Third World Quarterly, Vol. 28, No.

7, 2007, pp 1219 1237

Socially Responsible Investment and the Development Agenda: peering behind the progressive veil of non-nancial benchmarking
SUSANNE SOEDERBERG
ABSTRACT One of the most striking trends in global development nance has

been the growing role of Western-based, institutional investors. Pension funds in particular have played a leading part in supplying capital to publicly traded corporations in emerging market economies. An important feature of this type of nancing has been the trend to make investment conditional not only on sound economic fundamentals, but also on a series of non-nancial (or social) risk indicators (eg meeting labour standards and human rights). Despite the signicance of non-nancial benchmarking, these strategies have not been subjected to critical analysis, especially with regard to their wider impact on the reproduction of the mainstream development paradigm. This article addresses this gap by focusing on the benchmarking strategies of one of the worlds largest pension funds: the California Public Employees Retirement System (CalPERS). CalPERSs rating instrument, the Permissible Country Index (PCI), employs both nancial and non-nancial risk indicators to screen its investments in 27 emerging markets. I argue that, despite its progressive sheen, the PCI not only reproduces but also reinforces neoliberal forms of discipline and exploitation in the global South. It does this through coercive measures, such as divestment (ie removing a country from the PCI), as well as through the construction of specic forms of knowledge that act to normalise the expansion and restructuring of spaces of capital in the global South.

One of the most striking trends in global development nance over the past decade and a half has been the rise in private equity nancing in emerging market economies.1 Equity nancing refers to the method by which publicly traded companies in the global South raise long-term capital through the sale of shares (equity) to investors, rather than through other nancing means, such as bank loans.2 According to the US-based investment bank JP
Susanne Soederberg is in the Department of Global Development Studies, Queens University, MackintoshCorry Hall, E323, Kingston, Ontario K7L 3N6, Canada. Email: soederberg@queensu.ca. ISSN 0143-6597 print/ISSN 1360-2241 online/07/07121919 2007 Third World Quarterly DOI: 10.1080/01436590701547046

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Morgan, corporate debt has risen from $21 billion in 2002 to $111 billion in 2006.3 One of the major outcomes of the growing presence of Western-based, institutional investors in the lending game has been the imposition of new forms of conditionality. US-based pension funds, for instance, have played a lead role not only in investing in corporations in emerging markets, but also in monitoring and measuring investment risk, or what is referred to in the pension industry as benchmarking. One of the key features in benchmarking over the past decade has been the inclusion of non-nancial or social risk factors, such as the ability of a country to meet specic standards in their treatment of labour and in human rights. Although socially responsible investing (SRI) strategies are often associated with the rise of ethical awareness on the part of investors, from the perspective of money managers the primary motivation for the inclusion of social factors in the measurement of good investment sites is nancial considerations, or duciary responsibility.4 According to the recently forged United Nations Principles for Responsible Investment, There is a growing view among investment professionals that environmental, social and corporate governance issues can aect the performance of investment portfolios.5 Despite the signicance of this new trend in development nance, nonnancial benchmarking by pension funds has not been subjected to critical analysis, especially with regard to the social powers and wider impact on the reproduction of the mainstream development paradigm.6 This article addresses this gap by providing a critical analysis of the non-nancial risk factors employed by the California Public Employees Retirement System (CalPERS). With a market value of $240.4 billion, CalPERS not only represents one of the largest pension funds in the world, but also is well known for its proactive benchmarking system, most notably its Permissible Country Index (hereafter PCI or Index).7 The Index incorporates both nancial and social factors when calculating the risk levels in 27 emerging markets. On the surface the PCI has been celebrated as a progressive means of encouraging middle-income countries to adhere to the principles of the International Labour Organisation (ILO), or freedom of the press as dened by and rated by the conservative, US-based Freedom House. Indeed, some authors have suggested that the PCI has led to positive change, in that governments in emerging markets attempt to improve on social criteria so as to make their countries more attractive to large, foreign investors like CalPERS.8 Viewed at a deeper level, I argue that the PCI not only reproduces but also reinforces neoliberal forms of discipline and exploitation. The Index does this primarily through coercive measures, such as exit strategies (removing a country from its Index), as well as through attempts at constructing specic forms of knowledge that act to normalise the expansion and restructuring of spaces of capital in the global South. Capital is understood here not simply in mainstream economic terms, that is, a neutral object representing a form of money, but also as a social relation of capitalist production. The latter, Marxian conception allows us to grasp forms of social power inherent in this concept.9 1220

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The remaining discussion is divided into the following three sections. Section two discusses the general emergence of SRI with regard to the USA and outlines the non-nancial risk factors of the PCI. The third section provides a critical analysis of the PCI by identifying and elaborating on three main characteristics underpinning the Index: 1) its uncritical acceptance that development is an unproblematic term and therefore is treated and embraced as a neutral and universal objective; 2) the ahistorical and economistic lens through which social, political and ideological phenomena tied to human rights, labour standards and political transparency are understood and measured; and 3) the homogenisation of 27 culturally and historically distinct countries. The concluding section discusses the political and analytical ramications of the SRI trend in private investment. Non-nancial risk metrics and the The evolution of
SRI

PCI

and the Index

Although socially responsible investing has existed for centuries in the USA, its present form, which is dominated by negative screening devices such as the PCI, has only been in place since the civil rights and womens movement of the 1960s.10 The dynamic nature of SRI strategies is largely attributed to the fact that they are integral moments of the changing nature of the global political economy, as well as key social issues of our times, and evidence of pressure placed on pension funds by grassroots struggles. Although it did not include social factors in its rst version of the PCI, which was established in 1987, the CalPERS Board of Directors decided to commission their nancial advisors, Wilshire Consulting, to devise an Index to screen countries that demonstrated unfavourable economic and nancial conditions as a result of shareholder activism. This was driven by waves of mergers and acquisitions, and the associated abuses of corporate management in the USA, as well as by the high-prole ght against the apartheid regime in South Africa, and it was further galvanised by environmental catastrophes at Chernobyl and Bhopal. It was not until 1999 that CalPERSs Board of Directors insisted that Wilshire Consulting revise the Index to include non-nancial risk measurements when assessing the stability and protability of investment opportunities in developing countries. The amendment to the Index took into account two broad sources of risk (dened as the standard deviation of returns): 1) country factors, which concentrated on a narrowly dened concept of political risk; and 2) market factors, which related to issues such as market liquidity and volatility, market regulation/legal system/investor protection, capital market openness and settlement prociency/transaction costs.11 In the wake of the Enron-style debacles in the USA and elsewhere in the early 2000s, the Board insisted that the denition of country factors or social risk be broadened to encompass the following points: transparency, productive labour practices, and an expanded understanding of political stability (see Table 1).12 1221

