MHCi Monthly Feature: May 2012

Socially Responsible Investment or Corporate Social Responsibility

Socially Responsible Investment and Corporate Social Responsibility –  two halves of the same coin, or quite different currencies?

Julian Roche, VP, MHC International Ltd


Within the ‘CSR world’ it is almost taken as axiomatic that there is no contradiction between Socially Responsible Investment (SRI) and Corporate Social Responsibility (CSR)[1].  The vision is this.  Investors will act responsibly looking at responsible and impact investment to make their money count for a better world as well as just obtain a financial return.  Meanwhile enlightened companies will recognise that an increasing number of investors will look at not just their raw financial numbers but also their CSR engagement and scores, and act to improve their CSR performance to attract more investment and lower their cost of capital.  There is already suggested evidence[2] that companies are able to attract investment less expensively if they perform well in certain CSR indicators.  A virtuous circle is almost inevitable, as progressively more investment is directed on a socially responsible basis and the pressure on companies to perform better in CSR mounts accordingly.

SRI and CSR poorly aligned with each other?

But what if this cheerful vision was not in fact true?  What would happen if, in fact, SRI and CSR were actually poorly aligned with one another, and even potentially in conflict?  But how could this possibly be?  Surely they not only sit well together, but are almost two halves of the same coin?

Let us start with Environmental, Social and Governance screening.  To see how this might conflict with CSR we need to look to another discipline, that of organisational theory.  On the whole CSR practitioners and indeed theorists are not dreadfully inclined to look at mundane concepts like the alignment of incentives and conflicts of interest within organisations, but perhaps they ought to.  What will be the consequence for corporate managers of pressure from SRI investors?  It will be to conform to the implicit instructions that they have been issued – not to innovate, or drive forward CSR initiatives themselves.  A strong parallel could be drawn with accounting procedures, to which IRIS[3] and other SRI initiatives are already fast approaching.

Another parallel can be drawn with zakat, the charitable wealth tax of the Muslim world.  It’s compulsory in Saudi Arabia, so accountants are employed to ensure it is kept to a minimum.  What started as a religious duty to perform has now widely become, unfortunately, a business duty to avoid.  If these parallels hold, within a matter of a few years, we could well be looking at institutionalised SRI accounting procedures – such is the goal to which IRIS really must be directed if is to transcend its current muddled mass of multiple indicators without weightings or any mandatory application. One longstanding advocate of corporate governance looks forward to this with enthusiasm: ‘The only way to deal with ESG is through immediate, rigorous and disciplined amendment of the global accounting system’[4].  If this were to happen, an SRI world might largely reduce CSR to conformity with the requirements of institutional and retail investors.  CSR as an innovative, management-driven discipline at the cutting edge would be dead and buried. Its replacement would be a massive system of management accounts which ensures compliance[5]. Supporters argue that ‘Rather than just box-ticking, SRI focused investments must demonstrate that they are differentiating companies based on ESG criteria’[6] – but those criteria must inevitably sit in boxes that require ticking or crossing.  Some funds even admit it already: ‘Too often ESG and Sustainable Investment can become a compliance driven, box ticking exercise’[7].

Box-ticking better than nothing?

There are however certainly those like me who would in significant measure welcome such a world of box-ticking, provided it did not dilute as it gained acceptance.  It’s a question of volume: once we have at least a measure of agreement on SRI screening criteria, however partial, and we can boost SRI percentages to a mission critical level, it might just be possible e.g. to starve companies we don’t like such as Xe (formerly Blackwater) or Philip Morris of sufficient funds to enable them to operate at a profitable size.  SRI might – just – start to squeeze objectionable firms out of business however profitable they are in the short term.  That would be good.  But alternatively however firms that fail ESG screens might end up relying on internal funding, as most good firms try to do anyway, or end up driven into the arms of totally unscrupulous investors (think private equity at its unregulated, socially indifferent worst) which would make them impervious to the demands of SRI investors.  

If CSR gets reduced to conformity with the wishes of SRI, then such firms – which include most of the family firms that (speak it softly) employ most and run the planet will have a ‘get out of jail free’ card as far as CSR is concerned.  Such firms, and the private equity companies that invest in them, are already CSR laggards: pressing SRI to the fore will give them all the incentive they need to retreat from CSR altogether – and tragically, might actually rule out the one thing that would curb them: savage regulation.

But in fact, you don’t have to look just at organisational theory to see the conflict between SRI and CSR.  Look at the most basic type of SRI, negative screening. Whilst there is, unfortunately, a huge range of disagreement over what ought to be ‘in’ and what ‘out’ of a screened portfolio, there is widespread recognition that weapons companies ought to be ‘out’ and most ESG screens eliminate them.  

