The Maturing Of Socially Responsible
Investment: A Review Of The
Developing Link With Corporate
Social Responsibility
ABSTRACT. This paper reviews the development of
socially responsible investment (SRI) over recent years
and highlights the prospects for an increasingly strong
connection with the practice of corporate social respon-
sibility. The paper argues that not only has SRI grown
significantly, it has also matured. In particular, it has be-
come an investment philosophy adopted by a growing
proportion of large investment institutions. This shift in
SRI from margin to mainstream and the position in
which institutional investors find themselves is leading to
a new form of SRI shareholder pressure. Although this
bears some resemblance to lobbying campaigns which
might take advantage of shareholder rights, we seek to
distinguish it as an important phenomenon in its own
right – one to which corporate executives are likely to be
paying increasing attention in the years to come. We
further argue that this approach potentially meets some of
Russell Sparkes is a fund manager specialising in social invest-
ment for the Central Finance Board of the Methodist Church.
He is the Secretary of the Joint Advisory Committee on the
Ethics of Investment of the British Methodist Church, and a
Director of the U.K. Social Investment Forum. Russell
Sparkes is the author of numerous articles and speeches on
socially responsible investment. His books include The Eth-
ical Investor (Harper Collins 1994) and Socially Responsible
Investment – A Global Revolution which was published
simultaneously in the U.K. and U.S. by John Wiley in
November 2002.
Christopher Cowton has been Professor of Accounting at
Huddersfield University Business School since 1996. He was
previously University Lecturer in Management Studies at the
University of Oxford and a Fellow of Templeton College. He
was Chair of EBEN-UK (The U.K. Association of the
European Business Ethics Network) from 1998 to 2001 and
is editor of the journal, Business Ethics: A European Review,
published by Blackwells. He is the author or joint author of
five previous papers in the Journal of Business Ethics.
Journal of Business Ethics 52: 45–57, 2004.

2004 Kluwer Academic Publishers. Printed in the Netherlands.
Russell Sparkes
Christopher J. Cowton
the earlier ethical criticisms of certain forms of SRI but,
ironically, probably owes its existence to those pioneering
approaches. We conclude with some suggestions for
further research to inform discussion of the issues high-
lighted in the paper.
KEY WORDS: corporate social responsibility (CSR),
engagement, ethical investment, shareholder activism,
socially responsible investment (SRI)
Introduction
Reviewing the development of socially responsible
investment (SRI) in recent years, this paper argues
that not only has it grown significantly but it has also
matured, in the sense that it has become more
complex and begun to enter the mainstream of
investment practice. This maturation of SRI has
important implications for its relationship with cor-
porate social responsibility (CSR). SRI has changed
from an activity carried out by a small number of
specialist retail investment funds (in the form of unit
trusts and mutual funds), probably of negligible or
minor economic importance, into an investment
philosophy adopted by a growing proportion of
large investment institutions, i.e. large pension funds
and insurance companies. We argue, with support
from other recent authors, that this shift in SRI from
margin to mainstream could play a crucial role in
obliging or influencing quoted companies to address
CSR issues. For most corporate executives could
ignore SRI issues when they were limited to a fringe
minority, but this is no longer possible when they
are raised by institutional investors, which are the
46 Russell Sparkes and Christopher J. Cowton
most important ownership group of quoted com-
panies in many developed economies. The need for
corporate executives to pay attention to those
investors is not just a question of institutional
investors’ economic power, though; we argue it is
also a function of the way in which those investors
pursue SRI, which we describe and explain as part of
the development of an increasingly complex and
mature approach to SRI. We further argue that this
approach potentially meets some of the earlier eth-
ical criticisms of certain forms of SRI but, ironically,
probably owes its existence to those pioneering ap-
proaches.
The paper is structured as follows. First, our
understanding of certain important terms and basic
features of SRI is outlined. Second, we examine
various approaches to SRI which have developed,
outlining some of their technical and ethical features.
Third, we explore the implications of the adoption
of SRI by mainstream institutional investors, which
can be seen as a major landmark in the maturing of
SRI. Fourth, we discuss how those investors might
influence companies’ adoption of CSR. In the final
main section before the Conclusion we then return
to the ethics of SRI and also make some proposals
for future empirical research.
Coming to terms with socially responsible
investment
The field of SRI has been characterised by debate
(Bruyn, 1987; Hylton, 1992) or lack of consensus
about definitions (Cooper and Schlegelmilch, 1993;
Frankel, 1984). Even the terminology is not settled.
Thus broadly similar or related terms which appear in
the literature include social (Bruyn, 1987; McGill,
1984), divergent (Schotland, 1980), creative (Powers,
1971), green (Simpson, 1991), targeted, development
and strategic (Wokutch et al., 1984) investing or
investment. However, the two most common terms
are socially responsible investment – the term used in
this paper – and ethical investment. Before proceeding
further it may be appropriate at this point to analyse
these two terms and, in particular, to consider whether
there is any difference in meaning between them.
Ethical investment is the older term (e.g. Domini,
1984; Simon et al., 1972). This may reflect the fact
that the first investors to set ethical parameters on
investment portfolios were church investors in the
U.K., U.S., and Australia. The churches also played a
prominent role in the next stage, the development of
commercial ‘‘ethical’’ investment products, as
Methodists and Quakers were responsible for the
launch of the first ethical unit trusts in the U.S. and
U.K. (see Sparkes, 2002, Chapter 3). However, as
time has passed the term ‘‘ethical investment’’ has
increasingly been replaced by that of ‘socially
responsible investment’.1 In part this reflects the fact
that many people feel uncomfortable about using the
word ‘‘ethical’’ to describe investment matters. This
type of reluctance was publicly expressed by the U.K.
