A Comprehensive Report on SRI Strategies and Corporate Governance

This report provides a comprehensive overview of Socially Responsible Investment (SRI) strategies and their relationship with corporate governance. It begins with an introduction to SRI, defining its core principles and historical context, including the evolution of investor concerns from civil rights to environmental sustainability. The main body delves into specific SRI strategies, such as ESG integration, negative screening, impact investing, and positive investing, explaining their mechanisms and providing examples of their application by institutional investors worldwide. Evidence supporting the adoption of these strategies is presented, highlighting the growing importance of ESG factors and the shift towards sustainable investing. The report then analyzes corporate governance matters associated with SRI, emphasizing the role of diversity, transparency, and ethical practices. It provides examples of how corporate governance impacts the effectiveness of SRI initiatives, including how well-governed companies are better positioned to manage risks and create value. The report concludes by summarizing the key findings and emphasizing the dual benefits of SRI: financial returns and positive social impact. The report highlights the importance of SRI for institutional investors and its impact on society and business efficiency.

Corporate Governance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................2
1. Explaining SRI (Socially Responsible Investment) strategies................................................2
2. Providing evidences for supporting SRI strategies are applied worldwide by institutional
investors......................................................................................................................................3
3. Analysing corporate governance matters associated with SRI...............................................6
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
SRI is an investment strategy which is aimed for providing investments in social
responsible companies and avoiding investments in selling or producing additive substances such
as alcohol, gambling, tobacco, adult entertainment, weapons etc. The history of SRI can be tend
to mimic political and social climate of time. In 1960, investors were concerned with
contributing to causes like women's rights, civil rights and anti-war movement. For instance,
Martin Luther King Jr. played big role in raising awareness for civil rights movement by making
target companies to surrender which were opposing cause as socially irresponsible.
The awareness has grown in recent decades over global warming and change in climate,
SRI has trended toward companies that have positively impacted the environment. By reducing
emissions or investing in sustainable or clean energy sources. Subsequently, such investments
avoid industry like coal mining which poses negative environmental impact of its operational
activities. The SRI strategies will be discussed in report such as ESG Integration, Negative
Screening, Impact Investing, Positive Investing which are being adopted by institutional
investors for making their investments worthwhile for businesses to flourish and provide benefit
to society.
SRI encourages corporate practices promoting stewardship, consumer protection, human
right and also diversity. Avoidance can be made in investment to negative impact of companies
which does not provide any benefits to society as a whole. Major areas of concerns for SRI
practitioners are ESG issues and approach towards maintenance of adequate investment
portfolio. It is required so that by maintaining appropriate portfolio, institutional investors may
be able to earn positive returns along with fulfilling responsibilities towards society. Thus, it can
be analysed that investors should be socially responsible and try to manage their portfolios in that
manner which will provide them with dual benefits. Thus, by attaining profits, businesses may be
able to maximise their manufacturing and service level which will have direct benefits to society.
Moreover, investors would earn positive and accurate returns.
The SRI strategies will be enumerated along with evidences on how institutional
investors have applied worldwide for getting positive benefits in the best manner possible.
Furthermore, corporate governance matters associated with SRI will be discussed with
evidences. From this, societal benefits will be provided to company and as a result, efficiency
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will be attained in the shortest time period. It can be analysed that role of SRI towards the
institutional investors and how they have applied in practicality will be explained.
MAIN BODY
1. Explaining SRI (Socially Responsible Investment) strategies
The SRI is termed as investment strategy which is used to provide investments in socially
responsible business so that dual benefits may be accomplished. One of main benefit is social or
environmental good and other is financial return to bring positive change in the best manner
possible. It can be said that institutional investors are encouraged not to invest in businesses
where positive social change cannot be accomplished. Some avoid businesses involved in
tobacco, fast food, gambling, weapons etc. Thus, it can be analysed that investors are becoming
socially responsible towards the society in which they live (Revelli and Viviani, 2015).
Moreover, they are adopting sustainable or green investing by making investments in sectors
which does not only provide them with positive financial returns but also benefit the society as a
whole. The SRI strategies adopted by investors are as follows-
ESG Integration-
ESG (Environment, Social and Governance) integration is common SRI strategy aims to
incorporate ESG risks and growth opportunities for making out traditional valuation of security
and portfolio construction. This approach has long-term impact on financial performance of
concern company. ESG integration include proper understanding of how business handle ESG
risks that could led to damage its brand identity and reputation. It also entails whether business is
perfectly positioned for capturing opportunities of ESG that could provide organisation with
effective competitive advantage. Thus, it is one of the important investment strategy which
provide company with socially responsible towards environment, social and governance in a
better manner.
