When companies make an investment decision the first thought that comes to mind is will it return a profit? However, many investors when investing now think about the social, environmental and ethical implications of their investment. This type of thinking has been given the name socially responsible investment (SRI) and is an ever increasing phenomenon.
Although investors take into account the social implications of their investment they do aim to make a return on their investment. Companies cannot just invest in projects because it’s nice and ethical. They have a responsibility to shareholders to maximize their returns. As many experts point out SRI will merely just be a niche market if SRI only seeks low returns.
Research carried out by Bauer, Koedijk and Otten (2002) found that over a period from 1990-2001 looking at 103 German, US and UK mutual funds no significant difference was found between normal and SRI investments. This kind of research is promising to know and shareholders will be happy that they are investing in ethically sound companies while still returning a profit.
So, it will no longer do for a company to go quietly about its business. In these modern times when information is available so freely companies must show they are acting socially responsible. Even China is now starting to adopt SRI as it continues to conform to western business practices. SRI comes under the umbrella of corporate responsibility. Although, most companies enforce the view that they are ethically aware of their business practices there are still cases of misbehavior.
Such cases of misbehavior are regular occurrences in the news; with the most popular quoted case of unethical behavior being Primark. Receiving bad press for its use of child workers however, does not seem to have affected the chain too much. While some investors may now be deterred from investing in Primark others will not care. Fundamentally people have differing values across cultures and individuals have different values within cultures.
In a world where people are increasingly concerned with the environment and with how workers are treated SRI is only going to gain importance. Companies are increasingly incorporating ethical issues into their core strategies. In today’s world companies can no longer just think about maximizing profit they must also take into account the ethical implications of achieving returns on their investments.
Sources Used: bbc.co.uk, FT, Daily Mail, Bauer, Koedijk and Otten (2002).
What effect is such negative media attention having on the equity value of firms like Primark? If stories are published in the newspapers regarding the bad working conditions in their foreign manufacturing facilities does this have a direct effect on share price? Or do investors not care enough?
ReplyDeleteNegative press is not good for any business whether it will affect the equity value of companies will depend on the type of investor. The negative press will probably have an effect on share price. Not because investors care but because they may feel the public will reduce their shopping at Primark, reducing profits. Therefore they sell their shares reducing share price. Most investors will invest in companies if they perceive the share price as good value. Therefore, negative news unless really drastic is unlikely to have a major effect.
ReplyDelete