Pension Minister Stephen Timms in his 1999 speech
to Parliament announcing new SRI pensions regu-
lations to which we will return later (Timms, 1999):
(It) has traditionally been referred to as Ethical
Investment, but what I prefer to call Socially
Responsible Investment. I believe that when a name
becomes so loaded a term that the very mention of it
stifles intelligent debate rather than encourages it, then
it’s time for a change.
Perhaps some people are uncomfortable about
identifying the grounds for ethics or think that it
carries religious or moralising overtones. Others
object to the use of the word ‘‘ethical’’ because it
seems to imply that mainstream approaches to
investment are ‘‘unethical’’ (Purcell, 1980; Capital:
A Moral Instrument?, 1992) – though following that
line of reasoning, the usually preferred term of
‘‘socially responsible investment’’ would seem to
imply that normal investing is socially irresponsible,
which might be no more appreciated than an im-
plicit accusation of ‘‘unethical’’.
While the terms SRI and ethical investment are
often used interchangeably, in some contexts, for
some purposes, it may be worth making a distinction
between the two – although in practice the dis-
tinctions made are not always the same. For exam-
ple, Sparkes (2001) proposed a heuristic distinction,
suggesting that the older term could usefully be re-
stricted to non-profit making bodies such as chur-
ches, charities, and environmental groups. The
argument was that ‘‘ethical investment’’ could
accurately describe the process whereby value-based
organisations applied internal ethical principles to an
investment strategy, but that it was hard to see how
 The Maturing of Socially Responsible Investment
it could apply to the profit maximising behaviour of
fund management companies supplying ethical unit
trusts (see Anderson, 1996). This was prompted by a
conceptual issue pointed out by Cowton (1994):
At one level, ethical investment can be seen as just
another product innovation that helps widen
choice…. The irony is that its occurrence can be ex-
plained in pure, profit-seeking capitalistic terms, as
financial institutions seek to influence and exploit their
environment in the interests of profitability. Thus
individual investors, potentially at least, have their
values met or satisfied by institutions/people who do
not share these values at all, whose sole motive might
be to make more money.
Others might apply the term ethical investment to
the specialist or dedicated retail funds too, but view
SRI as a broader umbrella term (Collier, forth-
coming) which covers various related activities.2
Certainly we are content to use the term SRI to
cover the various approaches that we discuss in the
next section, all of which conform in some way with
Cowton’s (1994) definition of ethical investment (in
a broad sense) as ‘‘the exercise of ethical and social
criteria in the selection and management of invest-
ment portfolios, generally consisting of company
shares (stocks)’’. Notwithstanding some variety,
other definitions advanced in recent years possess a
strong family resemblance (for an overview see
Sparkes, 2001), and rarely does anything important
for a particular argument hang on which one is
chosen. Questions regarding abstract definition or
the choice of which term to use, though sometimes
of some significance, are probably of less importance
than developing an understanding of the range of
practices which have come to be associated with the
use of the terms. It is the contention of this paper
that the practices encompassed by SRI have signif-
icantly changed over recent years and that this
development has fundamentally altered its ability to
influence corporate social responsibility.
The development of socially responsible
investment
The prima facie ethical case for SRI is that investment
should not be immune from ethical scrutiny, for
there is nothing special about investment in general
47
that warrants its exclusion from the ethical consid-
erations that are brought to bear on other areas of life
(Bourke, 1997; Capital: A Moral Instrument?, 1992;
Sparkes, 1998). ‘‘Any individual or group which
truly cares about ethical, moral, religious or political
principles should in theory at least want to invest
their money in accordance with their principles’’
(Miller, 1992, p. 248). The original ‘‘ethical inves-
tors’’ were church investment bodies, and it is only
in the past two or three decades of late modernity
(McCann et al., 2003), and especially in recent years,
that such a perspective has been explicitly reflected
in dedicated SRI retail funds offered to the public.
Since their inception in 1971 in the U.S. and
1984 in the U.K. the basic model used by SRI retail
funds has been to base their ‘‘ethics’’ upon a rela-
tively straightforward and negative approach of
excluding shareholdings in companies judged to be
unethical – an avoidance approach. This is still the
predominant approach in the U.S., according to
Schepers and Sethi (2003). Building on the chur-
ches’ traditional concern over alcohol, tobacco,
gambling and perhaps defence, other issues have
included South African involvement during the
apartheid era, the environment, human rights, por-
nography, and animal welfare issues.
An ethical case for avoidance follows naturally
from the prima facie case stated above, that consistent
standards of behaviour should be applied in all areas
of life, including investment. Larmer (1997, p. 400)
contends that holding a share suggests approval, and
‘‘simply approving of an immoral action is im-
moral’’, while Gunnemann (1972, p. 193) argues
that ‘‘simply holding this stock and making a profit
from it indicates some acquiescence, or some sup-
port for a particular activity of the corporation or the
company’’. Mills (1996, p. 2) similarly argues that
‘‘the righteousness of any monetary return is con-
ditional on the absence of the exploitation of cus-
tomer, workers, creditors and suppliers’’. In this
strand of argument, integrity or ‘‘moral purity’’
(Simon et al., 1972, p. 25) appear to be the priority.
