Socially responsible investment

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Socially responsible investment

(for part “b”, please see p.10)


Introduction 3

History 4

Methods 5

Conclusion 8

References 9


Socially responsible investment is likely to be an integral part of investment culture. There is no single definition of socially responsible investment (SRI) within academic sources, but for the purposes of this essay SRI means “the integration of social or ethical criteria into the investment decision-making process” (Kinder, Lydenberg, and Domini, 1992). These criteria are vary in scope but can be widely defined as company policies and actions that enhance a socially responsible investor’s specific social, religious or environmental values. Based on these values, investors can compare socially responsible investments with those which are not by implementing different methods, nonfinancial criteria that applied in the decision-making process.

According to the Social Investment Forum (SIF), the assets invested in socially responsible investing practice indicate 11.3% of all assets tracked by Thomas Reuters (2012). Reporton Sustainable and Responsible Investing Trends in the United States shows that this figure, representing more than one out of every nine dollars managed by professionals in the United States, has increased 486%, from $639 billion in 1995 to $3.74 trillion in 2012 (SIF, 2012). It is obvious that social investing has significantly increased its market share in recent years. However, it is important to note that many investment experts remain skeptical of this investment philosophy. Many academic studies show that socially responsible investing is not able to achieve either their social goals or expected return, at least in comparison with traditional investing practices that particularly focus on profit-maximization.

This essay will provide an overview of the concept of socially and environmentally responsible investment and describe the basic investment strategies. It will specifically focus on three core approaches: screening, shareholder advocacy and community investing.


The decade of the 1990s is a renewal of interest in the environment issues. Incidents like the Bhopal, Exxon Valdez, Chernobyl and a lot of new information about ozone and global warming have attracted public attention. Additionally, working conditions in factories and issues of human rights have become important points for investors with a dual objective. Few core issues retained prominence over this half-century period of modern SRI. Issues like “sin stocks”, HIV/AIDS, abortion, contraception and unfair labor practices in third world countries are always on the radar screen of socially responsible investing. According to Ethical Performance, total assets under UK SRI funds for the third quarter of 1999 exceeded £2.5 billion which represented 78.6% increase since 1997 (1999). Harte, Lewis and Owen identified 18 UK SRI funds in 1990 (1991). In contrast, 44 UK SRI funds existed in 2000 (Friedman and Miles, 2001). Schueth indicates three most significant reasons that fuel the SRI growth: information, gender equality, good performance of socially screened portfolios (2003). The first and possibly most significant factor is information. Investors are better informed and educated today. The better-educated and informed investors are likely to act in more responsible way (Schueth, 2003). Another reason is related to equality between men and modern women. Women have moved out of the home and they have opened their own business. Moreover, women have started to play important roles in government and top management. Such recent changes have brought indirect link between women and the concept of socially responsible investing. The social investment industry indicates that about 60 percent of socially responsible investors are women (Schueth, 2003). The third reason is that investors need not sacrifice financial performance when investing in the socially responsible companies. Investors do not have to separate good will from good fortune. Real-world results and academic studies have broken the myth that socially responsible portfolios are underperform. Many investors realize that responsibility can work with prosperity.


Socially responsible investing is generally divided into three main strategies: social screening, shareholder advocacy and community investing (Schueth, 2003). These three categories are not mutually exclusive, for example, a socially responsible investor may use social screening while also practice community investing. The majority of socially responsible investors concentrate on screening and shareholder advocacy, but community investing is also increasing as the SRI movement itself evolves.


Screening is the process of selecting companies based on their environmental and social performance. The process of screening can be easily divided into two opposite methods, negative and positive screening. Negative screening means to exclude companies producing certain products that are objectionable, such as tobacco products or weapons. Positive screening is more proactive. It refers to selecting companies that are leaders in employee policies, human rights, product design, environmental protection or other practices. Although negative and positive screenings are easily distinguished, they tend to be best strategies that may effectively be applied to select socially responsible firms. Environmental and social criteria have to be considered together with financial performance as well. The aim is to arrange possible investments from most responsible to least responsible, and to select the top listed companies.

Negative screening is likely to be the simplest method used by investors. Some mutual funds have been screening firms that participate in the manufacturing process of tobacco, alcohol, or gambling products, known as the "sin" screens (Hutton, D'Antonio, Johnsen, 1998). They are fairly simple to use, and often require ultimate "yes, no" analysis. Critics of negative screening argue that excluding companies for their socially incompatible practices has no net effect, because there is always investor who is willing to buy their shares. They think that avoiding companies that produce “sin” products can make the investor feel better about their invested money, but they are not helping stimulate environmental improvement and social change. However avoidance screening still has a right to be in the range of methods used by socially concerned investors, to be mixed by shareholder advocacy and positive screening, and will remain the starting point for many. Moreover, the decision of one investor to exclude investment from unethical company does not impact, but the cumulative effect has effect. Voting in a national election has the same picture, where collective votes create a "voice". For example, the tobacco industry illustrates health effects caused by the emergent and cumulative efforts of investor and consumer advocacy.

