Socially responsible investment (SRI), or responsible investment (RI), has become a hot topic at the University of Edinburgh. Like fair trade, the issue of SRI was brought to the agenda by students. Students have been campaigning for responsible investment since around 2000, with the current campaign run jointly by People & Planet and EUSA. Some progress has already been made, with an SRI policy having been drafted in 2003, and this year the University has made a public gesture by signing up to the United Nations Principles for Responsible Investment. Since I work on fair trade, I am interested in understanding how SRI relates to making trade fairer. To what extent is SRI driven by genuine social and environmental concerns? In what ways can the University use its position as a large investor to influence the practices of the companies it invests in?
What are SRI and RI?
Those unfamiliar with the concept of SRI may quite logically interpret the ‘responsibility’ as being to society and the natural environment, based on ideas of doing the right thing for disadvantaged people and the planet. Large investors clearly have the potential to influence business practice by moving their money. Yet SRI definitions typically explain it as the incorporation of environment, social and governance (ESG) factors into investment decisions. One may wonder what the G is doing alongside the E and S, with governance here being about fund managers investigating whether companies are managed well. These three elements are brought together because they are all seen to potentially constitute risks or opportunities for long-term performance of investments. SRI definitions openly state that responsibility to make profits for shareholders is the primary motive, with the incorporation of ESG concerns being about reducing risk and improving financial performance over the long-term. Perhaps this is why there appears to be a preference for dropping the ‘socially’, leaving just ‘responsible investment’ – leaving it less clear to whom/what the responsibility is directed. The term RI may still imply to the public that the financial world is listening to calls for inclusion of ethical concerns, but does not oblige such concerns to be at the forefront. A similar shift in terminology can be seen in the move from ‘corporate social responsibility’ (CSR) to ‘corporate responsibility’ (CR) – again it is unclear as to what firms are taking responsibility for.
Evidently investors’ primary role is to make money, and they legally have a fiduciary duty to those they invest on behalf of to put profit first. It is worth making this point crystal clear, before raising expectations too high regarding what the University can legally do to invest more ‘responsibly’. Fair trade, in contrast, has grown out of a desire among NGOs, faith groups and value-driven small firms to address injustices in global trade, meaning social (and to a lesser extent environmental) concerns are the primary motive. However, today fair trade labelling systems are increasingly being incorporated into corporate supply chains, driven by a need to develop C(S)R schemes for reputation purposes, again with long-term profits in mind, as with (S)RI.
Approaches to (S)RI
There are three widely cited approaches to (S)RI: negative screening, positive screening (also referred to as targeted, mission-related or impact investing) and shareholder activism. Negative screening involves deciding not to invest in, or disinvesting from, particular industries such as weapons manufacture and tobacco. Positive screening involves selecting companies to invest in based on the social and environmental standards they uphold. This can include specifically choosing to invest in fair trade projects, for example through investment cooperative Shared Interest, which lends to fair trade farmers. Or perhaps principles of fairness developed by fair trade movements (e.g. concerning child labour, forced labour, inclusion of disadvantaged producers) could help investors determine which companies are trading in a fair way, assuming accurate information was available. Shareholder activism is about engagement from within – attempting to influence companies’ practice from the position of investor. In addition to making the most of voting rights, this may involve putting the case forward for changes to company practice, meetings with company representatives, or sharing information with the press. While these approaches typically refer to large-scale investment, usually operated by fund managers, value-driven ways for individuals to invest smaller sums have arisen in recent years, such as microfinance through NGOs (e.g. Kiva), and even by moving bank accounts to banks and building societies that guarantee (S)RI (as advocated by the Move Your Money campaign).
While typical (S)RI definitions do not tend to make reference to a concept of fairness, the word fair is being used with regards to investments by some initiatives. Fairpensions (now renamed ShareAction) is a UK NGO set up to campaign for fund managers to choose (S)RI. The Fairbanking Foundation offers a Fairbanking certification for UK retail financial products. Yet here, the term fair is used to refer to ‘helping customers to manage their money better’. The Fairbanking website makes no mention of fairness to those affected by the firms the banks invest in, although the use of the word fair could easily imply to consumers that banks accredited by this scheme would be operating to (S)RI models.
Evidently investors are concerned about whether (S)RI approaches can be as lucrative as other investments. While SRI market share is growing, it remains small (estimates range from ten to 20 per cent in Europe), implying either that most investors are not yet convinced that (S)RI is the best way to ensure long-term performance, or that (S)RI products are not widely available or promoted. Numerous reports (e.g. Charity SRI 2010, p.4), provide evidence that (S)RI approaches are typically as lucrative as others, despite less diversity in portfolios and smaller stocks due to smaller firm sizes being at the forefront of incorporating social and environmental concerns. Perhaps if investors such as universities demand better SRI options, offering SRI products may become more common among fund managers.