However, it has been questioned whether purity,
as implied by avoidance, is really a feasible ethical
goal. Simon et al. (1972, p. 26) describe it as
‘‘hopelessly naive’’ because the interconnectedness
of the corporate sector involves the investor in an
endless series of illusions and arbitrary decisions,
while Powers (1971) suggests that the search for
48 Russell Sparkes and Christopher J. Cowton
purity, a concept which tends to be ‘‘absolutist’’ in
moral terms, often leads to moral paralysis in today’s
complex world.
In practice, though, mechanistic filter screens are
often established to rule out unacceptable invest-
ments; typically a maximum percentage of a com-
pany’s turnover, perhaps five or ten percent in a
problem area. Thus SRI funds tend to use thresholds
of acceptability rather than ‘‘strictly binary proposi-
tions’’ (Rockness and Williams, 1988, p. 406).
However, whatever the practicalities of the use of
thresholds, it does pose a problem in principle. The
justification of arbitrary cut-off points rather than
absolute avoidance is difficult (Powers, 1971); the
use of thresholds does, after all, explicitly condone
the presence of certain apparently undesirable attri-
butes in the investment portfolio; and sometimes the
amount of business can be substantial. Schepers and
Sethi (2003, p. 17) note that the percentage ap-
proach ‘‘has the effect of bias against smaller com-
panies and favours large companies whose ‘‘socially
undesirable’’ conduct might be much bigger in
absolute terms’’.
Furthermore, some writers are critical of avoid-
ance on its own. There is a danger that investors will
feel that they have fulfilled their moral responsibility
for the use of their capital (Capital: A Moral
Instrument?, 1992) and it ignores the opportunity to
encourage good products, good companies, good
social conditions and best environmental practice
(Bourke, 1997). Over time some retail SRI funds
have made changes to the basic model, taking into
account positive factors when analysing companies,
such as charitable donations, employment of ethnic
minorities etc. There are various ways to combine
avoidance with more positive criteria, but one of the
problems with this approach is that there is relatively
little agreement on what such positive issues should
be, nor much data on which to assess them. It is hard
to avoid the conclusion that negative criteria tend to
dominate (Schepers and Sethi, 2003).
Another variant that has been tried by retail funds
with a strong ‘‘green’’ image is a positive approach
with a title such as ‘‘industries of the future’’. This
has a strong appeal to investors whose dominant SRI
concerns lie in the environmental area, as it offers
them the dual benefits of a commitment to sus-
tainability plus the hoped-for financial benefits of
investing in industries with significant long-term
growth prospects. Such funds have therefore con-
centrated their investments in the environmental
technology area, although again they are relatively
small in number. In general, avoidance remains the
dominant model for SRI retail funds.
Simon et al. (1972), who are critical of avoidance,
prefer moral effectiveness to moral purity. In other
words, they are more interested in affecting com-
panies’ adoption of CSR than simply keeping an
investment portfolio ‘‘clean’’. However, the prob-
lem of passive investment involving avoidance and,
perhaps, more positive criteria, is that as long as it is
on a small scale it is unlikely to have any impact on
larger, heavily-traded companies because the share
price will tend to return to a level reflecting financial
fundamentals (Boatright, 1999). This has led some to
suggest that SRI should involve active attempts to
put direct pressure on companies, taking advantage
of shareholder rights. In this shareholders may find
themselves allied with others who are campaigning
for corporate change, some of whom may own a
token shareholding. There have been a few notable
examples of this kind of behaviour in the U.K.
(Mackenzie, 1993), but U.K. SRI investors ‘‘appear
to prefer to conduct business behind closed doors’’
(Friedman and Miles, 2001, p. 536). The practice has
a considerable tradition in the U.S.A., where it is
easier to table critical shareholder resolutions (Graves
et al., 2001; Purcell, 1979), but Schepers and Sethi
(2003) cast doubt on how successful such efforts
have been. Part of the reason has been that institu-
tional investors have often sided with management
and so resolutions have rarely received a large pro-
portion of the votes cast. We return to this issue
below.
When SRI was limited to a few SRI retail funds
of insignificant size, it had minimal ability to assert
CSR values on companies. However, in countries
such as the U.K. and Australia, SRI funds have in-
creased significantly in number and size in recent
years (McCann et al., 2003; Solomon et al., 2002;
Sparkes, 2002). Friedman and Miles (2001, p. 526)
refer to a ‘‘staggering’’ 78.6% increase in U.K. SRI
funds between 1997 and 1999 and a perception that
their influence is growing as a result. Nevertheless, if
they remain based upon a passive policy focused on
avoiding investment in companies disapproved of
their impact is likely to remain marginal, at best.
(Such negative avoidance approaches probably also
 The Maturing of Socially Responsible Investment
made it easier for corporate executives and invest-
ment professionals to dismiss SRI as the work of the
‘‘lunatic fringe’’.) Schepers and Sethi (2003, p. 26)
suggest that ‘‘SRI funds have very little, if any,
bargaining leverage to influence corporate behaviour
based on its equity holdings’’. However, as Perks
et al. (1992, p. 61) point out, ‘‘an ethical investment
movement ... is potentially a powerful coalition of
interests, particularly if it includes substantial institutional
investors’ (emphasis added) because, as Corbetta
(1994) argues, the large institutional investors in
managerial capitalism have the ability to express
meaningful dissent rather than merely abandon
companies. Their (in)actions are crucial: ‘If CSR is
to be encouraged, the role of the institutional
investment community is essential’’ (Solomon et al.,
2002, p. 1). There are signs in recent years that
institutional investors are beginning to take SRI
seriously. This represents the maturing of SRI, its
movement from the margin to the mainstream.