Weighting in indices is a problem

Weapon manufacture is only one example: in the absence of a comprehensive agreement about the weighting of different aspects of ESG screening, a company that – for example – did an excellent job hiring disabled women in India could find itself screened out if it – again for example – made plastic bags[8].  It is not possibly to conceive naively of a world in which such brutal choices will always be necessary.  Fail one, fail all, is the usual ESG system: some companies might well be tempted, if they have already failed on e.g. environmental criteria, to throw in their lot with the sinners generally and abandon all CSR.  Why not?  Once they have failed on one test, no amount of useful charitable giving, sound employment practices, long glossy CSR reports, or anything else on the CSR scoreboard will make a penny of difference to the share price or cost of capital.  Plastic bag manufacturers, therefore, may see themselves as pariahs and abandon CSR altogether – and so might well tobacco manufacturers, arms manufacturers, airlines, oil and gas companies, and just about every company that feels itself threatened or excluded by the rising tide of SRI.  The effect of widespread ESG screening therefore might well be to reduce the level of CSR in the world, not increase it.  Or the world might divide between saints and sinners, with CSR playing the role of a Catholic pardon not needed by the sainted companies that pass ESG screens.

Impact investing a better solution?

So far though I’ve just looked at the potential effect of ESG screening.  We’re already well beyond that though, into the world of impact investment, where investors seek (without prejudice to their own interests) to make the world a better place by investing to effect.  What happens to CSR here? Powerful institutional investors might well be able to impose their own (usually liberal) values on companies that, left to their own devices, might pursue very different goals.  For example companies might constrain their overt adherence to religious principles in order to attract investment which would aim at – for example – women’s emancipation in developing countries.  Impact investment (II) if it is to work must constrain the freedom of action of investee companies’ directors, even if usually II objectives and investee companies’ objectives coincide.

A large fund might consider itself a successful II investor if the effect of an investment was to improve the living standards of a group of people far removed from the customers, suppliers or any other stakeholders of an investee company – whose directors and other shareholders might be reduced to local puppets, following the instructions of an enlightened higher being with much wider (but so often largely environmental) interests quite unidentifiable with any rational CSR policy of the investee company.  Is this an unimaginable notion?  No, certainly not: the II view of GM crops stands out as one example, where reducing local living standards by eliminating GM crops can be presented as an II triumph – albeit one hard to reconcile with any CSR policy of the now-impoverished local company.

To take another agricultural example, a CSR company (and actually any outside observer) might well take the view that the domestic policy of a country that restricts agricultural imports from developing countries renders the II of its Sovereign Wealth Fund (SWF) inherently contradictory – would such a company then reject investment from that SWF on ethical grounds? The number of potential conflicts is legion.


So that’s my argument: there is far from a happy synergy between CSR and SRI.  It’s interesting to note in conclusion that whereas CSR practitioners do not seem to recognise the threat to their profession that SRI may pose, SRI proponents themselves are alert to the possibility that they themselves might be outflanked by democracy.  It is surely fascinating that EUROSIF specifically excludes investment action driven by legislative requirements.  For example investment in screened arms manufacturers that are not involved in land mine production following the 2006 legislation in Belgium[9] – this is specifically not SRI, by the EUROSIF definition[10].  So it would seem that as legislation mandating funds to invest ethically (or at least not destructively) spreads, SRI should die a natural death.  I for one would welcome the day when SRI becomes unnecessary – and SRI’s greatest achievement would have been contributing to its own demise – but what makes me think that the emerging discipline itself would not welcome such an eventuality?  In the meantime, CSR and SRI may drift apart quite significantly.  We shall see.

[By Julian Roche with additional editing by Michael Hopkins, CEO, MHC International Ltd]


[1] An exhaustive internet search in April 2012 failed to reveal the slightest notion of such a contradiction

[2] Tortuously and possibly circularly based on the dividend theory of the cost of equity capital, but some evidence nonetheless

[3] IRIS: Impact Reporting and Investment Standards   accessed May 1st 2012


[5] How long before we start to see the rise of a discipline of ‘SRI compliance’ and the employment of ‘SRI Compliance Officers’?



[8] This very point came up recently in a debate within a private equity company about ESG and II


[10] This seems to be nonsensical – as if the only satisfactory burglary statistics are those where there burglary is not an offence – not to mention disregarding Australian election results because voting is compulsory