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TABLE 1. Permissible Country Index/CalPERS country and market macro-factors

Country macro-factors (or political risk factors) Political stability Transparency Productive labour practices Total assigned weight Weight (%) 16.7 16.7 16.7 50.1 Market macro-factors Market liquidity and volatility Market regulation/legal system/investor protection Capital market openness Settlement Prociency/Transaction Costs Weight (%) 12.5 12.5 12.5 12.5 50

Source: Wilshire Consulting, Permissible equity markets investment analysis, prepared for the California Public Employees Retirement System, Santa Monica, CA: Wilshire Consulting, 2005, pp 4, 11.

There are several interlocking reasons for CalPERS Board of Directors embrace of non-nancial risk indicators in the PCI. First, the rise of anticorporatism began to reach its zenith in the late 1990s. The greatest manifestation of the growing discontent with corporate power and abuse was the Battle of Seattle of 1999, which disrupted the ministerial conference of the World Trade Organization, and the latters plans to further liberalise trade, especially in the global South. Second, the growing awareness of environmental and social transgressions by major Transnational Corporations was greatly facilitated by the emergence of non-prot NGOs (CorpWatch, Clean Clothes Campaign, etc), faith-based shareholder groups (eg Interfaith Centre on Corporate Responsibility), and reinforced by the spread of information technology such as the internet. Third, the growing awareness by shareholders has also played a role in pressuring CalPERS to draw on non-nancial risk factors when assessing countries. According to former CalPERS chief executive ocer Dale Hanson, the Investor Responsibility Research Centre analysis of proxy voting records indicates shareholders in record numbers want companies to adopt global labour standards to ensure fair, decent working conditions for overseas employees.13 Fourth, the pressures from both stakeholders and shareholders led to the mainstreaming of SRI in the nancial community, especially with the growing, albeit still refuted, evidence that SRI-indexed funds perform as well, if not better, than general averages over a given length of time. Furthermore, at least from a legal perspective, SRI does not contradict duciary responsibilities. The US Pension and Welfare Benets Agency, which wields authority over all US private employee benet systems under the Employees Retirement Income Security Act of 1974 (ERISA), has consistently maintained that is not in itself illegal. A trustee must manage prudently with an eye solely to enhancing the value of the beneciaries interest. However, this investment may at the same time serve a parallel social purpose.14 It should be noted that, within CalPERS, the adoption of social risk factors has largely been a top-down process. The Board of Directorsas opposed to its 1 050 000 union-based members and beneciaries of state, local government and school district employeeshas made the decision to adopt nonnancial risk factors as an investment tool. This point, while important, 1222

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can only be agged here, given space constraints. We now turn our attention to the content of the non-nancial or social risk factors of the PCI. The social content of the Index The rst social risk or country factor is political stability (see Table 1). Like the rest of the indicators that comprise the permissible country criteria, political stability is comprised of two parts: a macro-factor and several subfactors. Political stability (the macro-factor) refers to progress in the creation of basic democratic institutions and principles, such as guaranteed elimination of human rights violations (eg torture), and a strong and impartial legal system. Political stability is seen as a vital component in guaranteeing the development of a free market in the Third World, which in turn will attract and retain long-term capital. Several sub-factors further dene political stability: 1) civil liberties; 2) independent judiciary and legal protection; and 3) political risk.15 It is interesting to note that the credible independent third-party source used to evaluate civil liberties is the Freedom House rankings that are published every year. For the most part Freedom Houses measurements are guided by the Universal Declaration of Human Rights of the United Nations.16 To determine the independent judiciary and legal protection sub-factor, Wilshire draws on the Contracts and Law SubIndex that is published annually in the Global Competitive Report. The latter is aliated with the World Economic Forum. Lastly, for the political risk sub-factor, Wilshire draws on the risk ranking published in the International Country Risk Guide of a private consultancy rm based in the USA, PRS Group, which has been in operation over the past 20 years and caters to 80% of the top Fortune 500 companies.17 Similarly to other PCI factors, each of the three sub-factors comprising political stability is scored out of 3. The highest score is 3 (good) and the lowest is 1 (poor). For a country to remain on the PCI, it must reach a passing score of 2. The second social risk factor is transparency. Wilshire sees this factor as primarily comprising nancial transparency, but also including elements of a free press necessary for investors to have truthful, accurate and relevant information on the conditions in the countries and companies in which they are investing.18 The transparency factor includes four sub-factors: 1) freedom of the press; 2) monetary and scal transparency; 3) stock exchange listing requirements; and 4) accounting standards. The third social factor is productive labour practices. To assist in the evaluation of this macro-factor, Wilshire identied a credible third party. Verite is an American non-prot research organisation, which CalPERS has employed since 2000 to provide information and analysis of labour protections in 27 emerging markets, employing 42 indicators of labour standards compliancethe rst such framework of its kind to be used for investment purposes.19 In their attempts to facilitate economically productive labour practices, Wilshire notes that markets shall be evaluated based on their ratication of and adherence to the principles laid out by the ILO, which cover labour rights and prohibitions on abusive labour practices, and the degree of eectiveness 1223

