Principles for Responsible Investment - Essay Example

Topic: Principles for Responsible Investment Socially Responsible Investment Socially responsible investment has been progressively increasing it profile in the recent times and this has been necessitated by motives that are politically motivated and a public interest that is increasing. While the issues that are associated with socially responsible investment are vital, it is of importance to keep in mind socially responsible investment is a part of good corporate governance which means that SRI and corporate governance are converging. The corporate governance research providers have put in significant resources that are aimed at expanding their SRI research capability and there is a clearly growing overlap between these two (Sparkes, 2002). As socially responsible investment records advancements, the investment policies that were controversial have developed to become mainstream (Fung, Law & Yau, 2010). It can be argued that socially responsible investment is no more than the outcome of how investors make sense of responsibility and therefore the interactions that are associated with institutional investors and the markets are not supposed to be evaluated as the market reactions by the investors but rather as market enactments which will later impose on them (Zarbafi, 2011). Since social investing defines a style that combines the will to make the most of financial return as long as there is a social good that exists, most social investors will more often than not be inclined to favor corporate practices that are environmentally responsible, workforce diversity, and product safety and quality. The best example of socially responsible investing if characteristically applied to the companies that are in the manufacture of alcohol, cigarettes or are the owners of casinos where to some people, the products that are associated with these companies are vices and the world would be better without companies of this nature. To the least, that is the perception that they have, however, this particular kind of investing is not always straightforward. In the case of Nike, one of the company’s larger institutional investors which is the United Methodist General Board of Pensions decided to engage with the company instead of having to liquidate the position that it held. In 1996, it filed a shareholder declaration that was aimed at encouraging the company to try to find modifications in the labor behavior of its suppliers. In most of the instances, this kind of shareholder activism has been seen to increase financial performance of the company that is targeted. Responsible Corporate Investment Responsible investment particularly refers to the practice that is associated with making investments in the companies that are socially responsible and the responsibility that the institutional investors have is implied by the term responsible investment which is defined in relation to whether or not an institution investor has aligned their investments with the various dimensions known from the mainstream research on corporate social responsibility. It can also be stated that an increase in concentrated ownership and the institutional investors growing role in relation to the owners that are active therefore the institutional investors are supposed to become actively involved in lobbying irresponsible corporations to become socially responsible. Irresponsible Corporate Investment Tobacco and alcohol are two negative screens that American funds use more often and the reasons for the former are straightforward while those for the latter has a more problematic characteristic. The firms that produce and distribute wine are considered to be irresponsible which is a product that the shareholders in the ethical mutual funds are likely to enjoy the same way as other investors would (Vogel, 2006). Where the formation and the continuous existence of a company are not natural, the corporate charter legislations and the instruments that are linked with it can be used to end the right that the irresponsible company has to trade. In the same manner, the public interest reasons for liquidating a company might encompass corporate irresponsibility also. The conditions that are set before a firm can be a part of the stock exchange can include extremes of corporate social irresponsibility in terms of the damage of the reputation of the company, the markets and also the stock exchanges that are associated with the corporate excesses that are outrageous. This is with respect to the activity of some of the stock exchanges that are influential in the development of CSR and SRI indices and promoting disclosure that is related to CSR. Differential taxation that is based on the orientation of the companies experiencing it towards CSR public policy objectives have had an effect on the firm’s financial practicability and therefore is more important that exceeds being simply a matter of compliance. Modern examples in this case generally include the taxation incentives that are directed at clean energy, reduction of green house gases and the importation and exportation of goods that are eco friendly (Horrigan, 2010). The PRI impact on business and Society The United Nations Principles for Responsible Investment initiative is an influential force on the global asset management scene and it boasts of signatories that that manage a combined USD 34 trillion in assets. The adoption of the PRI principles by the large institutional investors in the markets that exist in the developed world has been significantly successful and the number if signatories and the volume of funds that are under control which are pursued formally under PRI principles are characterized by growth that is very robust. The signatories themselves are becoming responsible for the further spread of the PRI principles amongst other institutions that are in the same practice and this has created a new momentum for SRI in the bigger markets. In spite of the augmentation of stake that is associated with PRI values globally by institutional investors, the ethical fundamentals of socially responsible investment engagements are left contained and unspoken. In relation to ethical theory, the PRI principles are purely formal which then posts an advantage and a disadvantage at the same time. The formality of the PRI principles in relation to ethical