Negative Screening-
It is termed as traditional and another common approach that does not include individual
companies or entire industries from portfolio if their activity areas gets in conflict with values of
investors in a better way (Revelli, 2017). This process is quite effective as it relies on standard
sets of exclusion criteria or needs to be tailored regarding investor preferences. For instance,
investors may not obey or wish not to make investment or sales generated from alcohol,
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weapons, tobacco, adult entertainment. It can be said that institutional investors are becoming
aware of their duties and social responsibilities and not providing investments in businesses
which are not going to bring positive change in society.
Impact Investing-
The impact investing aims to produce positive environmental or social impact along with
better financial return. It is unlike related to SRI strategies where social and environmental issues
progress could be regarded as by-product of financial entity. In relation to this, niche market of
impact investing is growing at a rapid rate which will open up more positive avenues for SRI
investments leading to bring positive change in a better manner. It means that SRI strategy is
helpful for maintaining positive influence on society by addressing issues in effective manner.
For instance, community investing, micro-finance, private equity investing in education,
infrastructure and energy sectors.
Positive Investing-
The SRI strategy is new generation formed strategy involving to make investments in
companies and activities regarded to have positive social impact. This SRI strategy suggested
broader revamp of methodology of industries to drive change through investments (Carey. 2018).
This approach allows institutional investors to express their values on corporate behaviour issues
like social justice and environment through proper selection of stock by not compromising with
long-term performance. This means that strong sustainability is required to attain higher
performance investment to effectively outperform weaker sustainability investments.
2. Providing evidences for supporting SRI strategies are applied worldwide by institutional
investors
Social investors utilise several strategies for maximising financial return and then attempt
to elevate social good in the best manner possible. Institutional investors are aiming towards
providing better avenues to society quite effectually (Crifo and Mottis, 2017). It can be analysed
there are various evidences which proves that institutional investors are effectively making
investments for maximising social good along with focus on individual financial returns. It can
be assessed that institutional investors are driving towards change and performing their duties
towards society in the best manner possible. The evidences supporting SRI strategies applied by
institutional investors are listed as under-
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ESG Integration-
The ESG integration is responsible for managing opportunities and minimising risks that
may arise from environmental, social and governance issues which are utmost influential. The
rise of ESG integration or responsible investing was coined in 2005 of landmark study called
'Who Cares Wins'. ESG has broader perspectives which include respond to climate change, build
trust and innovation, manage business's supply chains and how workers are treated. PRI
(Principle for Responsible Investment) has been established for advance integration of ESG and
is a thriving international initiative having more than 1600 members (Kell. 2018). More than $70
trillion assets are under management.
Investors were fairly reluctant to make good for society as shareholders' maximisation
objective was in trend. Moreover, corporate disclosures on ESG issues have fairly gone down as
80 % of world's largest businesses use GRI (Global Reporting Initiative) standards. It means that
good corporate sustainability performance is effectively in association with positive financial
results. In Europe, critical mass of pension funds and insurers have begun for awarding fresh
firm exclusively to asset managers having ESG capabilities.
Negative Screening-
The negative screening provides exclusion of certain criteria so that investments may be
made judiciously and no help may to provide to negative sectors in order to deprive mankind.
The ethics are required to be implemented by institutional investors and up to a certain extent,
they are adopting the same while making investment in a better manner. The evidence can be
served in this aspect that socially responsible investors are screening out tobacco company
investments to a larger extent (Auer, 2016). The SRI index dedicated to negative screening,
MSCI KLD 400 had been in operations since, May 1990. Impressive growth has been
accomplished. However, it is being perceived that SRI brings smaller returns in comparison to
unrestricted investing.
The 'sin stocks' which include purveyors of tobacco, alcohol, gambling and defence
contractors were banned from several portfolios for maintaining ethical grounds. This means that
sinful investing that was in operations in earlier decades have effectively come down and more
number of institutional investors are taking responsibilities for providing social good on priority,
then attaining their shareholders' objective of maximisation of wealth.
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Impact Investing-
Impact investing is another useful form of investing to place money for developing
positive change for society. For example, residential property development project has been
taken in Chilton. For this project, £400,000 of funding is raised for development of better quality
family homes in Chilton near Bishop Auckland in County Durham (Smith. 2018). It has been
developed in partnership with social enterprise Fusion 21 which include three CoreHaus homes
built by utilising modular core allowing homes to be built by 50 % quicker efficiency than earlier
traditional methods of construction and with less waste as well.
This development will create employment opportunities for 50 candidates. It is best
example of impact investing in getting rid of chronic housing shortage as it causes social
problems like higher rents, less disposable income and dampening economy effect. Thus, it can
be said that investors are making healthy approach towards the impact investing and helping to
shape society towards prosperity.