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of implementation through relevant laws, enabling regulations and their degree of enforcement through the judiciary process.20 The Productive Labour Practices macro-factor is accompanied by the following four subfactors, which total a maximum of 40 points per country: 1) ILO Ratication; 2) Quality of Enabling Legislation; 3) Institutional Capacity; and 4) eectiveness of implementation. Moreover, these sub-factors are more heavily weighted towards the quality of enabling legislation and the eectiveness of implementation.21 Drawing on its latest reformulated Index, CalPERS shocked the investment community by pulling out of investments in four East Asian countriesthe Philippines, Thailand, Indonesia and Malaysiaon the basis of social issues and human rights. In the words of Verite, the pension funds third party verication company, We looked at the laws and then we looked at what was really going onchild labour, force labour, freedom of association and discrimination.22 While some authors celebrated this move as a triumph for anti-corporatism or of the power of pension funds to eect real social change in key spaces of the global South, ie emerging market economies, the mainstream discussions have remained within the parameters of SRI debates, namely, whether or not duciary institutions should participate in social reform. In what follows, I would like to take this discussion in another direction by focusing on a largely neglected area of the debates, that is, the role and impact of the PCI vis-a`-vis the mainstream understanding of the dominant, neoliberal-led development agenda. The politics of naturalising neoliberal discipline and dependency in emerging markets This section seeks to explain how and why the reproduction of the disciplining and dependency of Third World corporations on Westernbased institutional investors occurs. As I demonstrate below, the reproduction of neoliberal forms of discipline and exploitation, which is inherent in the Index, is accomplished largely through coercive measures, such as exit strategies, as well as consensus formation through the construction of specic forms of knowledge which act to normalise the conditionality imbued in the Index. Both the capitalist nature of the PCI and its reproduction can be revealed and understood by identifying three overlapping assumptions underpinning the content of this social construct. First, the content of the Indexas well as its larger frame of reference, entrepreneurial developmentperpetuates the common-sense assumption that development is a neutral and universal concept that aims to promote material prosperity through growth. This premise, which has been a central feature of postwar development, assists in naturalising the new conditionality and its primary goal: the establishment and maintenance of new forms of spatial expansion of capitalism in the global South, especially with regard to equity nance. Second, the PCI relies on an economistic frame for assessing countries investment potential. This perspective is assumed to be scientic and, therefore, unproblematic. 1224

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The portrayal of the Index as based in scientic knowledge further distorts the exploitative and disciplinary features of capitalist society by treating capital as an object as opposed to a social relation. And, third, the content of the Index assumes that the Third World is culturally homogeneous and its governance structures (legal, economic and corporate) are backward. Through this objectication process, which is also reinforced in the rst and second assumptions, the PCI represents highly complex, national, social formations in ahistorical and apolitical terms. This move subsequently not only primes a developing country to be objectied, and thus understood in terms of categories that can be measured in terms of its ability to provide a good investment site.23 It also renders the disciplinary action to withhold funds, or subject the country to a cure period, as an unproblematic and indeed necessary strategy to ensure that the sick and ailing policies of a country be rectied, so that a primary goal of development, namely market stabilisation, can be realised. The neutrality and universality of development The Index and entrepreneurial development have remained above critical reproach largely because they resonate well with a deep-seated, Western, common-sense understanding that economic growth leads to progress. As Gilbert Rist observes, this understanding of development, which has dominated ocial discourse and policy since the end of World War II up to the current entrepreneurial development model, oers the promise of general abundance, conceived in biological imagery as something natural, positive, necessary and indisputable.24 The debates have remained silent on the question of how and why the knowledge contained in the PCI is readily accepted by policy makers, the media, shareowners and scholars as some objective fact. Before continuing with our discussion, it is important to introduce a caveat. While the PCI represents an attempt by US investors to inuence political and economic structures and practices in emerging markets, so as to safeguard their investments, the Third World should not be viewed as a homogeneous victim. By this I mean that many political elites and local capitalists have been actively campaigning either to remain or to get listed on the Index. By helping to signal to foreign investors that a country is creditworthy, capital (or, more specically, money circulating as capital) also becomes less expensive through lower interest rates and more favourable repayment schedules, as a good investment site is deemed a relatively low risk. In other words, while all capitalists favour and benet from the reproduction of the domination of capital over labour, some capitalists gain more from Western attempts politically and socially to congure this domination through, for instance, the Anglo-American variant of corporate governance.25 To transcend the technical and economistic treatment of the Index, it is important to question the assumption of progress, as this highly political concept beats at the heart of the ocial understanding of development. 1225

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Progress is dened in terms of material prosperity, which is, in turn, generated by economic growth. According to the PCI and entrepreneurial development, the ability of countries to attract equity nance assists in obtaining growth. The International Financial Corporation (IFC), for instance, insists that harnessing the power of private capital and free enterpriserepresented as positive poweris necessary to bring about needed change in the developing world.26 This change will in turn reduce economic risks and protect shareholder value by ensuring that the underdeveloped countries strive towards establishing good (ie Anglo-American) corporate governance practices through, for example, implementing well functioning (universal) legal and political systems, modernising stock exchanges, stabilising capital market ows, decreasing commission rates and other transaction charges, and so forth. The questions that emerge here, but are rarely posed in the dominant discourse, are on whose terms is change in the developing world needed? Who benets from this change? And what social, political and cultural dislocations are associated with this change, and why? To address these questions it is useful to combine the capitalist nature of the PCI with an interrogation of its cultural dimensions of knowledge and production of social space. This strategy allows us to grasp that the key sources of power of the PCI lie not only in the coercive features of the Index (exit strategies, blacklisting bad investment sites, cure periods), but in its ability to normalise, and therefore reproduce, the knowledge rooted in ocial development discourse and policy. What is at stake here is concealed by the neutrality of the term development, namely the production of knowledge and exercise of power over the Third World.27 Following Arturo Escobar:
most forms of understanding and representing the Third World are still dictated by the same basic tenets. The forms of power that have appeared act not so much by repression but by normalisation; not by ignorance but by controlled knowledge; not by humanitarian concern but by the bureaucratization of social action. As the conditions that gave rise to development became more pressing, it could only increase its hold, rene its methods, and extend its reach even further.28

