Ethical Performance
inside intelligence for responsible business


institutional investor interest in SRI at bottom rests on ethics, not risk

May 2005

Financial markets may be faltering, but ethical or socially responsible investment continues to gain ground. The number of UK ethical investors in pooled funds now stands at a record 475,000. Other countries, notably France, are also seeing rapid growth. The institutional SRI market, too, is strong. Its exact size is hard to call because responsible investment can be variously defined, but in Europe alone is conservatively estimated in the hundreds of billions of euros.

At first sight the institutional and retail streams seem very different. Retail came first, driven by individuals concerned at what companies were doing in their name. Institutional investors followed, motivated largely by risk management considerations. Undoubtedly, important differences exist between the two markets. Individual investors answer only to themselves, while institutional investors owe fiduciary responsibility to others. The amount of money controlled by individual investors is peanuts compared with mighty institutions. Yet the two have much in common. Both consider the social, environmental and ethical performance of companies when picking stocks; indeed, the same investment management company not infrequently serves both markets.

Each in part also owes its clout to the other. The retail minnows would be easily brushed aside if institutions were not there to speak out. Conversely, those institutions ultimately represent the interest of individuals, and in certain areas, such as charity investment, which in the UK is a sizeable institutional market, pressure from below helps win SRI mandates.

Institutional investors may prefer to talk about risk management rather than ethics, but a failure to identify unethical business practices which subsequently cause a company’s valuation to shrink lies at the root of the problem. Nor is it purely a question of business ethics. Broader concerns from pollution through genetic modification to child labour have moved into the field of vision of institutional investors. And while individual investors may be willing to forgo some return for the sake of principle, they are not insensitive to risk. After all, that is why they put their money into diversified ethical funds in the first place.

In one important respect individual and institutional investors still differ. The trend among institutions towards sharing information, rather than confrontation (see page eight), will not satisfy SRI activists and pressure groups. That should convince more big investors to put CSR policies higher on their agenda. It leaves companies, mindful of their market capitalizations and looking to grow, with ever fewer skirts behind which to hide.


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