claims means that they don’t have any practical reliable content that possible signatories might pull back from. for instance, the don’t rule out investment that is directed at tobacco and weapons or define invested company employment rights or any environmental guidelines the same way that many of the SRI funds that are established do (Ransome, & Sampford, 2011). Most of the major banks in the world have sections and departments that are dedicated to addressing responsible investment and also boutique firms are specializing in advising and consulting environmental, social and corporate governance related investments. One of the most important attribute of the ESG part of the insurance market which develops this particular inclination to propagation is the fundamentally prejudiced character of the information on which asset choice is made. By description ESG figures are qualitative; it is not financial and also not enthusiastically quantifiable in terms of money. The asset market has long had dealings with these intangibles – such attributes as Goodwill have been broadly accepted as additions to the significance of a firm. But the ESG intangibles are very highly prejudiced as well as predominantly hard to measure and more significantly validate. Relationship between Corporate Social Responsibility and Responsible Investment The doctrines of responsible investing revolve around the business case argument for corporate social responsibility whereby the responsible investing initiatives have adopted three established customs for CSR practice which are: systems for risk management; processes for external review that entail auditing and transparency; and managing reflective processes such as reputation, accountability and legitimacy. The operation of the two levels of the corporate social responsibility which can be identified in the structure of responsible investing initiatives in both customs of CSR that is used for responsible investment practices as they are seen by the investors and other firms. It can further be seen that responsible investing practices themselves operate at two levels that are: in assessment of the possible investment mechanisms that firms have and in the making of decisions within the firm which affect its own investments and the manner in which they are perceived (Hebb, 2012). From a business point of view, sustainability makes a provision for economic argument for CSR. For instance, a reduction in the carbon footprint of a company will result in a reduction in the amount of damage that is done to the environment while at the same time it reduces costs, cuts waste and makes the business more efficient. In the same sense, renewable energy is not just good for the environment that the natural fuels, but in many of the cases, it is also cheaper. It can therefore be concluded that it makes economic sense to corporations to be sustainably responsible. The concept of Corporate Social Responsibility is heavily focuses on global environmental and social factors or a form of solution for the problems that the world faces, but since the economic downturn that has been experienced in recent years, there has been more prominence on economic sustainability also (Zu, 2009). As the investors that are socially responsible try to impose their demands on the boards of directors of the corporations that they represent so that they can be able to influence corporate practices on economic, environmental and social issues, corporate governance has developed to become an important criterion that the investors consider. The investors that are socially responsible are more likely to invest in the companies where the shareholders can effectively engage the company through the normal corporate governance channel without having to use some hostile techniques in regards to its corporate social responsibility (Richardson, 2008). It can be identified that the impact of corporate investment decisions on the cost of capital structure of a company is a tool that is used in enforcing management so that it can align its business activities with the demands of the investors. Any change that occurs to corporate behavior is likely if the shareholders use their ownership rights as means of influence. These opinions have shed light on the relation that exists between responsible investment and corporate social responsibility while at the same time stimulating a discussion that aims to find out if or if not responsible investment encourages corporate social responsibility. It should be noted though, that responsible investment does not only focus at increasing the social responsibility of business companies, but it also reinforces the corporate responsibility of the executive investment house in the case of institutional investment. It is interesting that a lot has been documented about the potential of responsible investment to develop the social responsibilities of the large corporations but there is very little literature concerning corporate responsibility as far as investment funds are concerned, or even the financial intermediaries in general. Considering the global credit crisis that is prevailing, the link that exists between responsible investment and the CSR has a lot of importance and therefore cannot be neglected (Idowu & Leal Filho, 2009). References Fung, H., Law, S. A. & Yau, J. (2010). Socially Responsible Investment in a Global Environment. Cheltenham: Edward Elgar Pub. Hebb, T. (2012). The next generation of responsible investing. Dordrecht: Springer. Horrigan, B. (2010). Corporate social responsibility in the 21st century. Cheltenham, U.K.: Edward Elgar. Idowu, S. O. & Leal Filho, W. (2009). Professionals perspectives of corporate social responsibility. Heidelberg: Springer. Ransome, W., & Sampford, C. (2011). Ethics and Socially Responsible Investment: A Philosophical Approach. Farnham: Ashgate Pub. Richardson, B. J. (2008). Socially responsible investment law. New York: Oxford University Press. Sparkes, R. (2002). Socially responsible investment. New York: J. Wiley. Vogel, D. (2006). The market for virtue. Washington DC: Brookings Institution Press. Zarbafi, E. M. (2011). Responsible investment and the claim of corporate change. Wiesbaden: Gabler Verlag. Zu, L. (2009). Corporate Social Responsibility, Corporate Restructuring and Firms Performance. Berlin, Heidelberg: Springer-Verlag Berlin Heidelberg. Read More