To grasp the inner nature of the PCI and its ability to replicate the conditions of capitalism by normalising and universalising the meaning of good investment sites, I highlight two ways in which the spatial dimension to the production of knowledge is rooted in capital relations of exploitation and domination.29 First, entrepreneurial development and the PCI are social constructs that are forged by particular individuals, groups and institutions within social space.30 As we saw earlier, entrepreneurial development represents an intensied phase of neoliberal-led development policies and practices over the past several decades. There are at least two novel attributes of this neoliberal variant: 1) the more explicit and direct control of nancial actors vis-a`-vis policy formation, such as the new conditionality; and 2) the 1226

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increasing presence of foreign investors in the global South accompanied by emphasising the social dimensions of good governance. The space within which the knowledge underpinning entrepreneurial development and the PCI is both produced and reproduced reects dominant capitalist interests in the USA. In an attempt to deal with the eects of the tendency towards capital accumulation, American institutional investors such as CalPERS expand geographically into new regions by exporting capital, extending towards the creation of what Marx referred to as the world market.31 David Harvey describes this as a process of spatial displacement of capital.32 The latter refers to a strategy in which capitalists seek to nd outlets for their surplus capital by opening up new markets, new production capacities and new resource, social and labour possibilities elsewhere.33 As Marx suggested, If capital is sent abroad, this is not done because it absolutely could not be applied at home, but because it can be employed at a higher rate of prot in a foreign country.34 Marxs observation resonates well with Wilshires emphasis on the importance of economic growth as the primary motivation for investing in developing countries. According to Wilshire, growth is the reason for investing in the emerging markets, including superior relative expected returns and expanding opportunity set for investment. Last year [2005] the emerging markets collectively outperformed their developed markets counterparts globally.35 Second, as discussed above, equity nance is not an object, but has its base in money, which is viewed here as an integral moment of the social relations of capital. Seen from this perspective, money, and by extension equity nance, wields social power. Those who wield this social power, according to Harvey, also seek to cultivate command over spatial organisation, and authority over the use of space becomes a crucial means for the reorganisation and reproduction of social power relations.36 This command over space, and subsequent power struggles to resist this command, are concealed in the discourse and policy of entrepreneurial development, and the PCI, as money which takes the form of equity nancing is reduced to a neutral object. One such expression of this power is the ability of US capitalists and their state to construct particular forms of knowledge that assist in protecting US surplus capital abroad, for example in the form of pension or mutual funds. The manner in which a specic variant of corporate governance is championed over others is a case in point. It is not purely objective forms of scientic knowledge that drive the general consensus among mainstream scholars, policy makers and the media that East Asian forms of corporate governance are weak and underdeveloped compared with their American counterparts, despite the fact that the latter bred the largest and most socially devastating forms of business fraud in US history during the early 2000s. Key aspects of the Indexs country factors involve changing national legal and political systems, so as to protect private property, liberalise nancial markets and exibilise labour markets. However, the political and legal systems of a country are not undierentiated, ahistorical features of investment sites; rather, they are complex historical products of class-led 1227

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struggles rooted in nationally specic colonial and postcolonial power relations. Thus a basic prerequisite for the Anglo-American reforms contained in the PCI to be implemented would entail a fundamental reorganisation of the total social relations of production and exchange in a given social formation. For instance, given the high concentration of familyowned, publicly run corporations in East and Southeast Asia, minority shareholder rights cannot be guaranteed by mere technical changes, without ensuring major social and political struggle and dislocation through the implementation of neoliberal forms of social engineering.37 The naturalised understanding of development allows the PCI (or, more specically, the money managers and Board of Directors of CalPERS) to conceal its role in promoting imperial practices required to guarantee the expanded reproduction of capital in the context of Third World countries. Economics as scientic knowledge: naturalising the hegemony of market episteme Regardless of its emphasis on country factors (or political factors), the PCI grants primacy to the economy. Both the means and end of the Index are to promote a well functioning market by granting it as much freedom from government intervention as possible. This position is rmly rooted in the hegemonic understanding of economic growth and the material prosperity it generates (ie market episteme), which we discuss in more detail below. For our purposes here, suce it to say that the theory that the hegemony of market episteme reduces all aspects of life to the needs and proper functioning of the market serves to remove and therefore sanitise the political, material and cultural aspects of societies and to recast them ahistorically in terms of the neutral realm of science. In doing so, economics is represented as somehow embodying a scientic and therefore accurate representation of and truth about the world.38 As Arturo Escobar notes, there is a close, albeit distorted, connection drawn between the scientic knowledge of economics, and its implicit claims to neutrality, and what he refers to as the cultural code, or cultural discourse of economics. Economists do not see their science as a cultural discourse. In their long and illustrious realist tradition, their knowledge is taken to be a neutral representation of the world and truth about it. Theirs is, as Patricia Williams writes referring to the law in ways that are equally applicable to economics, an imposition of orderthe ironclad imposition of a world view.39 One of the main reasons why economics is treated and largely understood as a science is because it places rationality as a dominant value in its paradigm. This is evident in the country and market factors that comprise the PCI. Within the parameters of the Index the market or the economy is viewed in harmonious terms, without politics, social power or history, an utterly rational world, made even more abstract with the application of mathematical tools used to gauge the quality of investment potential of a country.40 The basic premise driving this view is that the economy is comprised of 1228