The second method of screening is positive that is used by an increasing number of socially responsible investors. Rather than excluding companies with objectionable products, the investor selects companies that manufacture environmentally friendly products or have socially responsible business practices or production methods that protect the environment. In comparison with negative screening, which generally needs simple analysis, positive screening require an investigation of complex issues such as workplace practices, pollution, product safety and diversity. Most people think that the main part of companies selected by positive screening is small companies producing products that may contribute to the future environmental and economic sustainability. “Green energy”, natural food, recycling and environmental cleanup are all areas that can support the sustainable future. It is wide area for positively screened investments. However, a well-diversified portfolio is difficult to create by investing in the small companies. Medium and large sized companies are also under the positive screens. Large companies, and the problems they have, are more complicated. They have own history, corporate behavior that can be difficult to amend. Whether applying positive or negative screens, it is important to note that screening can be one issue of an institution's or individual's involvement in responsible investing.

Shareholder Advocacy

Shareholder advocacy is another growing methods used by socially responsible investors. It traditionally includes shareholder resolutions related to some aspect of corporate social responsibility or dialogue with management of companies concerning their social actions (Camey, 1994). The goal of advocacy efforts is to positively influence corporate behavior. Such efforts of socially concerned investors have highly increased the awareness of many significant issues and caused important changes at some business structures.

Community Investment

Community investment is the process of providing capital to people in low-income and less economically successful communities (Schuetz, 2003). It is the most recent addition to the main socially investing categories. The aim of community investing is to ensure access to basic banking services, equity, capital and healthcare that previously unavailable inside the community. These programs are created to stimulate the economic growth areas that cover first human needs. Community development capital is most often aimed at supporting of lower-income entrepreneurs, assisting in employment efforts and building affordable housing.


There is no doubt that socially responsible investing is in the growth phase of its life cycle. Methodological and philosophical issues will continue to develop through research and debate. It should be a concept that bridges personal and social values with pragmatism of financial investing. There are a lot of research opportunities from clear determination of the investing industry and how to better analyze and measure social screens to the determination of ultimate role that SRI can play in stimulating social change. It has potential to become an important mechanism for people who are engaged about relationship between business and social problems. SRI provides a tool to voice investor’s opinion and may even change social problems. Socially responsible investing remains an area of study, of work and of practical application that continues to develop.


Brian F. Camey, Socially Responsible Investing, Is It Successful? (November 1994), (May 9. 2005)

Ethical Performance (1999). ‘In brief’, Ethical Performance, 1(7), November, p. 6.

Friedman, A and Miles, S, 2001,Socially Responsible Investment and Corporate Social and Environmental Reporting in the UK: An ExploratoryStudy, British Accounting Review, 33(4), pp 523 – 548

Harte, G., Lewis, L. & Owen, D. (1991). ‘Ethical investment and the corporate reporting function’, Critical Perspectives on Accounting, 12(3), pp. 227–254.

Hutton, R. B., D'Antonio, L., & Johnsen, T. (1998). Socially responsible investing growing issues and new opportunities.Business & Society,37(3), 281-305.

Peter D. Kinder, Steven D. Lydenberg, and Amy L. Domini, eds.. The Social Investment Almanac: A Comprehensive Guide to Socially Responsible Investing, Henry Holt, New York City, 1992, p. 5.

Schueth, S. (2003). Socially responsible investing in the United States.Journal of business ethics,43(3), 189-194.

Social Investment Forum: 2012 Reporton Sustainable and Responsible Investing Trends in the United States (Social Investment Forum, Washington, DC).


  1. Every year Ethisphere Institute announces annual list of World`s most ethical companies. Among most socially responsible are Marks and Spancer (UK retail store), Starbucks Coffee Company, Google (computer services). We relied on the Ethisphere list but used own criteria’s for choosing companies.
  1. Three major ethical policies we stressed on is:

Employee well-being: Many believe that employee satisfaction is the driving force for company productivity growth. Satisfied workers are more productive and more creative. Loyal employees stick with the company and rarely switch to other places, thus companies have lower rotation rate and save moneys on training new staff and recruitment costs. Ethical treatment of employees covers everything from paying fairly to providing good working conditions. Employee retention and fair treatment are mainly important in labour intense companies such as IT service.

Google treat employees differently. Exceptional attitude toward staff makes Google most desirable place to work in tech industry thus Company able to employ most talented staff. In Company code of ethical conduct there is section devoted to the treatment of employees. Google committed to support work environment where Googlers have opportunity to reach their highest potential. Google stress on equal opportunity employment and strictly prohibits discrimination of any kind. Company complies with laws protecting the rights of disables people and most importantly Google support families of the employees with medical insurance, dad maternity leave, considerable death benefits and others.

