
performance of ethical and non-ethical funds of 60
European funds from four countries and concluded
that there is no difference between ethical funds and
non-ethical funds’ performance.
Interestingly the overall evidence is inconclusive
as to whether ethical funds outperform non-ethical
funds. However as SRI is increasingly seen as part of
mainstream corporate governance, we have to bear
in mind that some studies indicate that ‘good’ cor-
porate governance enhances shareholder value.
Hence SRI itself may enhance shareholder value and
hence fund return. This sentiment is echoed by
TABLE I
Ethical fund performance studies
Study Year Results
Luther, Matatko and Corner 1992 15 UK ethical funds performed as well as market index by Jensen and Sharpe
measures
Hamilton, Jo and Statman 1993 Performance of 32 US ethical funds no different from large random sample of
ordinary funds
White 1993 11 US and 5 German ethical funds under performed benchmarks between 1990
and 1993
Luther and Matatko 1994 Performance of 9 UK ethical funds no different from small company benchmark
in the 1985–1992 period
Mallin, Saadouni and Briston 1995 Performance of 29 UK ethical funds similar to ordinary funds as measured by
Jensen, Sharpe and Treynor during 1986–1993
WM Company 1996 Strong performance by the FP Stewardship fund, UK ethical indices performed well
Guerard 1997 Constrained investment universes performed as well as unconstrained in the US
between 1987 and 1996
Gregory, Matatko and Luther 1997 Performance of 18 UK ethical funds similar to ordinary funds. Size, age and ethical
status of fund did not explain fund performance
M’Zali and Turcotte 1998 Mixed results compared to market for 12 US and 6 Canadian ethical funds in the
1994–1997 period
Reyes and Grieb 1998 Performance of 15 US ethical funds no different from peer indices by Sharpe
measure
EIRiS 1999 UK ethical indices performed as well as market benchmarks between 1990 and
1999
WM Company 1999 Similar performance between charity, ethical and unconstrained indices in the UK
Abramson and Chung 2000 Evidence that ethical investment is style neutral. No significant cost to a passive
ethical approach
Antonio, Johnsen and Hutton 2000 Combinations of American ethical bond and equity indices outperformed con-
ventional indices
Cummings 2000 Performance of 7 Australian ethical funds no different from small industry and
market indices
Statman 2000 31 US ethical funds and an ethical index perform no different from 62 non-ethical
funds and 2 indices
Naturva
˚
rdsverket 2001 10 Swedish and 3 Norwegian ethical funds perform as well as similar ordinary
funds
Bauer, Koedijk and Otten 2002 No significant difference between 103 US, UK and German ethical funds and
conventional funds
The first column reports the authors of the study, the second column refers to when the study was published. The third
column reports the main result of the investigations.
Source: Kreander (2002).
402 Sirkku Hellsten and Chris Mallin
Hermes (2005) report which states ‘we also believe
that engaging with companies regarding a larger set
of governance standards as part of an active owner-
ship approach will ‘‘in itself’’ improve the perfor-
mance of investee companies’.
Conclusions
We have discussed the idea that ethical investments
have an important role in enforcing corporate social
responsibility and in finding a form of ‘moral’ cap-
italism that can be used for the benefit of local and
global development rather than for mere self-inter-
est. Our attempt to bring together studies of ethics
and business studies to further discuss the issues of
social responsibility in business and finance, has
created an interesting set of questions as summarized
below.
The four most important sets of ethical questions
that came to mind in relation to the ethics of ‘ethical
funds’ themselves are as follows:
– Firstly, can we now enjoy market capitalism
without being guilty of taking a part in exploita-
tion and to the widening gap between the rich
and the poor – locally and globally or whether
ethical investment is merely a new market tech-
nique for the survival of the fittest in ever more
demanding markets? Can ethical investments
integrate financial profit with social profit or are
they merely based on the minimal degree of so-
cial responsibility society is entitled to expect
from business? Have ethical investments created a
way for us to use the capitalist system to enhance
the social responsibility of business as well as the
ethical commitments of all their investors, are
their conceptions of ethics and social responsibil-
ity compatible with those of the communities
they mostly invest in and operate in?