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rational actors, whose behaviour can be readily explained and understood through observation, measurement and prediction. It follows from this that rational behaviour is innate and therefore only alterable if and when external forces to the market, such as the state, distort the competitive environment through, for example, rent-seeking activities or weak legal systems that fail to protect private property. The assumption that markets are inherently rational, as long as they are left to their own devices, is an important feature of the cultural code of economics, and serves as the cornerstone of the Indexs ability to recreate the status quo by neutralising and thus normalising disciplinary relations of exploitation and domination. It does so in the following two ways. On the one hand, the understanding that markets are inherently rational depoliticises, and therefore naturalises, the knowledge upon which the PCI attempts to exercise its disciplinary power, as it removes any problematic issues, such as social conicts, contestation over material power, and so forth, from the political and cultural realms and recasts them in terms of the sanitised and neutral realm of science. While CalPERS claims that its revised Index gives equal weight to market and country factors, for instance, it should be underlined that the country factors have been selected to encourage governments of emerging markets to pursue the neoliberal utopia of unregulated freedom of the market. Country factors are scored on the basis of how well national governments provide the proper conditions (eg legal entitlements, sound economic policy based on scal austerity, nancial deregulation and trade liberalisation, and so on) for the market actors to ourish under the conditions of competition in order to promote economic growth. On the other hand, the assumption of the rationality of the market allows CalPERS to continue to place the blame for economic crises or slowdown at the door of the developing world, thereby justifying ever more intrusive forms of surveillance and control through neoliberal knowledge. Given the assumption of rational and ecient behaviour of nancial actors, such as CalPERS, the occurrence of crises is largely blamed on internal factors of state failure, or in neoliberal parlance, poor governance structures and lack of sound macroeconomic fundamentals of developing countries. As we saw above, the PCI has been subject to revision each time a major crisis occurred, whether this originated in the Third World (East Asia) or in the USA (Enron). The underlying assumption in each revision of the Index was not an acknowledgement of market failure, but rather of state failure to provide a free-market environment. Crony capitalism, rent-seeking behaviour and weak legal systems were believed to have led to the distortion of the competitive tendencies of rational economic actors. By locating blame with the Third World countries, CalPERS revised Index mirrored, and therefore legitimised, the knowledge produced by the IMF, World Bank and G-7 countries in reaction to the major nancial crises that occurred during the 1990s, and which culminated in the creation of international standards and codes of the New International Financial Architecture in 1999. As I have argued elsewhere, these standards and codes did not emerge from a consensus, but were largely imposed on a select number of emerging markets 1229

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(based on their economic utility to the worlds richest countries, especially the USA) by a chosen few technocrats sympathetic to recreating the status quo, and especially to ensuring that nancial ows remain free to roam across as many national borders as possible.41 An important consequence of this neoliberal knowledge, which is rooted in the economics as a science assumption, has served to naturalise further the eciency and desirability of Anglo-American forms of corporate governance. One criticism of the high concentration of family ownership of indigenous, publicly listed corporations, for instance, is that the management and board of directors are eectively insulated from market discipline, because of their lack of exposure to outside voices, such as minority shareholders. The assumption here is that, in the presence of good governance structures, such as the democratic and legal systems found in the USA, there will be less chance of market failure; that is, nancial actors like CalPERS will act rationally. The recent Enron-style debacles in the USA have revealed that the same short-term, speculative and irrational herd-behaviour, as well as bad corporate governance practices, are as much at play in the highly deregulated nancial markets of the First World as they are in the Third World. There is an important feature of the cultural code of economics that Escobar overlooks, however. While the assumption of rationality appears to legitimise the reductionism that occurs in the portrayal of economics as a science, it also helps to cloak the social power inherent in capital by treating the latter as some sort of neutral object or thing. The ability of CalPERS investment in publicly listed corporations in the developing world to increase in value is believed by neoclassical economists to occur through harmonious and equal relations (both of which take place on a level playing eld) between rational market actors (buyers and sellers). The latter conditions are predicated on the ability of the state to provide the right policy and institutional atmosphere (good governance), so as to encourage free market competition by ensuring, inter alia, that universal laws apply to both foreign and local capitalists regarding the protection of private property, the expression of voice in the management of corporations, sound macroeconomic policy framework (liberalised nancial system), the avoidance of formulating policy that encourages rent-seeking behaviour, and so forth. There are at least two immediate and interrelated outcomes in treating capital as a thing as opposed to a social relation. First, the dominant treatment of capital as an object devoid of social power fails to acknowledge the exploitative relationship that occurs between capitalists and labour in the creation of surplus value. Investors like CalPERS hold titles of ownership and receive interest (dividends). The latter are not generated in thin air but, in order to share in future surplus value production, must at some point confront labour.42 Second, by treating capital as a thing, the cultural code of economics conceals the role and class nature of the bourgeois state, and thereby depoliticises and declasses the gloss of good governance in which the country factors of the Index are encased. While so-called good governance practices acknowledge the role of the state in creating the ideal conditions for the untrammelled freedom of the market, they do so by representing the state 1230

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as a set of neutral institutions and policies, thereby concealing its repressive and ideological functions. Thus the content of the Index masks the capitalist nature of the state and its role in recreating the conditions for expanded reproduction of capital accumulation, through, for example, the establishment of good governance principles. The technical and economic aspects of the Index also downplay how the historical conguration of relations of power within a particular national formation can limit the degree to which Anglo-American forms of good governance can be eectively and swiftly implemented (the one year of cure period) without deeper social conicts and/or possible threats of economic and political destabilisation. Following Marx, capital (or, in the case of equity nance, money circulating as capital) is not a thing, but a social relation that takes on historically specic meaning in a class-based society in which the means of production rest in one class (capitalists). Within this societal context capital cannot increase in value, or turn a prot, without confronting labour through exploitative and unequal relations. Unlike the picture painted by de Soto and the IFC, prot is not generated in conictless relationship between labour and capitalists, but instead is fraught with social antagonisms. Seen from this perspective, the bourgeois state is required to intervene in order to mediate struggles and thereby recreate the conditions of accumulation. As David Harvey argues:
The free market, if it is to work, requires a bundle of institutional arrangements and rules that can be guaranteed only by something akin to state power. The freedom of the market has to be guaranteed by law, authority, force, and, in extremis, by violence . . . Free markets, in short, do not just happen. Nor are they antagonistic to state power in general though they can, of course, be antagonistic to certain ways in which state power might be used to regulate them [for example, the interventionist style of the developmental state model, or forms of corporate governance that give emphasis to stakeholders as opposed to shareholders].43