From margin to mainstream
Collier (forthcoming) refers to an ‘‘evolutionary
shift’’ in institutional investment, ‘‘one which has
sharpened the CSR focus of the financial sector’’. It
is now something carried out by major investors
such as some pension funds and insurance compa-
nies. Sparkes (2002) shows that the adoption by
pension funds of SRI policies has occurred on a
significant scale in the U.S., U.K., Canada, and
Australia. Although putting precise figures on the
size of SRI beyond the dedicated SRI retail funds is
difficult, McCann et al. (2003, p. 16) refer to its
‘‘recent and quite sudden growth’’, which accords
with the situation that Sparkes portrays. As McCann
et al. (2003, p. 19) note,
SRI in its current form is very different from earlier
modes of ethical investment. SRI is not restricted to
ethical funds but rather involves a mainstream invest-
ment strategy … which is being adopted increasingly
by the majority of pension funds and large institutional
investors.
The growth in SRI arises from a combination of
legislative compulsion and pressure from actual and
future beneficiaries. Possibly the most rapid growth
49
has occurred in the U.K., encouraged by govern-
ment legislation. The U.K. Government has not
required pension funds to adopt SRI. However, in
July 1998 it did announce plans to require, from July
2000, all trustees of occupational and local govern-
ment pension schemes to state their policy on SRI.
This has been a significant driver in the growth of
SRI, encouraging many trustees to develop SRI
policies (Solomon et al., 2002).
The growth in pension funds adopting SRI
techniques and analysis is of the greatest importance
for CSR, as they are the majority owners of most
quoted businesses. As such they have the power to
request, and if necessary instruct, corporate execu-
tives to include social and environmental guidelines
in their business objectives. Such growth, both to
date and in the foreseeable future, has a number of
important consequences. It means that, inter alia, SRI
now has a much greater influence on the financial
markets and the economy as a whole. Corporate
executives need to take notice of their most pow-
erful investors, and if those investors are embracing
SRI in some way, social issues will inevitably find a
significant place on the corporate agenda. Such
pressures and incentives have been reinforced by the
phenomenon of ‘‘socially responsible’’ stock indices
being produced, such as the FTSE4Good series and
the Dow Jones Sustainability series. It is notable that
some companies (e.g. O2) refer to their presence in
such indices in their own publications. This seems to
have further prompted the launch of an increasing
number of agencies and consultancies seeking to sell
CSR advice to the corporate sector.
Although the introduction of legislation on SRI
disclosure for pension funds built on the precedent
and progress of SRI retail funds over the previous
decade and a half, the core SRI retail fund approach
of avoidance of large elements of the stock market
sets considerable practical challenges for institutional
investors. One of the difficulties with the classic
avoidance approach is that it reduces diversification
and misses out on potential growth opportunities.
The evidence suggests that the underlying investors
in SRI retail funds are willing to accept lower
financial returns as a price worth paying in order to
invest in line with their conscience (see Lewis and
Mackenzie, 2000) and theoretically one would ex-
pect, ceteris paribus, that the adoption of SRI con-
straints would lead to lower risk-adjusted financial
50 Russell Sparkes and Christopher J. Cowton
returns. However, the research evidence is not clear
on this point, although on balance it suggests that
there need not be any major performance penalty.
(Gregory et al. (1997), Guerard (1997a, b) for U.S.
data, Mallin et al. (1995), for U.K. research see
Sparkes (1994)). The subject of absolute and relative
SRI investment returns is summarised in Sparkes
(2002, Chapter 10), which came to three main
conclusions. The first was that SRI exclusions make
an insignificant difference to index returns over any
reasonable time frame. The second was that most
U.K. SRI unit trusts and U.S. SRI mutual funds
have tended to make slightly lower returns than a
peer group of comparable trusts, although this per-
formance cost is probably acceptable to the under-
lying investors. The last point was that academic
research on SRI financial returns has been based
upon retail funds whose performance data is widely
available. However, the rapid growth in pension
funds that have adopted socially responsible criteria
means that such research can no longer be regarded
as representative. With such large sums involved,
results might be different, and pension funds – which
operate under the legal obligation of fiduciary duty –
would need to exercise caution in extrapolating
from previous findings.
Pension funds which wish to add SRI criteria to
their investment objectives have essentially two ways
forward past this conundrum of financial cost. (Since
the vast majority of pension funds use external
investment managers they will normally take
investment advice from their professional advisers on
this point.) One approach to the problem of
investment performance is to integrate SRI exclu-
sions into portfolio construction in such a way that
the financial risk is minimised. Such ‘‘active risk
minimisation’’ uses internal market correlations to
minimise the potential investment penalties of SRI
exclusions. This enables institutional portfolios to be
created that avoid sections of the stock market, but
yet produce a risk/reward performance similar to
that of a benchmark index such as the FTSE All-
Share in the U.K., or the S&P 500 in the U.S. A
classic example would be to offset the risk of not
owning tobacco or alcohol shares in a portfolio by
overweighting the fund’s exposure to food manu-
facturing companies which have similar economic
characteristics. This is the approach adopted by the
Central Finance Board of the Methodist Church in
the U.K., and the Domini Social Index in the U.S.
The evidence suggests that such an approach can
obviate the financial cost of ethical avoidance, and
possibly even be a net positive to returns (for further
details see Sparkes, 2002, Chapter 10).