Positive Investing-
It is a new generation investing meeting to provide better investment in socially
upgrading sectors such as manufacturing, service industry etc. For example, Hive.HR helps
companies for improving upon their financial performance, productivity, retain and attract
employees and reduce absenteeism and improve customer satisfaction by employee engagement.
Aiming to raise funds for cloud-based software, £150,000 was required but amount attracted was
£298,000. This has positive impact on investors and company as it significantly grew working
with blue chip companies to enhance healthy growth. More productivity was enhanced and
workplaces were happy.
Another evidence of positive investing can be applied. In 2015, Morgan Stanley, oldest
firm providing financial services and investment management conducted a review of 10,000
funds (Lean, Ang and Smyth, 2015). It then concluded these funds as 'strong sustainability'
investments outperformed weak investment having weaker position. To tackle idea of trade-off
among positive impact and financial return. While, Global Impact Investing Network's report in
2015 on benchmarks and impact investing returns in private equity and venture capital found that
market rate was common in impact investments.
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3. Analysing corporate governance matters associated with SRI
The corporate governance is one of the important matter for business. The corporate
governance entails ESG because of environmental factors such as reducing emission through
renewable energy. Social issues are important as properly treating diseases, producing saf
products consumable by customers and maintaining healthy workplaces for employees. The good
governance seeks to balance intended needs of executives and shareholders which is ultimately
good for investors (Ioannou and Serafeim, 2015). Well-governed companies are required to be
transparent about business practices and management structure is perfectly aligned with roles and
responsibilities being obliged by management. The Board of Directors are required to uphold the
rights of company's investors and identifying concerned risks and opportunities. There are
various corporate governance matters which are associated with SRI are as follows-
1. Greater diversity-
Pax World Investments since, 2012 has filed for gender diversity proposals at eight large
companies. Five of which including eBay have added new female directors for handling better
operational activities. It has been analysed that organisations with more women in Board of
Directors had better performance in comparison to male directors who have average performance
for managing operations (Brown. 2017). This shows that SRI strategies are being in association
with corporate governance and companies are able to attain higher efficiency.
2. Ethical practices of business-
The ethical business practices have been followed for enhancing corporate governance in
a better manner. Parnassus Investments has decided to boycott investment in Valeant,
pharmaceutical corporate as it has questioned with regards to business model of organisation. It
has been turned to be a smart decision as Valeant had allegations regarding fraud with insurers.
The stock of Valeant fell by 86 % in 2016. Moreover, executives of organisation are facing
criminal charges up to a major extent. While, Parnassus Investments was nominated for US
Domestic-Stock Fund Manager of Year. This justifies that corporate governance is associated
with SRI strategy such as positive investing.
3. Increase pay-
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Executives pay for years have increased over the year, since, excessive pays to CEO
comes at bottom line of organisation, it is connected to forthcoming performance of corporate.
The companies are putting efforts for making reasonable pay for getting boost when SEC began
firms to make disclosure regarding compensation packages (Chatterji, Durand, Levine and
Touboul, 2017). However, it is under process and fund organisations like Domini, Walden and
Trillium are continuing to engage with organisations such as AT&T, Target, Citigroup, JP
Morgan Chase and Pfizer to give out their boards. Domini has worked with corporates to reform
in relation to paying minimum wage. It has met with Best Buy for creating better workforce
through minimum wage reform and improved career heights for employees.
4. Stronger privacy and data security-
Good corporate governance is not only to maintain better management and stakeholders
objective but also to keep data of customer secure enough. Trillium Asset Management has
worked in association with Internet Service Providers (ISP) like Century Link on their privacy
practices and engaged with Verizon as it is planning to buy Yahoo, company which had serious
data breaches and responsible investing is not been acknowledged. It can be analysed that
corporate governance is to focus on ESG so that responsible investing must be attained.
5. Intelligence fusion-
Technology business Intelligence Fusion (IF) is growing at a rapid rate for developing
online intelligence and risk management platform. IF provides an industry leading platform for
helping security professionals for managing risks and disseminating intelligence on large global
scale. Greater accuracy, efficiency have been accomplished for maintaining transparency in the
best way possible (Auer and Schuhmacher, 2016). This means that with partnering with
intelligence mechanism, company will be able to maintain efficiency quite comfortably.
Thus, it can be referenced to above evidences that corporate governance is fairly
associated with SRI strategies and positively shaping society as a whole. On the other hand, it
can be analysed that institutional investors are becoming aware of the objectives with regards to
prioritise social goodness above the financial return. Moreover, Board of Directors are
effectively complying with corporate governance so that all stakeholders are able to attain higher
efficiency in a better manner. Moreover, by maintaining proper corporate governance structure
along with emphasis on SRI, businesses will be able to accomplish desired objectives by
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maintaining long-term financial performance and also helping upliftment of society up to a high
extent.