As Harvey rightly claims, capitalist states help mediate conicts largely through the depoliticisation of struggle through ideological forms of intervention (media, education, religion, and so forth) and/or repressive processes (military, police, legal system). Bourgeois states are also called upon to intervene in order to deal with periodic barriers to capital accumulation, which occur in the form of economic and political crises. In these cases bourgeois statesin both developing and advanced countries are required to intervene in order to establish political, including legal, structures to ensure the social reproduction of capitalist society.44 Cultural homogenisation and objectication: naturalising the reduction of countries to quantiable investment sites The act of denying a country its individual history, culture and political characteristics objecties national social formations, so that scientic 1231

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assessments of its investment potential can be undertaken. This process of othering also permits capitalists to control social space within these countries by naturalising the importance of reducing all economic, political and social activities to the goal of convincing investors that the country is a good investment site. The country categorisation of the Index is rooted in a cultural imperialism that feeds o, and is reinforced by, what Edward Said refers to as orientalism, which occurs through the spatial (re-)organisation of capital. An example of this process may be found in the manner in which the PCI establishes two main investment categories involving 24 developed countries and 27 emerging markets.45 This representation demarcates and recreates geopolitical space or imaginative geographies that showcase the evolutionary phases of progress across the globe. For instance, some 140 countries (comprising a large majority of the worlds population), which fall outside the two categories of the PCI, are viewed not only as high risk, and therefore unworthy investment sites, but also as failures of development, because of their unwillingness and/or inability to embrace Western expert knowledge, technology and management skills (market episteme).46 The PCI does not allow for any dierentiation between the various countries. Take, for example, the term emerging market economies, which was constructed by the IFC in 1981 to encourage foreign investment in select countries in the global South. It has reduced the historically distinct cultural, social and political characteristics of entire countries to a potential investment site, or simply to nancial markets. Yet, as Escobar suggests, this discursive homogenization (which entails the erasure of the complexity and diversity of Third World peoples, so a squatter in Mexico City, a Nepalese peasant, and a Tuareg nomad become equivalent to each other as poor and underdeveloped) is necessary to the exercise of power over the Third World.47 An important consequence of discursive homogenisation has been the objectication of countries that are rated by Wilshire through the PCI. The political risk factors of the Index (ie political stability, transparency, and productive labour standards) are presented in an unproblematic fashion as embodying the universalised understanding of how markets and states should be optimally organised, not to meet the social, physical, spiritual and mental needs of people working and living in the Third World, but instead to support the requests of foreign capitalists by constructing stable political and legal systems, so that their investments are made to feel safe and secure. The benets of creating a better investment climate are portrayed by the Index and, more broadly, those championing entrepreneurial development, not only as a win-win situation for developing countries and foreign investors, but also as universal. According to the World Bank, investment climate improvements are the driving force for growth and poverty reduction. A good investment climate is one that is better for everyone in two dimensions. It benets society as a whole, not just rms. And it expands opportunities for all rms, not just large or inuential rms.48 The knowledge entailed in the prescription of desirable investment sites is further normalised by portraying the interests and goals (material gains) of foreign investors and (apolitical and asocial) markets of (homogenised) Third World 1232

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countries as fundamentally the same, thereby side-stepping issues of power, struggle, class, contestation, gender and race. Viewed against the above backdrop, the SRI dimension of the PCI may be viewed as a social construct that reects and bolsters the ultimate goal of development: expanded reproduction of capital. The political risk or country factors of the PCI are not designed to address humanitarian concerns, but have been crafted, rst and foremost, to assist in the establishment and reproduction of good investment climates for US institutional investors. The signicance of transparent and impartial governments and legal systems vis-a`-vis development are not new, however. In several of its World Development Reports, the World Bank has emphasised the importance of good governance in the creation and maintenance of well functioning markets. Corruption and lack of property rights are seen as hindering the states ability to provide market-supporting institutions, because of the absence of eective restraints on arbitrary behaviour of public ocials.49 In other words, Western-based institutional investors reject certain forms of regulating the market, particularly those that do not provide them with enough power once in the host country, such as the structures of the development state model. Economic and political inequality, which are brought about by poor labour standards and lack of basic human rights, lead to economic ineciency, political conict (and therefore instability) and institutional frailtyall of which act to hinder poverty reduction and growth (development).50 To obtain the latter goal, the political risk factors of the PCI, such as civil liberties, human rights, freedom of the press and independent judiciary and legal protection, need to appear neutral, desirable and universally applicable. Western-based (and largely US) organisations, such as Verite, PRS Group and Freedom House, linked to the denition and measurement of the various factors are portrayed as having expert knowledge rooted in scientic understanding.51 Mirroring the aims of entrepreneurial development and the PCI, the need for good investment climates operates in a context that is not only apolitical and ahistorical, but is also devoid of cultural diversity and specicity, and rife with a variety of social factors, such as institutionalised forms of racial, gendered, ethnic and/or religious discrimination, relations of power and domination, and so forth. The neutral, scientic discourse of economics removes the complexity and diversity tied to issues of poverty and inequality in the Third World and therefore eectively homogenises and dehumanises the social and political landscape upon which the good investment sites are to be constructed and assessed. Moreover, it acts to smooth over the highly uneven and exploitative nature of global capitalism. This stance is evident in two features of the factor pertaining to productive labour practices, which falls under the country or political risk category of the PCI. While labour codes speak directly to the SRI concerns, upon closer inspection of this category, it becomes clear that the Index does not strive to empower workers. Rather, it appeases their demands while remaining within the neoliberal-led development framework, so as not to distort the existing 1233

