Exploring the Intersection of Financial Returns, Corporate Behavior, and Investor Values in the Era of Corporate Social Responsibility
Corporate Social Responsibility (CSR) encompasses various facets of corporate behavior. It examines how companies align with standards that define socially responsible conduct toward themselves, shareholders, stakeholders, and society.
However, corporations may not inherently adhere to CSR goals without incentives. For instance, esteemed economist Milton Friedman and others contend that corporations are solely accountable to shareholders.
Shareholders can influence corporate behavior towards CSR through tools such as Socially Responsible Investing (SRI). SRI, including socially, faith-based, value-based, or sustainable investing, involves incorporating personal beliefs, sentiments, and preferences into investment decisions while aiming for financial gains.
Essentially, SRI allows investment in companies practicing CSR while ensuring alignment with the investor's values. CSR, often described as "doing well by doing good," is thus matched with investors' ethical standards through SRI.
For instance, investors might choose to avoid companies involved in fossil fuels, mining, or environmentally detrimental products. Alternatively, they might implement a "negative screen" against firms selling tobacco or firearms. This screen guides investors to allocate their funds in a manner consistent with their values.
Advocates argue that SRI offers added value as companies identified through positive screens may be more profitable due to shareholder loyalty, increased sales, and reduced production costs. Conversely, opponents suggest that CSR, as a whole, may confer a competitive disadvantage due to a narrower investment scope resulting from divestment. Some research indicates that SRI neither enhances nor diminishes risk-adjusted returns.
Trends indicate that shareholders engaging in SRI tend to scrutinize companies perceived as unethical. Consequently, there's heightened shareholder interest in third-party audited ESG reporting.
Sustainability constitutes a vital aspect of SRI. The concept of investing in companies considering both profit and social benefits is gaining popularity. A study by the United Nations Global Compact Accenture (2019) revealed that 99 percent of CEOs overseeing companies with annual revenues exceeding $1 billion considered sustainability crucial to their success.
Morally conscious investors perceive their consumption habits as integral to their lifestyle. The fair trade and SRI movement embodies a lifestyle aligned with ethical values, impacting communities economically.
The global financial crisis of 2007-2009 prompted increased attention to CSR from investors and consumers. Consequently, there's a greater propensity for engaging in SRI as returns are evaluated against community and environmental benefits.
Instances of Corporate Social Irresponsibility (CSII) have led investors and regulatory bodies to scrutinize SRI more rigorously. For example, British Petroleum's CSII following the Deepwater Horizon oil spill in 2010 resulted in a significant loss of shareholder value and regulatory intervention.
During the 2007-2009 financial crisis, CSII contributed to stagnation in Assets Under Management (AUM) for traditional investment firms, whereas SRI funds experienced significant growth.
The debate arises whether investing according to one's values leads to socialism or is merely exaggerated by Friedman-style economists. The resolution lies with individual investors, brokerage firms, and corporations to determine whether environmental concerns, social impacts, and ethical considerations influence investment decisions.
Undoubtedly, SRI is still in its infancy within the global economy, and its full effects are yet to be determined.
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References:
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Mackenzie, C. and A. Lewis. “Morals and Markets: The Case of Ethical Investing.” Business Ethics Quarterly, 9, (1999), pp. 439–452.
Rosen, B. N., Sandler, D. M., & Shani, D. (1991). Social issues and socially responsible investment behavior: A preliminary investigation. The Journal of Consumer Affairs, 25(2), 221–234.
Rosen, B. N., Sandler, D. M., & Shani, D. (1991). Social issues and socially responsible investment behavior: A preliminary investigation. The Journal of Consumer Affairs, 25(2), 221-234.