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Is Capitalism Growing More Socially Conscious?

20060814.jpg Corey Tazzara works for Worldwatch, which provides "Independent research for an environmentally sustainable and socially just society."

Recent trends suggest that both corporations and investors are taking socially responsible investing (SRI) more seriously. A study released by the Social Investment Research Analysts Network on July 11 reveals that 34 companies listed on the S&P 100, a weighted index of 100 major blue chip companies, now base their corporate social responsibility (CSR) reports on a recognized third-party standard—the Global Reporting Initiative’s Sustainability Reporting Guidelines. The use of uniform reporting criteria is critical to helping SRI firms select appropriate companies in which to invest. Other indicators similarly point to corporations’ greater embrace of social responsibility: according to the same study, 79 of the S&P 100 firms now have CSR websites, up 34 percent from last year.

The growth of CSR among major corporations has been spurred by a parallel development in social consciousness among investment firms. In April, the United Nations launched its new Principles for Responsible Investment, a series of guidelines on how to integrate environmental, social, and corporate governance issues into the financial industry. As of August 1, the diverse signatories to the Principles together controlled more than $5 trillion in assets. This enormous quantity of money, expected to grow as the initiative wins new adherents, will make SRI central to the practices of the financial investment industry.

Yet merely reporting on corporate social responsibility is not enough, some argue; firms need to integrate responsible practices into all levels of their business. Socially responsible investing is thought to offer the best hope, since investors are the ultimate owners of most corporations. Recent years have witnessed a dramatic increase in the money devoted to SRI. According to the Washington, D.C.-based Social Investment Forum, $2.29 trillion was managed under SRI funds in 2005—$20 billion more than in 2003, and an estimated 9.4 percent of total global assets. More significantly, there has been a qualitative shift from individual or marginal investors to larger institutional investing firms, such as government pensions. As a group, institutional investors control most publicly traded companies in industrialized countries and thus wield immense power.

Experience shows that SRI can be as profitable as more traditional enterprises, while most analysis shows little or no difference in performance between SRI and non-SRI funds. A number of SRI funds have even surpassed the standard stock market indices. In June, for example, the Parnassus Small Cap Fund (which invests in companies worth less than $3 billion) registered one-year returns of 17.4 percent—nearly 10 percent higher than its benchmark index, the Russell2000. As long as investors can maintain a good conscience without sacrificing profits, socially responsible investing is likely to flourish. But society and the environment will ultimately benefit most from their enlightened self-interest.

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I have an investment in a socially responsible fund, so I'm with the program, but frankly I've always doubted that such investment choices -- whether from me or even from a big investor like an institution -- really encourage good corporate behavior.

Maybe someone with financial-industry expertise can clarify, but here's how I understand things. A corporation gets its benefit from stocks, bonds, notes, etc when they are issued. Once those things are trading in the open market, they are pretty much out of the corporation's hands. Sure they can get an indirect benefit from an increase in the market value of the stock, bond, etc. (such as might happen if a lot of people demanded responsible behavior) but there are plenty of ways they can increase that value -- such as by acting irresponsibly.

For example, few of the socially responsible funds invest in Exxon, but it hasn't stopped them from wallowing in big bath of savory profits...

Posted by: bottleman on 31 Aug 06

Very interesting post! Since I am also learning about this subject, it is quite interesting to hear about the various quantitative measures for on SRI. Thank You!

In response to Bottleman: As a former analyst now learning about SRI, it seems easier to enforce values through owning debt rather than equity, by its fundamental structure. As an owner of debt, your "rights" or "social hurdles" are written into contracts and you are first in line for repayment. You should look into Community Investing (a still tiny branch of SRI), where you can get your dollars to grass-roots communities and earn interest. In many ways SRI investment in equity seem like asking for too much... both investment returns and social responsibility. When you ask for both values and returns you give up something. That said, SRI seems to have come a long way. SRI Mutual Funds seem to vary widely with how they apply their SRI mandate. That's my 2 cents. Very interesting question.

I started a blog called D.I.Y. S.R.I. to follow my adventure as I learn more about SRI... if you are interested. Cheers!

Posted by: Hopton on 1 Sep 06

Let's not confuse 'SRI' and 'CSR' and 'ERI' and 'CER' with reality. Anyone who understands capitalism knows that it is always on the look out for new markets. 'Social responsability' is just another 'market'. Deleuze nicely describes this, how capitalism will eventually even see anti-capitalism as just another territory to colonize. So the capitalist version of 'social responsability' has nothing to do with the real thing.

It would be dangerous to think otherwise. For the sake of clarity, corporations would better stick to what they are: machines to make profits by all means. Let's leave the fight for justice and social responsability to those who take it serious, and let corporations play it fair and show themselves for what they really are.

'The social' and 'the responsible' are not up for commodification. So hands off please. Thx.

By the way, this current wave of CSR and SRI is reminiscent of the 19th century capitalists and their 'pro-poor' charity. Hand out saucages, but do not dare to attempt to change anything structurally.

It's time capitalists grow up and be satisfied with what they are, that is pains in people's asses and men who want to make money by all means. It's not use to have a SRI fund with the one hand, and sell wars for the military industrial complex with the other, so to speak.

Posted by: Lorenzo on 2 Sep 06



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