Socially Responsible Investing

Socially Responsible Investing (SRI) is one of the most well-known concepts in the liter-ature about considering sustainable values in the finance industry and academia. For example, according to Eccles & Viviers (2011), it was the most used name in their sample of academic literature (n=190) that describe investment processes involving some con-sideration of Environmental, Social and Governance (ESG) issues in making investment decisions. As Circular Economy can be viewed as a benefactor of especially the envi-ronmental dimension of sustainability, a lot of norms that apply to SRI also apply in fi-nancing and investing in CE.

Definition

By an older academic definition, SRI is a name of an investment process that integrates social, environmental and ethical factors, in addition to financial ones (Renneboog et al.

2008; Sparkes 2001; Sparkes and Cowton 2004). A more recent suggestion to name similar investment practices was made by Eccles & Viviers (2011): they reasoned that Responsible Investment would be more descriptive since the social dimension accounts for only one-third of ESG factors. In older literature especially the term Ethical Investing has been used interchangeably with SRI, but nowadays it is usually used to describe investing done by churches, non-profit organizations and other similar parties following their ethical guidelines (Sparkes and Cowton 2004). Other names used of the same con-cept include, for example, Social Investment, Green Investment and Sustainable ment. Socially Responsible Investment, Sustainable Investment and Responsible Invest-ment have been the most up-and-coming names for the concept after the turn of 2010s (Viviers and Eccles 2012). In this study, the term Socially Responsible Investment and the abbreviation SRI are used since they are the most favored in academic literature.

In practice, the definition and the name of the concept have also evolved in some amount, although fundamentally the idea is the same. Eurosif (2020) explains the abbre-viation SRI to be Sustainable and Responsible Investment, while US SIF (2020) goes with Sustainable, Responsible and Impact investing and Global Sustainable Investment Alliance (2018) with Sustainable Investment. But despite a bit different naming, the def-initions of all three organizations’ concepts are the same and align well with the academic definition: according to them, SRI is integrating ESG factors in investment decision

making to create 1) long-term financial profits and 2) sustainably positive impact to society.

Socially Responsible Investing in practice

SRI is also a very well-known and used concept in the finance industry and literature.

According to Global Sustainable Investment Alliance (2018), at the beginning of 2018, 48.8 % of total assets under management in Europe were managed by sustainable prin-ciples. In the US, the corresponding figure was 25.7 %. In the five largest markets of Sustainable Investing (Europe, US, Australia and New Zealand, Japan, and Canada), assets under sustainable management totaled $30.7 trillion. But even though there is a huge amount of assets that are claimed to be managed sustainably, there is no estab-lished theoretical framework to value the sustainability part of different investments. In other words, SRI can’t be taken into account (at least unambiguously between different market actors) when calculating the attractiveness and the monetary value of an invest-ment using traditional finance theory (Berry and Junkus 2013).

There are several ways to manage assets according to SRI principles in practice. GSIA (2018) classifies different SRI strategies into 7 groups, which are introduced in Table 2.

Note that these strategies are very similar to ESG investing strategies introduced later in Chapter 2.3: the difference between SRI investing and ESG investing is discussed more in detail at that point.

Table 2. Main SRI strategies and their proportion of all socially responsible investments by GSIA (2018). Note: the total is higher than 100 % since some managers apply more

than one strategy to a given pool of assets.

Strategy Explanation SRI AUM-%

1. Negative/Exclusionary Screening

The exclusion from a portfolio of certain companies or sectors based on specific ESG criteria

64.4 %

2. ESG Integration The systematic and explicit inte-gration of ESG factors in finan-cial analysis

57.2 %

3. Corporate Engagement and Shareholder Action

The use of shareholder power to influence corporate behavior

32.1 %

4. Norms-based Screening Screening of investments against standards issued by e.g. certain companies or sectors based on positive ESG perfor-mance

6.0 %

6. Sustainability Themed In-vesting

Investment of themes related to sustainability, e.g. clean energy or green technology

3.3 %

7. Impact/Community Investing Investments targeted for solving social or environmental prob-lems, including investing in com-munities like NPOs, churches, animal welfares etc.

1.4 %

As can be seen from Table 2, the exclusionary screening, ESG integration and corporate engagement strategies are used more frequently than norms-based screening, best-in-class screening, sustainability-themed investing and impact investing strategies. It is not in the scope of this study to interpret why some strategies are more popular than the others, but one might argue that the former strategies are probably easier to integrate into practice (e.g. sustainability-themed investing might derail funds from their original

area of expertise) and more likely have a smaller trade-off in terms of exchanging finan-cial profits to sustainable values (e.g. impact investing might be interpreted as philan-thropy instead of investing, as it targets communities) than the latter.

SRI’s effect on performance

While there is no straightforward way of determining the monetary value of sustainability of socially responsible assets, academics have tried to assess the value of SRI assets by evaluating their performance. According to Junkus & Berry (2015), there are two op-posite views of the matter recognizable in academic literature, which both have their own supporters and reasonable facts supporting them. The first one is called “do good, but not well” (pay in lower returns to pursue sustainability) and the second one “doing well by doing good” (pursuing sustainability leads to greater returns).

The strongest arguments supporting the first one – inferior performance of SRI assets – include 1) the diminishing portfolio diversification opportunities deriving from the exclu-sion of non-SRI compliant assets or industries and 2) additional costs incurring from SRI screening and analysis. The arguments supporting the second one – superior perfor-mance of SRI assets – include that 1) SRI compliant companies are able to attract better employees, 2) adapting to external SR constraints forces company to be more innova-tive, 3) SRI compliant companies are able to attract customers who favor sustainable companies and to increase their margin because of it and 4) by complying with SR con-straints and monitoring the company usually behaves better overall.

It is difficult to differentiate the truth between these views: in their meta-analysis of 190 SRI performance studies over 35 years (1975-2009), Viviers & Eccles (2012) noted that 56.23 % of those studies indicated no significant difference when comparing SRI mutual funds’ performance to non-SRI funds and broad market indices, 23.44 % indicated better performance for SRI funds and 20.31 % indicated worse performance. Although, it is worth noting that most of the studies that indicated underperforming belonged to the earlier section of the timeframe. Not depending on whether the performance of SRI as-sets actually is better or worse than regular ones, according to Renneboog et al. (2008) the investors would anyway be willing to sacrifice some of the profits to pursue sustain-able objectives.

SRI’s relation to Circular Economy

The relationship between SRI and Circular Economy is very rarely discussed in the ac-ademic literature. SRI by definition strives to achieve sustainable and positive action to society (e.g. Eccles and Viviers 2011; Global Sustainable Investment Alliance 2018) in addition to financial profits, whereas CE is widely seen as a benefactor for sustainability

and especially its environmental dimensions (Geissdoerfer et al. 2017). Thus, they both are strongly connected to the overall concept of sustainability in a positive sense.

Therefore, it could be argued that CE should be a concept in which socially responsible investors would be interested to invest in and that the relationship of CE and SRI would be an interesting research topic. Nonetheless, it seems that there are no published aca-demic research papers about the relationship between SRI and CE. The lack of research on the subject is an interesting gap in academic literature and partially the motivation for this study: as CE is in principle also a financially feasible concept for investors and com-panies and allows economic growth (Ellen MacArthur Foundation 2013; Hysa et al. 2020;

Kirchherr et al. 2017), in addition to its positive effects on environment and sustainability, it would seem to be a good match with Socially Responsible investors.