What is the University’s approach so far and what more do student campaigners want?
Following student-led research and campaigning, the University first adopted an SRI policy in 2003. While a negative screening approach has led to disinvestment in tobacco industries, the policy favours an approach based on shareholder activism through engagement, to be carried out by fund manager Baillie Gifford, and transparency about where the University invests. Decisions on where to invest are made by an Investment Committee, which is advised by University Court. A list of companies the University invests in can be found here – indeed some of them do ring alarm bells, such as Monsanto (criticised for pushing GM crops onto smallholders in developing countries) and Ryanair (criticised for promoting air travel for short journeys through cheap prices). Although student campaigners are asking for disinvestment from fossil fuels and arms manufacturing industries, the University’s 2006 policy states that the Committee is hesitant to carry out further negative screening beyond the tobacco industry as the negative impacts of other industries are less clear cut, and that an engagement from within approach is favourable. This preference for maintaining relationships with firms found to be operating in ethically-dubious manners, in order to influence them from close-by, reflects the approach advocated by many supply chain codes of conduct which aim to make trade fairer – including the new APUC code of conduct developed with the University’s and students’ input.
So how far does the engagement with such firms by Baillie Gifford go and have there been any tangible results in terms of incorporating social and environmental concerns? Baillie Gifford has a policy on how it incorporates ESG into investment decisions, and how it carries out soft engagement relating to the environment, climate change, labour, bribery and corruption – yet a lot of the points made in the policy are about mitigating financial risk associated with these issues, rather than simply doing the right thing. Student campaigners evidently feel the engagement does not go far enough, as they are calling for 25 per cent of the University’s endowments to be managed by an overtly ethics-driven fund manager. Perhaps detailed reporting of how social and environmental concerns have influenced investment decisions on behalf of the University at Baillie Gifford would be useful at this stage.
More recently, the University has signed up to the United Nations Principles for Responsible Investment (UNPRI). The UNPRI are six principles developed by the investment community, which define how to incorporate ESG issues into investment decision-making, due to the performance benefits of doing so. Compliance with these principles is voluntary, which leads to criticism of the initiative’s lack of transparency, accountability and enforcement (Gray, 2009). It will be interesting to see in what ways the University can utilise these principles to build on its existing approach to SRI – or perhaps signing up to the principles is more useful as an awareness-raising activity than anything else.
Pushing SRI further
While students are campaigning for responsible investment in many UK universities, campaigners at Edinburgh want the University to be world leading in terms of SRI. Scotland wants to be world leading in terms of social responsibility in general – having become the second Fair Trade Nation (after Wales) this year. So how can we take SRI further?
The extent to which University funds can be limited to only the most socially and environmentally responsible companies is restricted both by the fiduciary duty fund managers have to investors, and perhaps also by the mindsets of financial services professionals. How effects on long-term performance of investments of environmental and social factors are calculated by fund managers is not clear. Fund managers that focus solely on SRI may make different calculations to more general fund managers, for whom incorporation of ESG factors is more of an add-on. The University can either further engage with its current fund manager to ensure increased focus on SRI – using its preferred approach of shareholder activism, or as suggested by students, look into overtly ethical fund manager options.
Universities are in a position to create demand for better SRI products, but perhaps further research is needed into what form these products could take – for example examining what socially and environmentally responsible, and also fair, investment could look like, and how it can best be implemented. Greater transparency on how fund managers operate and the social and environmental progress they made would be useful for this end. If prevailing mindsets among financial industries professionals are in need of a shift towards mainstreaming the incorporation of ethics, perhaps the University has a role to play in ensuring SRI is explored in Business School courses. Finally, it would be logical to include SRI in the concept of what is a Fair Trade Nation – whether in terms of encouraging investment in fair trade initiatives, or through wider definitions of what constitute fair investments.
Beavis, L., 2013. Shared Interest: investing in a fairer world. Guardian Professional Network.
Charity SRI, 2010. Socially responsible investment: a practical introduction for charity trustees. EIRIS Foundation, London.
The Ethical Investment Cooperative report on SRI at the University of Edinburgh, commissioned by University of Edinburgh People & Planet.
Gray, T. R., 2009. Investing for the Environment? The Limits of the UN Principles of Responsible Investment. School of Geography and the Environment Working Paper. University of Oxford.
Socially responsible investment at the University of Edinburgh, Edinburgh Centre for Commercial Law blog.
 A UK Law Commission report is due in July 2014 on the extent to which fiduciary duties can include long-term performance standards and even ethical concerns (Edinburgh Centre for Commercial Law blog)
 The student campaign has devised its goals and recommendations based on a detailed report commissioned from The Ethical Investment Cooperative on what SRI is, how the University’s investments are carried out, and how to devise a policy and approach to SRI.