However, this is very much a minority approach
at present. The risk-optimisation investment ap-
proach naturally goes along with a related invest-
ment philosophy of investing in most sectors of the
stock market, but evaluating potential investments
using both financial and SRI criteria. For example, it
might rank ten potential investments in the U.S.
energy sector, and decide that six of them were
acceptable. This may be described as ‘‘best in class’’
investing, which ‘‘means that socially responsible
funds do not exclude whole sectors from their
portfolios but include those companies in previously
excluded sectors that are making the most effort to
improve their social responsibility’’ (Solomon et al.,
2002, p. 3). However, a ‘‘best in class’’ methodology
may also be used on its own. It is best seen in the
growing number of SRI index funds that have few if
any SRI exclusions. The Swiss SAM index series is a
good example of this approach.
The more common approach for institutional
investors is to abandon the SRI avoidance policies of
SRI retail funds, so that there should be no invest-
ment penalty. Engagement ‘‘is the preferred invest-
ment approach of institutional investors over
screening’’ (Friedman and Miles, 2001, p. 535).
Thus in this case the socially responsibility concerns
will be implemented not directly in the composition
of the portfolio but by using shareholder ownership
rights to influence corporate behaviour, seeking to
steer it in a more socially responsible direction. How
this might be accomplished is discussed in the next
section, but it should be noted at this point that, as a
strand in the corporate governance debate, institu-
tional investors have been encouraged to take a less
passive approach to the management of their share-
holdings.
From SRI to CSR
The attempt by investors to influence companies is
often associated with the term ‘‘shareholder activ-
ism’’. Technically speaking ‘‘shareholder activism’’
simply means the use of voting rights attached to
 The Maturing of Socially Responsible Investment
ordinary shares to assert political, financial, or other
objectives. It occurs when a shareholder group en-
gages in coordinated action to utilise their unique
rights to facilitate change. Such action can take a
number of forms beyond the obvious one of filing a
shareholder resolution at a company’s Annual Gen-
eral Meeting (AGM), such as seeking publicity for
the group’s objectives or dialogue with corporate
executives over the matter in dispute.
Shareholder resolutions on social and environ-
mental issues have become commonplace in the
U.S. over the last thirty years, generally known as
‘‘social proxies’’ to distinguish them from other types
of shareholder activism (Graves et al., 2001). Over
time U.S. SRI activism has developed a recognised
code of procedure. It begins with initial dialogue
with corporate executives to inform them of CSR
concerns held by institutional investors, a process
generally known as ‘‘engagement’’ in the U.K. Such
discussions may work well in facilitating the ex-
change of information on sensitive CSR issues be-
tween institutional investors and corporate
executives and may even last for a number of years.
However, if agreement cannot be reached, the social
proxy resolution is then presented to the company’s
AGM for shareholders to vote upon it; though it is
not unknown for the mere threat of filing a social
proxy to be enough to influence corporate behav-
iour in a desired manner. The matter is settled
amicably at this point, with the resolution being
withdrawn by its sponsors before the company’s
AGM. In the 1970s social proxies laid before the
AGM normally received low levels of support, but
by the 1990s it was not unknown for them to re-
ceive the support of 10%–25% of shares cast. Even
though it does not represent a defeat for them, the
existence of such a high level of public support puts
great pressure on company boards to respond posi-
tively to the CSR concerns expressed in the proxies.
The response to defeated social proxies and the
withdrawal of proxies mean that the success of
shareholder activism cannot be judged simply by the
passing of social proxies at the AGM. As Collier
(forthcoming) comments:
Much of what can be called investor engagement is
low-profile, and frequently remains that way over a
long period of time… [and] although it is easy enough
51
to theorise the process of engagement, it is less easy to
pronounce on whether or not investor engagement
improves overall CSR.
Even when something appears to happen ‘‘it is dif-
ficult to measure the impact of shareholder activism
on corporate policies and practices because both
sides like to claim credit for progressive results’’
(Purcell, 1979, p. 30). For example, it was reported
in Ethical and Social Investment No. 10 (Winter 1986/
87, p. 5) that, while the Church Commissioners
publicly claimed credit for the decision of BET to
raise its wages in South Africa (thus vindicating the
Commissioners’ policy of influencing companies
rather than selling shares), a spokesman for the
company denied that the role of interested share-
holders was decisive. Part of the reason for this is that
sometimes shareholder activism is just one part of a
wider campaign, which might, for example, include
political lobbying and consumer boycotts led by
NGOs.
At first sight single-issue advocacy campaigns look
very similar to SRI investors asserting social objec-
tives. The two groups may share similar concerns
over a particular social or environmental issue, and
they may often work together to pressurise a certain
company. However, although the means of NGO
advocacy and SRI activism may be similar, the aims
and objectives of the two groups are in principle
quite different and need to be carefully distin-
guished.
NGOs are normally based upon a narrowly de-
fined agenda that is perceived to be of overwhelm-
ing importance to their members. It seems fair to
state that they do not seem interested in general
shareholder democracy issues. Indeed, their advo-
cacy campaigns may use (critics might say abuse)
shareholder rights to attend a company’s annual
general meeting simply in order to complain in a
public forum about a company’s activities. For
example:
Each year Partizans, a tiny but dogged London-based
campaigning group, has launched a campaign on
RTZ, the world’s largest mining company. Partizans
wants RTZ to act in a more environmentally
responsible way, and to treat indigenous people with
more respect. Partizans does not table resolutions, in-
stead it asks difficult questions and seeks to attract press
publicity for the causes it represents. Occasionally it
52 Russell Sparkes and Christopher J. Cowton
has stormed the podium in an effort to make the
company and the press listen (Mackenzie, 1997).