CONCLUSION
Hereby it can be concluded that SRI is sustainable investing which aims to generate long-
term sustainable returns and is mainly dependent on companies and capital markets. It can be
said that SRI is acknowledging most common approach of ESG to financial returns. More than
$1 trillion is invested in SRI strategies. Various strategies such as negative screening, positive
screening, ESG integration and impact investing have been effectively considered with reference
to the institutional investors which make them for maintaining their investment strategy. They
are making socially responsible investments and as a result, societal benefits are arrived at quite
effectually. This means that investors are perfectly screening sectors and then they are making
investment without making wastage of funds and uplifting society.
It can be further analysed that institutional investors are following the grounds of societal
grounds so that business may be able to attain desired funds and enhancing overall growth in
socially good business sectors in the best manner possible. It can be ascertained that negative
screening is growing phenomenon as investors are making their way out of business sectors such
as tobacco, adult entertainment, gambling, alcohol, weapons and other sectors which does not
imply positive change in the society. This clearly shows that SRI strategies are fairly adopted by
investors and they attaining dual benefits out of the same. First is positive financial returns are
earned and next is providing societal benefit in the best way possible. This means that
institutional investors are perfectly applying SRI strategies for creating societal benefits along
with shareholders' wealth maximisation objective.
Societal benefits along with focus on maximisation of wealth by implementing adequate
portfolio is what SRI is entrusted to attain through institutional investors. ESG integration is one
of the important investment strategy aimed for managing three broad pillars for risks and
opportunities. It helps business to have potential funds in hand so that appropriate investment
may be made quite comfortably. By making out investment in effectual manner, environment,
social and governance criteria can be used to met fundamental analysis of equity investments
with ease. This integration helps business to attain higher efficiency and strategies can be
successfully placed for gaining accurate results. Impact investing is also enumerated along with
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the evidences which provides that money should be placed in such a way that it results in
accomplishing positive for society.
Long-term social impact can be attained with impact investing in major areas where it is
ultimately beneficial for company in maximising its growth. On the other side, corporate
governance matters are in direct association with SRI strategies in a better manner. This means
that company can attain investment by carrying out better corporate governance in a better
manner. Hence, it can be said that businesses may be able to get desired funds by complying with
SRI strategies and maintaining accurate corporate structure.
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REFERENCES
Books and Journals
Auer, B. R. (2016). Do socially responsible investment policies add or destroy European stock
portfolio value?. Journal of business ethics. 135(2). 381-397.
Auer, B. R., & Schuhmacher, F. (2016). Do socially (ir) responsible investments pay? New
evidence from international ESG data. The Quarterly Review of Economics and
Finance. 59. 51-62.
Chatterji, A. K., Durand, R., Levine, D. I., & Touboul, S. (2016). Do ratings of firms converge?
Implications for managers, investors and strategy researchers. Strategic Management
Journal. 37(8). 1597-1614.
Crifo, P., & Mottis, N. (2016). Socially responsible investment in France. Business &
Society. 55(4). 576-593.
Ioannou, I., & Serafeim, G. (2015). The impact of corporate social responsibility on investment
recommendations: Analysts' perceptions and shifting institutional logics. Strategic
Management Journal. 36(7). 1053-1081.
Lean, H. H., Ang, W. R., & Smyth, R. (2015). Performance and performance persistence of
socially responsible investment funds in Europe and North America. The North American
Journal of Economics and Finance. 34. 254-266.
Revelli, C. (2017). Socially responsible investing (SRI): From mainstream to margin?. Research
in International Business and Finance. 39. 711-717.
Revelli, C., & Viviani, J. L. (2015). Financial performance of socially responsible investing
(SRI): what have we learned? A meta‐analysis. Business Ethics: A European
Review. 24(2). 158-185.
Online
Brown. 2017 Why Governance Matters In Sustainable Investing [Online]. Available Through:
<https://www.forbes.com/sites/investor/2017/02/17/why-governance-matters-in-
sustainable-investing/#15dd44a17c9a>
Smith. 2018 5 great examples that show exactly what impact investing is [Online]. Available
Through: <https://blog.growthfunders.com/5-great-examples-that-show-exactly-what-
impact-investing-is>
Kell. 2018 The Remarkable Rise of ESG [Online]. Available Through:
<https://www.forbes.com/sites/georgkell/2018/07/11/the-remarkable-rise-of-esg/
#6e7c3f3a1695>.
Carey. 2018 SRI Investing Strategies [Online]. Available Through:
<https://www.m.fundssociety.com/en/opinion/sri-investing-strategies>.
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