The Hindu Business Line : Socially Responsible Investments: Integrating commerce with morality

One of the seven social sins that Mahatma Gandhi spoke about (along with politics without principles, wealth without work, pleasure without conscience, knowledge without character, science without humanity and worship without sacrifice) is commerce without morality.

While speculators and investors alike have made money from the stock market, investors have started to ask themselves whether these investment avenues are aligned to their beliefs and values and can their capital be deployed in a manner that makes a positive difference to humanity as well as meet personal financial goals.

Thus was born the Socially Responsible Investments (SRI) movement. This movement has steadily graduated from following a merely passive investment approach to one that attempts to leverage the shareholder's views on issues of interest and put pressure on firms to behave in a socially responsible manner.

Socially responsible investment seeks integration of the financial objectives of the investor with his social values and ethical beliefs. As regards the returns on the investments, the considerations that help decide in favour or against an investment unit in the SRI portfolio include screening, shareholder advocacy and community investing.

Three pillars of SRI

A broad assessment of leading companies indicates that environmentally and socially responsible companies are usually also the better-managed ones.

There are, of course, plenty of exceptions to this rule, but large corporations are often run by professional managers who have a reputation to protect, and hence they are hesitant to take decisions that may be seen as unethical or socially exploitative.

Investment companies should perceive the social expenses of these companies as capital expenditure which will yield benefits in the future. This will result in a proper valuation of these companies. Should the companies realise better-than-expected profits, those who invested by understanding this aspect of social benefit will gain.

Global SRI trends

The UN has laid down Principles for Responsible Investment. Till date more than a hundred firms globally have accepted these principles, which are:

To incorporate environmental, social and governance (ESG) issues into investment analysis and decision-making processes.

To be active owners and incorporate ESG issues into ownership policies and practices.

To seek appropriate disclosure on ESG issues by the entities in which investment is made.

To promote acceptance and implementation of the Principles within the investment industry.

To work together to enhance effectiveness in implementing the Principles.

Report on activities and progress towards implementing the Principles.

As more and more investors care about social issues, it is no wonder that socially responsible investing is becoming increasingly popular in developed economies.

In 2005, $2.3 trillion of the $24.4 trillion investments in the US was in professionally managed portfolios utilising one or more of the three core strategies that define socially responsible investing: screening, shareholder advocacy, and community investing. In Europe, the scene was no different. As on June 2005, with euro 24.1 billion invested in SRI through 375 green, social or ethical funds, Europe lists among the world's most advanced markets in the SRI business.

In the Asia-Pacific region Australian dollar 7.67 billion remained invested in SRI markets. With more than a 100 billion yen invested in SRI funds, Japan is Asia's leading market for SRI. Microfinance, together with other types of community investing, continues to play a significant role in many Asian countries by providing credit to lower-income entrepreneurs and communities across developing Asian economies

SRI in India

In India, there is a compelling need to direct investments towards projects and organisations that work with communities, empower people, create jobs for low-skilled workers, provide primary education, build up rural infrastructure, and fund products and innovations that raise the living standards of the people. The Government has done its bit in the past and is continuing to do so by seeking social returns from its investment. A good way to start the same in the private sector is through voluntary proactive compliance. To begin with, the newly reformed pension sector, insurance companies, mutual funds and other investment advisers should start by disclosing information on how they vote on a host of proxy issues by issuing voting guidelines, etc. Companies raising money from the public should disclose their performance on pre-identified environmental factors and on the returns to society. This process leads to a higher level of granularity and helps the investors recognise and benefit from the unlocked SRI return value of the firm. Producing annual accounts through the EVA (Economic Value Added) approach will prove to be one more step in this direction by India Inc. It is good that leading corporate houses are contributing and raising the corporate social responsibility culture.

A case of how socially responsible investments can make a difference is the e-chaupal initiative. The initiative brings to the farmer better access to markets and information on agriculture practices and, thereby, better realisation for their produce. This breaks the shackles of fragmented land holdings, poor infrastructure, and numerous intermediaries required to bring the produce to the markets.

The company that was once perceived to be largely engaged in tobacco business, an activity defined as negative by some SRI practitioners, has done positive SRI work.

However, for the SRI movement to strike deep roots, there is an urgent need to create a greater level of awareness among the growing class of educated investors who may be willing to see their investments make a sustained difference to society while meeting their long-term financial objectives. With the economy on a roll and increasing awareness among investors, it would be interesting to see how the SRI movement progresses in India.

(The authors are with the Domain Competency Group of Infosys Technologies Ltd, and can be reached at parthiv_mehta@infosys.com and praveen_daga@infosys.com.)

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