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levels of exploitation of labour which are necessary to ensure high returns on CalPERS investment, or at least higher returns than could be gained in the USA. On the one hand, while Verite provides insight into the treatment of workers in the formal sector, it ignores the informal sector. While the neglect of the latter may relate to its illusive character, it is problematic that the PCI does not begin to question the connection between the highly uneven and exploitative nature of global capitalism under neoliberal rule. This unevenness may be seen by the rapid expansion of the informal sector, which has come to represent a signicant and increasing portion of the labour market in the Third World. For instance, according to the ILO, more than 80 per cent of new jobs created in Latin America and Africa in recent years have been in the informal economy.52 In the Philippine case, 82% of the non-agricultural workforce, and 90% of the manufacturing sector are outside the formal sector.53 The growth of the informal sector implies that workers are in a precarious position to exert pressure for socioeconomic reform, such as legislation regarding fair labour practices. Indeed, the connection between the search for ever-higher prot rates in emerging market economies and parallel levels of rates of exploitation are conveniently neglected by the PCI. On the other hand, the ILO standards upon which Verite bases its assessments strive to encourage union competition and to discourage centralised collective bargaining. As Teri L Caraway argues, the ILOs understanding of freedom of association is distinctly liberal and promotes the formation of free as opposed to powerful trade unions.54 Depending on the historical conguration of state labour capitalists relations, the ILO position can lead to the weakening as opposed to empowering of trade unions. This position is not surprising, however, given the dominant neoliberal opinion that trade unions lead to rent-seeking activities and therefore threaten good governance practices in both the government and the publicly listed corporation. When taken together, the above three premises that underpin the Index serve to conceal and distort the capitalist nature of the PCI. These assumptions act to normalise, and thus reproduce, the exploitative forms of domination and control linked to the expansion of capital accumulation in the form of equity nancing in designated spaces in the global South, namely, emerging markets. Conclusion I have argued that, when we look behind the progressive veil of responsible investing strategies of the third largest pension fund in the world, we are able to observe disciplinary features associated with the normalisation and legitimation of the capitalist development agenda. This is not to suggest that all SRI strategies are ineective forms of resistance to the growing power of corporations over all aspects of social life. Indeed, there have been important victories by stakeholders applying pressure to the Boards of Directors of large corporations to change investment decisions and strategies, such as the 1234

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recent victory by Oxfam and its supporters over Starbucks to ensure Ethiopias bid to trademark its Harar, Sidamo and Yirgachee coee names.55 Nonetheless, we must remain wary and critical of SRI strategies that are devised and employed to judge subjectively and quantitatively whether countries are worthy of either receiving foreign investment or divestment (ie blacklisting a country from the Index). It should be kept in mind that the mainstream development agenda, imbued in the PCI, has been construed to promote capitalist interests, which stands in contradiction to concerns of social and environmental justice. Through its replication of the uncritical meaning of development and the primary economistic goals attached to its concept and practice, a new conditionality is being established by Boards of Directors of institutional investors and nancial technocrats. Furthermore, the disciplinary features of the PCI and its negative screening device seem to parallel the trend towards reverse conditionality. The latter refers to a policy by an aid agency to withhold funding until a number of criteria, which are quantitatively measured and subjectively dened, have been met. The practice of reverse conditionality based on a quantitative rating system has become an important practice in the issuance of grants by government aid agencies, such as the GW Bush administrations Millennium Challenge Corporation. Given the growing momentum and social signicance of private equity nancing in emerging market economies, there is a need for further research on the ideological, cultural and political features of SRI, particularly from the perspective of countries subjected to non-nancial risk metrics, and on its links both to new forms of conditionality imposed by institutional investors and to the structural constraints inherent in the uneven development of global capitalism. Notes
1 Although highly subjective and economistic, the World Banks denition of emerging markets or middle-income countries is based on a countrys Gross National Income (GNI) per capita equivalent to more than $756 but less than $9265 in 1999. Middle-income countries are further divided into uppermiddle income countries (eg Turkey, Malaysia, Chile) and lower-middle income countries (eg the Philippines, Nicaragua, Namibia). For more information, see web.worldbank.org. 2 Mekong Private Sector Development Facility (MPDF), Expanding horizons: equity nance in Vietnam, International Finance Corporation, 18 August 2004, at www.mpdf.org, accessed 2 January 2006. 3 How the developing world is striving to free itself of debt, Financial Times, 8 February 2007, at www.ft.com/cms/s/caf85732-b7e1-11db-bfb3-0000779e2340.html, accessed 8 February 2007. 4 Fiduciary responsibility simply refers to the duty or obligation of the person or organisation handling the funds on behalf of another party to act in a manner that is in the latters best nancial interest, eg seeking the highest returns with the minimum amount of risk. 5 See www.unpri.org/about/, accessed 2 March 2007. Key global actors in the nancial community have also turned to SRI as a means of gauging sound investment climate in emerging markets, such as PricewaterhouseCoopers Opacity Index. The Dow Jones Sustainability Index oers investors corporate sustainability assessments of opportunities and risks relating to sustainable factors. 6 See, for example, S Andreasson, Orientalism and African development studies: the reductive repetition motif in theories of African underdevelopment, Third World Quarterly, 26 (6), 2005, pp 971 986. See also the introductory essay by Michael Bloweld, Reasons to be cheerful? What we know about CSRs impact, Third World Quarterly, 28 (4), 2007 (special issue), pp 683 695. 7 This reects market value as of market close on 27 April 2007. For more information, see www. calpers.ca.gov.

