Financial markets and socially responsible investing

The goal of promoting environmentally sustainable business is not just for regular corporations in the productive economy, as other chapters in this book discuss, but extends also to those companies’ investors and financiers. This chapter investigates how the financial sector shapes the environmental performance of the economy, and assesses whether the burgeoning global movement for socially responsible investing (SRI) can foster sustainable companies, especially in the absence of credible governmental regulation. The chapter concentrates on five areas of potential SRI influence. The principal argument is that the financial sector continues to have negative environmental characteristics and impacts, both in its own right and on the companies the sector funds, and presently SRI has only a modest remedial influence. SRI will likely only acquire greater significance through a more enabling regulatory and public policy framework rather than continued reliance on voluntary goodwill. This first part of the chapter outlines the often hidden environmental impacts of the financial economy and why it should assume greater accountability for promoting sustainable development. Section 2 briefly maps the history, aspirations, and methods of SRI while Section 3 conceptualises SRI as a means of market governance that, at least for some proponents, seeks to discipline companies and improve their social and environmental behaviour. Thereafter, Section 4 (SRI’s financial rationale), Section 5 (altering the cost of capital to business), Section 6 (corporate engagement), Section 7 (voluntary codes of conduct), and Section 8 (public policy reforms) examine the efficacy of the principal means of influence available to social investors. Section 9 concludes this chapter with a warning of the need for more concerted action if SRI is to leverage positive change for sustainable business. No discussion of corporate environmental behaviour today is complete without recognition of the role of financial institutions, both as often significant corporate actors in their own right, as is the case with banks and insurance companies, and as financiers and investors in conventional firms.