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Finance & Bien Commun

2005/3 (No 23)

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Companies are increasingly supposed to do more than just produce good products or services, to market them in a fair way and to comply with all relevant legislation. They are in addition held responsible for the impacts of their activities on (groups and individuals within) society. More concrete, companies are expected to reduce as much as possible their impact on the environment, to take care of the (physical and mental) health of their employees, to offer equal opportunities to various groups with reduced chances on the labour market, to maintain good and communicative relations with all their stakeholders (including neighbours, trade unions, shareholders, suppliers, etc.), and so on. Companies are expected to develop policies in these areas, to implement them and to report to the public on their results. In response to these expectations, more and more companies issue sustainability reports and have corporate responsibility sections on their websites. But even then, all major stock quoted companies receive regularly extensive questionnaires and other requests for information from socially responsible investment research agencies.


As Socially Responsible Investment (SRI) is growing out of its cocoon and its niche, a large variety of criteria sets, evaluation systems, and investment product approaches has emerged, and all these systems have their own information needs for which they call on companies to supply data.


Not surprisingly, companies are not always happy with this avalanche of information requests. An increasing number of companies refuse to complete questionnaires, claiming that they don’t have the resources to invest time and money in this kind of work. This phenomenon has led to the popular neologism ‘questionnaire fatigue’.


Companies sometimes express the desire to have the SRI community to agree on a limited set of indicators and information requirements in order to allow more cost-efficient reporting.


Left aside the question if requests for information from SRI groups is really such a heavy burden for companies (which can be doubted), it would probably be far from easy - if not impossible - for the SRI community to agree on one single set of questions to companies. There are many reasons for this, but within the scope of this contribution, we limit ourselves to the existing of different concepts of SRI, each having its own logic and assumptions for deciding which kind of information is relevant for the evaluation of companies and which isn’t.


A first approach is articulated clearly in the well-known and controversial study commissioned in 2004 by the Swedish institute Mistra. This study launched the concept of ‘materiality’ as key criterion for selecting SRI indicator for social responsibility. An indicator is supposed to matter only if it is ‘material’. Materiality became a buzzword in the SRI-scene. The Mistra report referred to financial audits when stating that materiality is related to ‘impacts that would cause an informed person to reach a different conclusion or make a different decision about representations shown in financial statements’. The outcome of the study was: ‘While recognising that a range of social, environmental and economic issues may be of relevance to different stakeholder groups, these issues are only considered to be material where they have actual or potential impact on a company’s investment value’. This definition shows clearly that the ultimate criterion for deciding if something is material or not, is related to the question whether an impact is to be expected on the investment value of the company.


The second approach uses very different criterion to decide what is ‘material’ and what is not, based on the common language meaning of the word ‘material’: ‘Being both relevant and consequential’. This means that something is always material FOR something else. This something else can be the shareholder value, but also for instance the environment, or the employees, or communities. The SRI approach that is based on this concept of ‘materiality’ will use as key criterion for deciding what is important or not, the (potential) impact of a company on its stakeholders (including - but not limited to - the shareholders). This approach assesses the degree to which a company’s behavior is in line with the concept of sustainable development, and therefore we will call it the ‘sustainability approach’.


Though both approaches differ significantly from a principles point of view, there are many similarities when it comes to practical results. Often, there will be a link between socially responsible behavior and investment value, especially if we consider a long term perspective. Sustainable development is a concept linked to the future (as are lots of investment funds), but it can have immediate consequences as well. Limiting energy consumption will reduce costs and at the same time benefit the environment. Violating human rights (take the example of child labor) may result in public controversy, which negatively affects a company’s reputation and sales. Producing landmines or cluster bombs can end up in court. Exporting hazardous chemicals to communities in developing countries who are not aware of the risks can end up in tragedies (and law suites). Not being transparent on good governance can lead to severe questioning and even more serious financial consequences. However, this link between corporate responsibility and investment value is not always clearly present (what about a human rights violation that never becomes publicly known? What about very severe impacts that only affect a few individuals?). This explains why both approaches will most probably never come to exactly the same criteria and indicators and, as a consequence, will not come to exactly the same conclusions in evaluation companies.


Even if the differences in practice are not huge and are sometimes not easy to detect, the differences in terms of principles and goals are important: where the ‘materiality’ approach sees CSR (corporate social responsibility) indicators and SRI products in the first place as tools to maximize return on investments, the ‘sustainability approach’ uses them in the first place as a way to contribute to sustainable development, be it - not unimportant - without reducing returns on investment.

The diversity of the investment market and different views of different investors on sustainability and materiality’s are the driving forces behind the different approaches of SRI. •

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