– Secondly, a related question is whether the idea
of ethical investment is merely market rhetoric
rather than a sign of serious commitment to so-
cial responsibility in business and finance. Partic-
ularly this comes to mind when ethical
investment funds are using their ethical position
openly in order to attract investors, that is, as a
central part their marketing strategies with such
selling catch phrases as ‘invest ethically and feel
better about your money’, ‘invest your money
where your values are’, ‘bring a new dimension
into your financial life and put the energy of
your money into the direction of your values’,
etc.
– Thirdly, whether ethical investments and partic-
ularly religious funds are rather vehicles of
exporting a particular set of values that some-
times may even conflict with the local ethics?
Depending on our resources, beliefs and value
systems we might have different ideas of what
benefits and what does not benefit society. This
question becomes particularly interesting when
we discuss investments in multinational compa-
nies, which themselves may sometimes follow
different ethical standards in the countries in
which their stockholders are and in those coun-
tries in which most of their operations and pro-
ductions take place. This is also related to the
ideal of democracy and the choice of our values.
Do ethical investment funds actually provide
their clients a voice in democratic corporate
governance – or is their ethical agenda already
fixed and the investors are simply given a choice
to choose from what is already on the ‘financial
value markets’? In other words, are we not
merely buying our values from the markets by
again choosing the best, most attractive or the
most economic options available to us at any gi-
ven time and circumstance?
– The final question is whether ethical investments
offer an ethically acceptable and simultaneously
financially sound way to make sure that every-
body benefits when no great personal sacrifice is
needed in order to follow one’s ethical values
and to take up one’s moral responsibilities or do
people still have to settle with less profits in or-
der to support the realization of the ethical prin-
ciples followed by the companies? The ethical
investments promise to maximise profit for their
shareholders, but not at any price – what is this
price? If profit is low or at risk, how does ethical
investment differ from charity or non-profit cor-
porations? If it is a gamble that the investors are
willing to take to pay for their values, is this
‘gamble’ ethical – particularly if it contradicts
the very principles of the investor and invest-
Are ‘Ethical’ Investments Socially Responsible? 403
ment company or fund of not investing in gam-
bling. In more practical terms there is a need to
study more closely, how do ethical investment
funds fare in their market performance compared
to – if not directly unethical – at least ‘ethically
not committed’ funds. And if they manage to
make less profit, how much profit are people in
fact willing to lose in order pay for their values?
There are various other economic and ethical
questions that need more theoretical and empirical
study when it comes to ethical investments, for
example: Do the funds follow the principles they set
for themselves? Who are involved in ethical invest-
ment schemes, to what volume and on what moti-
vation? Has the interest in ethical funds increased or
decreased during the last decade? Does this interest
depend on our greater moral awareness or on the
performance of the fund in the markets?
This paper has set the scene for further research in
this area and posed some questions which can direct
some of this research. However it is a vast and
evolving field rich in research questions which will
likely continue for some time into the future.
Notes
1
This topic has been particularly timely given the
Corporate Responsibility Bill which unfortunately, due
to a lack of government support, was unable to become
law in this session of Parliament. However the Corpo-
rate Responsibility (CORE) Coalition, founded by Am-
nesty International, Christian Aid, Friends of the Earth,
New Economics and Traidcraft, will be lobbying 20 se-
lected MPs to take up the CORE Bill for this Year’s
ballot. The Corporate Responsibility Bill has three main
objectives, viz., mandatory reporting on companies’ social
and environmental performance; directors of companies
shall have a duty of care for their company’s environmen-
tal and social impacts; and liability of companies for seri-
ous environmental damage or direct harm to workers,
consumers, or communities, irrespective of whether they
caused the damage within the UK, or overseas.
2
If we go back in history to the Ancient Greeks, for
example Aristotle (who can be considered also to be a
forefather of modern economic theory 2000 years be-
fore Adam Smith introduced the mechanisms of the
invisible hand in the markets) distinguished two differ-
ent senses of what we now call economics. One of
them was oikonomikos or household trading, which Aris-
totle approved of and thought essential to the working
of any even modally complex society. The second one
cherematisike or trade for profit, Aristotle declared to be
devoid of virtue and called those who engaged in such
purely selfish practices ‘parasites’ (Aristotle, 1981; Barry,
1998; Solomon, 1993).
3
See for example De George (1990), Manning
(1988), O’Neil (2001), Sorrell (2000) and Stone (1997).
Levels of corporate social responsibility are based on
Carroll’s Pyramid of Corporate Social Responsibility
(1991), p. 42.
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406 Sirkku Hellsten and Chris Mallin