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SUSANNE SOEDERBERG 8 The one exception is Hebb and Wojcik, although the authors remain within the connes of what RW Cox refers to as a problem-solving approach as opposed to a critical perspective. RW Cox, Production, Power, and World Order: Social Forces and the Making of History, New York: Columbia University Press, 1987. 9 See K Marx, Capital, Vol 1, London: Penguin, 1990; and D Harvey, The Limits to Capital, London: Verso, 1999. 10 Social Investment Forum, Report on Socially Responsible Investing Trends in the United States10Year Review, Washington, DC: Social Investment Forum, 2005. 11 Wilshire Consulting, Exposure draftpermissible equity markets investment analysis, report prepared for the California Public Employees Retirement System, January 2006. 12 Ibid. 13 C Adams, G Frost & W Webber, Triple bottom line: a review of the literature, in A Henriques & J Richardson (eds), The Triple Bottom Line: Does It All Add Up?, London: Earthscan, 2004, p 20. 14 P Camejo, The SRI Advantage: Why Socially Responsible Investing has Outperformed Financially, Gabriola Island, BC: New Society Publishers, 2002, p xv. 15 The sub-factors of political stability are dened by Wilshire in the following manner: Civil Liberties: The extent to which countries permit freedom of expression, association and organizational rights, rule of law and human rights, free trade unions and eective collective bargaining, personal autonomy and economic rights. Independent Judiciary and Legal Protection: The extent to which countries have independent judiciaries, the degree to which or the absence of irregular payments made to the judiciary and the extent to which there is a trusted legal framework that honours contracts and clearly delineates ownership of and protects nancial assets. Political Risk: The extent to which there exists government stability, a high quality of socio-economic conditions, and a positive investment prole. Toward these ends this sub-factor evaluates the extent of internal and external conict, corruption, the military and religion in politics, law and order, ethnic tensions, democratic accountability and bureaucratic quality. Wilshire, 2006, p 6. 16 For more information regarding the methodology employed in calculating freedom scores, see Methodology at ww.freedomhouse.org/template.cfm?page35&year2005. 17 To view the methodology employed by the PRS Group with regard to political risk, see their website at www.prsgroup.com/commonhtml/methods.html. 18 Wilshire, 2006, p 6. 19 Research Services, Verite, at http://www.verite.org/research/main.html. For more detailed informa tion regarding the methodology and ndings of Verite, see Emerging markets research project: year-end report, document prepared for California Public Employees Retirement System, December 2004, at www.calpers.ca.gov/eip-docs/investments/assets/equities/international/permissible/calpersverite-nal-report-2004.pdf, accessed 15 February 2005. 20 Wilshire, 2006, p 7. 21 Ibid. 22 US pension fund quits Asian countries, BBC News, 21 February 2002, at http://news.bbc.co.uk/2/hi/ business/1833674.stm, accessed 2 May 2007. 23 See, for example, M Mamdanis critique of the Darfur divestment campaign in the USA. Mamdani, The politics of naming: genocide, civil war, insurgency, London Review of Books, 29 (5), 2007, at www.lrb.co.uk/v29/n05/mamd01_.html accessed 5 November 2007. 24 G Rist, The History of Development: From Western Origins to Global Faith, London: Zed Books, 2002, p 214. 25 S Soederberg, The Politics of the New International Financial Architecture: Reimposing Neoliberal Domination in the Global South, London: Zed Books, 2004. 26 International Finance Corporation, Emerging markets heading for banner year in 2006: IFC notes progress, development challenges ahead, 2005, at www.ifc.org/ifcext/home.nsf/Content/Emerging_ Mkts_2006, accessed 14 December 2005, emphasis added. 27 A. Escobar, Encountering Development: The Making and Unmaking of the Third World, Princeton, NJ: Princeton University Press, 1995, p 9. 28 Ibid, p 53. 29 H Lefrebvre, The Production of Space, Oxford: Blackwell, 1991. 30 Ibid; and D Harvey, Spaces of Capital: Towards a Critical Geography, London: Routledge, 2001. 31 K Marx, Capital, Vol 3, London: Penguin, 1981, ch 15. 32 Harvey, Spaces of Capital. 33 D Harvey, The new imperialism, in Leo Panitch & Colin Leys (eds), Socialist Register, London: Merlin Press, 2003, p 64. 34 Harvey, The Limits to Capital, p 434. 35 Wilshire, Exposure draft, p 2. 36 D Harvey, The Urban Experience, Boston, MD: Johns Hopkins University Press, 1989, ch 6.

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SOCIALLY RESPONSIBLE INVESTMENT 37 J Zhuang, D Edwards, D Webb, Ma Virginita & A Capulong, Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea, Malaysia, Philippines, and Thailand, Manila: Asian Development Bank, 2000. 38 See Escobar, Encountering Development, ch 1. For another critique of economism in development in relation to Peru, see T Teivainen, Enter Economism, Exit Politics: Experts, Economic Policy and the Political, London: Zed Books, 2002. 39 Escobar, Encountering Development, p 59. 40 Ibid, p 65. 41 Soederberg, The Politics of the New International Financial Architecture. 42 Harvey, The Limits to Capital, p 276. 43 D Harvey, Spaces of Hope, Berkley, CA: University of California Press, 2000, p 178. 44 See, for example, N Poulantzas, State, Power, Socialism, London: Verso, 2000. 45 E Said, Orientalism, New York: Vintage Books, 1979; and Escobar, Encountering Development, p 9. 46 Based on 191 member countries of the United Nations as of April 2006. See www.un.org/Overview/ unmember.html. 47 Escobar, Encountering Development, p 53. 48 World Bank, World Development Report 2005: A Better Investment Climate for Everyone, Oxford: Oxford University Press, 2004, p 35. 49 World Bank, World Development Report 2002: Building Institutions for Markets, Oxford: Oxford University Press, 2002, ch 5. 50 World Bank, World Development Report 2006: Equity and Development, Oxford: Oxford University Press, 2005, p 9. 51 Escobar, Encountering Development. 52 E Altvater, Socialist Register, London: Merlin Press, 2002, p 79. 53 J Hutchison, Crisis and change in the Philippines, in G Rodan, K Hewison & R Robinson (eds), The Political Economy of South-East Asia: Conicts, Crises, and Change, Oxford: Oxford University Press, 2001, pp 42 70. 54 TL Caraway, Freedom of association: battering ram or Trojan horse?, Review of International Political Economy, 13 (2), 2006, pp 210 232. 55 For more information, see K MacDonald, Globalising justice within coee supply chains? Fair Trade, Starbucks and the transformation of supply chain governance, Third World Quarterly, 28 (4), 2007 (special issue), pp 793 812.

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