For campaigning NGOs, maintaining the value of
the shares they have bought, normally for only a
small sum, is not an object of concern. It seems quite
legitimate for them to want to cause financial harm
to a company, perhaps by encouraging consumer
boycotts, if that is seen as the most effective way to
achieve their aims and it is done in a non-violent
way in accordance with the law. On the other hand
it is hard to conceive of any circumstance in which
SRI investors would actually want to see a decline in
the value of the shares they hold. Indeed, to do so
would seem to go against their legal fiduciary obli-
gations (Solomon et al., 2002). Socially responsible
investors want a financial return from their invest-
ments, whereas this is immaterial for advocacy
campaigns. The ultimate objective of SRI share-
holder activism is to improve corporate behaviour,
whereas NGO advocacy campaigns may even seek
to close down a particular company on the basis that
its whole basis of operation is immoral, e.g. nuclear
power (British Energy), mining (Rio Tinto), or
tobacco (Philip Morris). Confrontation and publicity
are also standard tools of campaigning groups,
whereas private dialogue or engagement with cor-
porate executives is more characteristic of SRI, as
described earlier.
However, it seems fair to note that many NGOs,
particularly larger ones, have realised that the tre-
mendous growth in SRI across retail funds and espe-
cially institutional investors provides an opportunity
to gain influential allies. SRI investors would be re-
pelled by the older ‘‘confrontational’’ approach, and
some NGOs have recently adopted a more pragmatic
stance that fits in well with SRI. Such approaches are
covered in depth in Hildyard and Mansley (2002). For
example, they describe the campaign led by Friends of
the Earth which persuaded the U.K. company Balfour
Beatty not to construct a dam at Ilisu in Turkey. This
campaign actively courted the support of socially
responsible investors, and seems a good example of the
pragmatic approach.
Nevertheless, although SRI activism by institu-
tional investors might focus on similar issues to
NGO campaigners, it is probably more appropriate
to draw parallels with shareholder activism as a tool
for overtly increasing shareholder value. Public
recognition of shareholder activism as a valid
investment tool probably dates back to April 1989
when U.S. shareholder activist Bob Monks informed
the board of Honeywell Inc, a large U.S. computer
and defence company, that proposals to limit
shareholder powers were unacceptable. Monks
formed a shareholder action group to oppose the
board’s proposals, and a fierce proxy battle began.
The board’s proposals were subsequently defeated,
and three months later Honeywell announced a
major restructuring resulting in a 22% increase in its
share price. Monks (1990) commented:
We do not claim to be responsible for all of the gain ...
perhaps Honeywell management would have an-
nounced a restructuring even without external pres-
sure. But we believe that our demonstration of
shareholder concern – and power – played a substantial
part in the gains realised.
The 1989 Honeywell proxy battle was historic for a
number of reasons. Of particular relevance to the
concerns of this paper, it was the first time that insti-
tutional shareholders joined forces with private
investors for a proxy initiative to defeat a corporation’s
anti-takeover proposals. It was also the first time
shareholder activism by institutional shareholders, and
against the will of an incumbent management team,
clearly demonstrated a substantial improvement in the
target company’s share price. Monks went on to found
a company, Lens Inc., an investment management
firm specialising in shareholder activism with the
objective of making financial gains. One of Lens’s
most celebrated cases was a two year battle in 1990–
1992 with the giant U.S. retail chain Sears Roebuck,
where Monks even stood as an independent director.
He was not elected, but the company was eventually
forced into a major restructuring plan which involved
selling off its financial operations to concentrate on
retailing. Over this period Sears’ share price almost
doubled from $24.75 to $44.75. Shareholder activism
is not the only means of influencing companies –
regulation and consumer power are other obvious
vehicles, among many – nor is it necessarily the best
one, but these cases show that it can be effective in
changing corporate behaviour. Institutional share-
holders have expressed their financial concerns
through activism in the past, but equally, they can
express social and ethical concerns, particularly now
 The Maturing of Socially Responsible Investment
that they are adopting SRI policies. The Balfour Be-
atty case was mentioned earlier; Collier (forthcoming)
cites the unfolding case of a major U.K. asset man-
agement company putting pressure on BP over safety
in its Alaskan operations.
It should be acknowledged that the U.S. is a
particularly favourable context in which shareholder
activism can flourish. American shareholders benefit
from the closely defined legal rights to file share-
holder resolutions issued by the Securities and Ex-
change Commission (SEC). Primary sponsors of a
resolution must own a minimum of $2000 worth of
stock in the corporation (a threshold increased from
$1000 in 1992) and they must have held this for at
least a year. To be resubmitted a resolution must
receive at least 3% of the votes in year one, 6% in
year two, and 10% subsequently. Compared to many
other countries, these requirements are not partic-
ularly onerous.
Until recently, overt shareholder activism has
been rare outside the U.S., but public policy mea-
sures in many Anglo-Saxon countries aim to make it
more widespread. The U.K. pension legislation to
encourage SRI and shareholder voting was noted
earlier. Canada and Australia can be cited as two
further examples. Attempts to file U.S.-style social
proxy resolutions in Canada were made illegal by a
court decision in 1987 over a shareholder resolution
criticising the tractor company Massey–Ferguson for
its involvement in South Africa. The court upheld a
legal challenge by the company that this contravened
the Canada Business Corporations Act (CBCA).
However, in November 2001 the Canadian Federal
Government responded to growing public criticism
of this legal prohibition by issuing new regulations
amending the CBCA that make the Canadian rules
on shareholder resolutions similar to those in the
U.S.
