Week 6 Socially Responsible Investment (SRI) Faisal AlSager MGT 427 - Corporate Governance.

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Presentation transcript:

Week 6 Socially Responsible Investment (SRI) Faisal AlSager MGT Corporate Governance

Objectives ✤ To understand the different approaches that may be used for socially responsible (ethical) investment ✤ To appreciate the role of institutional investors in socially responsible investment ✤ To be aware of some indices that may be used to assess the performance of socially responsible funds

What is SRI? ✤ SRI involves considering the ethical, social, and environmental performance of companies selected as well as their their financial performance. ✤ SRI is also called ethical investment ✤ SRI covers different areas: genetic engineering, the environment, employment conditions, and human rights

SRI for Institutional Investors ✤ Institutional investors have become aware of the importance of SRI because ✤ client demand ✤ corporate citizenship ✤ potential economic benefits

Strategies for SRI ✤ Three basic strategies for SRI ✤ Engagement - identify areas for improvement 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 that trustees prefer companies invested in to meet ✤ Screening - trustees ask for investments to be limited to companies selected (screened) for their ethical behavior. May be ‘positive’ or ‘negative’ screening

International Guidance ✤ Global Sullivan Principles (1977) - principles that are directed toward increasing CSR throughout the world, based on self-help ✤ The MacBride Principles (1984) - consists of nine fair employment, affirmative action principles ✤ UN Global Compact (1999) - nine principles relating to the areas of human rights, labor standards, and environmental practices ✤ OECD Guidelines for Multinational Enterprises (2000) - cover areas such as disclosure, environment, employment, industrial relations, and consumer interests

International Guidance ✤ Global Reporting Initiative (GRI) Sustainability Guidelines (2002) - the United Nations Environment Programme (UNEP) and CERES formed a partnership in 1999 to encourage NGOs, business associations, corporations, and stakeholders to undertake sustainability reporting. The 2002 guidelines represent the latest consensus on a reporting framework for sustainability reporting

CSR Indices ✤ FTSE4Good Indices ✤ designed to reflect the performance of socially responsible equities ✤ three criteria: human rights, stakeholder relations, environmental ✤ launched in 2001 ✤ four Markets: US, UK, Europe, and global ✤ DJSI (Dow Jones Sustainability Indices) ✤ aimed at providing indices to benchmark the performance of investments in sustainability companies and funds ✤ includes only leading sustainability companies worldwide ✤ criteria: corporate governance, scorecards and measurement systems, environmental performance, and external stakeholders

SRI Increasing Importance ✤ SRI is highly considered in the UK and USA, especially in institutional investors ✤ SRI is seen as a mainstream corporate governance issue ✤ There is the increasing perception that SRI can help to maintain or increase shareholder value

References ✤ Corporate Governance: Mallin, Tina. Oxford.