All this makes Google appealing for employees. As employee fair treatment is one of the important ethical aspects that company may follow it enhances reputation of the Company for investors and consumers which may in turn favourably influence share prices.

Environmental responsibility: Companies who assesses and takes responsibility for company`s actions which impact on environment and social welfare. Most of the time this companies perform beyond the environmental protection norms and standards. It is vital for the overall development of a corporation or organization to deal with public concerns and act in a responsible way, particularly as far as environmental issues are concerned.

Starbucks went beyond of environmental expectations imposed by regulatory bodies. Company has clearly stressed on environmental stewardship involving recycling, energy conservation, water conservation, building greener stores and tackling climate change. The Starbucks indicates their corporate social responsibility as “ethical sourcing practices for products such as coffee and cocoa, strengthening their involvement in education programs focused on cultural diversity globally, funding water projects in developing countries, and reducing their environmental footprint” (Starbucks Corporation, 2007). Starbucks environmental efforts involve Global Green's plan to educate businesses, shareholders and individuals on how they can contribute and influence climate change. Starbucks applied the “World Resources Institute Greenhouse Gas Protocol” to check on major emissions from their coffee roasting, retail stores, distribution network and administrative operations. Company tries to mitigate risks of environment change and reduce emissions.

A lot of studies prove that as companies report to behave responsibly towards the environment share prices experiences sharp increase. Thus choosing to invest in an environmentally friendly Company such as Starbucks may give high returns to the shareholders.

Supplier relationship:

Supplier relationship found to be one of the key success drivers of every business. With strong and efficient supply chain management companies can rely on stable profits. As fair treatment of suppliers recognized among ethical investors companies put a lot effort to maintain and develop effective supply chain. Marks and Spencer is among the most ethical companies in the world because of the ethical efforts such as support of suppliers of cotton and coffee beans from developing regions, training of suppliers and providing good working conditions along supply chain.

Marks and Spencer launched Plan A program in 2007 stating 100 commitments they want to achieve in 5 years. Plan A covers aspects of business such as customer and supplier relationships, climate change, waste and natural resources, health and wellbeing of consumers. Company believe that strong supply chain management and fair trading with suppliers enhance company’s status and earning figures. Marks and Spencer reports that since the launch of the Plan A Companies Fairtrade labelled product sales are doubled which indicates that customers value such and effort. These will drive profits which in turn influence share prices and investor relationship.

  1. Major methods for choosing Company to invest were the complex of negative and positive screening. Firstly, we excluded all “sin stocks” including tobacco, alcohol, gambling and defense contractors. After that we used positive screening to identify companies which have positive social impact. First of all, we identified most important ethical policies for us concerning employee relationships, environmental care and supplier fair treatment. Based on these criteria we selected Companies which developed best practices in mentioned areas.
  2. Sources of information to make investment decisions were Company`s websites, annual reports and independent institutions analysis. We have selected among Companies listed in the annual World’s Most Ethical companies made by Ethisphere Institute. Ethisphere’s research covers nominations from companies in more than 36 industries and 100 countries. Judgement is based on proprietary rating system Ethics Quotient which includes multiple-choice questions designed to capture a company’s performance in a standardized and objective way. Another source of independent information is Ethical Trading Initiative (ETI) organization which certifies Companies following Ethical Trading Initiative 'Base Code' which is code of labor practice.

Also information from Company`s corporate sites where all social responsibility reports are available were used. However, it is important to note that publicly available information cannot be fully reliable. For example, The Body Shop was highly rated by Franklin Research and Development, but later Business Ethics Magazine published an article about poor performance of The Body Shop. Simon Billenness commented: “We learned a hard lesson: never take a company’s representations at face value. This is not a science but an art” (Entine, 1996).

  1. While considering Starbucks major concern was tax avoidance scandal in UK. Company has made perfectly tax avoidance techniques and remained unprofitable on papers in UK. After bunch of criticism and boycott of the brand Company decided to pay £ 20 mln corporation tax to “please customers”. As Company paid out portion of the taxes it signals that Company care about brand image and customer perception of the brand. Along with massive innovation in recycling and environmental care Starbucks considered as socially responsible for us. There was the same problem with Google. IT Company avoids federal tax by transferring its profit into offshore subsidiaries. However, it cannot be compared with high social performance of company. Therefore, it has no significant impact on our selection.

Total words: 2573


Entine, J. (1996). Ethical Investing. At Work, 5(5), pp. 16-19

Starbucks Corporation Fiscal 2007 Corporate Social Responsibility Annual Report (Seattle, USA)