In March 2002 a major reform of financial ser-
vices in Australia came into effect. The new rules put
an obligation on all Australian pension funds to
disclose their compliance with the SRI regulations
shown below, and upon the Australian Securities
and Investment Commission (ASIC) to monitor
compliance:
(a) Any seller or issuer of investment products
must disclose to investors the extent (if at all)
to which labour standards or environmental,
53
social or ethical considerations are taken into
account in the selection, retention, and reali-
sation of the investments.
(b) ASIC may develop guidelines that must be
complied with where a product disclosure
statement makes any claim that labour stan-
dards or environment, social, or ethical con-
siderations are taken into account in the
selection, retention or realisation of the
investment.
In the U.K. and Australia, where social resolu-
tions are relatively new, company executives fre-
quently exhibit an antagonistic reaction, probably
regarding them as an unwarranted interference in a
company’s affairs. Such suspicions may be justified
when they are filed by a single-issue campaigning
group. However, SRI resolutions can have a positive
function as a feedback mechanism that alerts the
board of directors to potential problems lying ahead.
Such a function is perhaps one of the most clear cut
illustrations of the linkages between SRI and CSR.
When U.S. institutions started filing social proxies in
the early 1970s, the atmosphere was often highly
charged and adversarial. The pioneers in this respect
were church investors coordinated by the Interfaith
Center on Corporate Responsibility (ICCR), who
are still playing a leading role thirty years later. Of
the 261 shareholder resolutions filed in 2001, nearly
half, 135 in total, were filed by ICCR. However, in
recent years relations between corporate executives
and social proxy filers have changed through what
Tim Smith, the former head of ICCR, called ‘‘a
process of maturation’’. In other words each side of
the process recognises that the other has something
of value to offer and that the objective of the exer-
cise is to benefit the corporation by improving its
behaviour; it is not aimed at damaging it. In Smith’s
words:
Today a generation of parties to these negotiations has
become accustomed to the idea that the interests in-
volved are not mutually exclusive but are often com-
plementary. In fact, this is what the corporate social
responsibility movement has contended from the
beginning. A ‘‘maturation’’ process is taking place on
both sides. Increasingly investors are recognising and
affirming the constructive role of social investors such
as the churches to raise and work though issues that
must be of concern to the corporation. (Smith, 1992)
54 Russell Sparkes and Christopher J. Cowton
Thus shareholder ownership rights, or ‘‘shareholder
activism’’, may be used for CSR motives or to
produce financial gain – or both. The growing SRI
retail funds might have some influence, particularly
on smaller listed companies (Friedman and Miles,
2001). However, it is institutional investors, which
are both becoming more active as shareholders as a
result of the governance debate and now taking into
account SRI concerns, that are most likely to pro-
vide leverage on companies to improve their per-
formance with respect to CSR.
Discussion
The preceding sections have argued that socially
responsible investment has developed significantly in
several ways. As other writers have also noted, it has
grown in size, most obviously in the establishment
and advance of SRI retail funds but, we would ar-
gue, more importantly in the recent past through its
adoption by some major institutional investors. The
adoption of SRI by powerful mainstream investors
could in itself be seen as a sign of maturity, but we
would argue that the field has matured in other ways
too. For example, we now have SRI stock market
indices and there are several different approaches to
the practice of SRI in addition to the core avoidance
approach of SRI retail funds, including SRI risk
optimisation and engagement/activism. The latter
are better suited to institutional investors.
There has also been increased complexity in SRI
in ethical terms. As we noted earlier, the prima facie
ethical case for SRI is that investment should not be
immune from the ethical considerations that are
brought to bear in other areas of life. When church
investors started ‘ethical investment’ they did so as
relatively homogeneous institutions, based upon a
relatively well-defined set of beliefs, and possessing a
system of authority which enabled disputed ques-
tions to be tackled. In other words, each church
investment fund may be regarded as a single fund
with an explicit set of beliefs and some form of
advisory body to advise on the practical implemen-
tation of these beliefs.
Ethical complexity increased once retail SRI retail
funds were launched. They enable individuals with
differing social and environmental concerns (see
Anand and Cowton, 1993; Cowton, 1999) to par-
ticipate in financial products which avoid investing
in particular areas of concern. In a pluralistic society
there is no definitive set of beliefs among such
investors, and it seems likely that few of them find
any one fund’s exclusion criteria exactly meets their
requirements. It may not be economic for invest-
ment management companies to launch a series of
niche funds tailored to each market segment of
investors, so the underlying investors have to make
do with funds where their particular concerns are
probably but a subset of the SRI criteria being fol-
lowed. However, it should be noted that where the
policy is primarily one of avoidance or exclusion,
this may not be a major problem, for as long as the
individual investor does not have a positive desire to
invest in any of the areas avoided, the product at least
meets his or her own particular negative concerns.3
The ethical complexity deepened once govern-
ment action and the pressure of public opinion pu-
shed large institutional investors into adopting social
responsibility criteria. For reasons already explained,
a passive approach focused on simple avoidance is an
impractical approach for them; engagement/activism
are more attractive options. Given their economic
significance, this is likely to prove the most powerful
way in which SRI will influence corporate execu-
tives to engage in corporate social responsibility. If it
does, it will meet the concerns of critics who have
complained that basic forms of SRI, especially
avoidance, are ethically inadequate because they are
not designed, or at least not able, to bring about
change in companies’ behaviour. Yet there is an
irony here, for it is highly unlikely that the disclosure
of institutional investors’ SRI policies would have
appeared on the political agenda in the U.K. without
the successful establishment of SRI retail funds and
the infrastructure of information and expertise which
they helped to build up. If that is the case and the
adoption of SRI by institutional investors does have
an impact on CSR, it will represent an indirect
vindication of SRI retail funds beyond their ability
to satisfy the scruples of individual investors.
However, there are some concerns about insti-
tutional investors’ influencing of companies, partic-
ularly if it is limited to ‘‘behind the scenes’’ dialogue.
It has been condemned by campaigning NGOs as an
essentially futile exercise, particularly if – as appears
to have often been the case in the U.K. – it is treated
as a discrete activity in itself rather than as a possible
 The Maturing of Socially Responsible Investment
prelude to more public activism such as the filing of
a shareholder resolution. Friends of the Earth, for
example, have condemned it as ‘‘greenwash’’
(McRae, 2001). However, as explained earlier, it is
difficult to judge the effectiveness of such discreet
interactions. More might be happening than meets
the eye; but then that leaves the activity open to a
charge of lack of transparency, which does not seem
to fit well with SRI and CSR.
There would therefore seem to be several ethical
advantages of following the shareholder activism
route, perhaps with some limited opening dialogue,
rather than relying solely on ‘‘engagement’’. Firstly,
shareholder resolutions are public documents and an
exercise in shareholder democracy, so there is greater
transparency and disclosure. Secondly, this follows
well established procedures of corporate governance.
Finally, this supports the aims of public authorities in
most Anglo-Saxon countries that institutional
investors should make greater use of the voting
rights attached to their shares. However, whatever
happens, if SRI is to bring about greater CSR,
institutional investors’ policies will have to have real
content, and companies will have to be persuaded
that a constructive response to those policies is in
their shareholders’ best interests. If the pressure is
coming from their largest shareholders, who bear a
fiduciary responsibility, it will not be easy for com-
panies to prove otherwise unless they engage in
serious dialogue.
With the above in mind, it is clear that research
will be important to track and understand what is
happening as we enter this mature phase of SRI,
perhaps building on earlier research into dedicated
SRI retail funds (e.g. Harte et al., 1991; Rockness
and Williams, 1988; Schepers and Sethi, 2003).
Questions to address might include:
• How many institutional investors have formal
SRI policies and what are the differences be-
tween adopters and non-adopters?
• What are the components of those policies and
how do institutional investors seek to have
them implemented by the companies in which
they are invested?
• How were the policies established and what
processes are in place to review them?
• What response do institutional investors receive
when they raise CSR concerns with companies
55
and how does the relationship develop over
time?
• How do their activities relate to campaigns by
NGOs?
Such questions, and no doubt many others, will need
to be addressed by a variety of research methods,
including questionnaire surveys and interviews. Case
studies would be particularly informative. They
could focus on a particular institutional investor’s
approach to SRI, a particular company’s dealings
with institutional investors over SRI, a particular
issue across a range of investors and companies or
even a particular episode. All could provide valuable
detail to enrich our understanding of the issues
which matter and the processes at work. Hopefully
good research data would be accessible; it would be
disappointing, and somewhat ironic, if our ability to
know and understand what is happening in this
important area were inhibited by a lack of co-
operation by the parties involved.
Conclusion
This paper has provided a review of developments in
socially responsible investment. The aim has not
been to look in detail at the issues and policies
pursued but rather to highlight important recent
trends which, we believe, mark a ‘‘step change’’ in
SRI and its connection with the practice of corpo-
rate social responsibility by major companies. The
‘‘mainstreaming’’ of SRI as it is adopted by institu-
tional investors (not just by charities and other val-
ues-based organisations or in dedicated SRI retail
funds) is a major step in the maturing of SRI which
offers the prospect of putting significant pressure on
companies to adopt CSR. If successful, it will meet
some of the criticisms levelled against earlier forms of
SRI from which it can be regarded as having
developed. Citing support from other literature, this
paper has explored how the process of influence
might take place. Shareholder resolutions will con-
tinue to have a part to play in the U.S. and will
become more common than they have been hith-
erto in other countries, but their use will need to be
viewed in the context of other engagement mech-
anisms, especially dialogue between institutional
56 Russell Sparkes and Christopher J. Cowton
investors and companies. Although in practice the
SRI activities of institutional investors might be
aligned with NGO lobbying activity from time to
time, it is important to distinguish between the two,
for their goals are ultimately different.
Although we have produced some support for it,
it should be acknowledged that such an argument is
to some extent speculative and also needs to have
the details ‘filled in’. Some research has been con-
ducted on dedicated SRI funds and bodies such as
churches over the years, and also on shareholder
resolution campaigns in the U.S. The challenge now
is to build on the limited available evidence, much
of it anecdotal, regarding institutional investors and
thus to understand what happens when they adopt
SRI.
Notes
1
Note that this is not true in Australia, which has
generally kept the older usage. Hence one finds that
Australian pension (superannuation) funds which
adopt SRI constraints are described as ‘‘ethical su-
pers’’, a term unknown elsewhere.
2
This was the view of one of the referees of the
original version of this paper.
3 Accounting Review 33, 523–548.
This is a possible explanation for the focus on
avoidance by SRI retail funds, for the same logic
does not apply to positive criteria. It should also be
noted that the ‘‘ethics’’ belong to the underlying
investors, whereas the investment managers who
meet their needs do so for standard commercial
reasons
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Russel Sparkes
Senior Fund Manager,
Central Finance Board,
Methodist Church,
UK
Christopher J. Cowton
Professor,
Huddersfield University Business School,
Queensgate,
Huddersfield HD1 3DH,
U.K.
E-mail: c.j.cowton@hud.ac.uk