The effectiveness of socially responsible investment: a review

Abstract

Over the past two decades, an increasing number of shareholders have begun to consider non-financial criteria, such as social and environmental criteria, in making investment decisions and executing shareholders rights. Investing based on such criteria is often labelled socially responsible investment (SRI). This article reviews the actors in SRI, the motives for SRI, relevant theoretical frameworks and the effectiveness of SRI in changing environmental, social and corporate governance (ESG) performance of public companies. Various actors with different motives engage in SRI through distinct strategies. Although the effects of SRI strategies are difficult to identify and quantify, overall, SRI does not yet play a major role in changing ESG performance. Several factors can be identified that impede SRI in improving ESG performance, together forming an action agenda for SRI researchers and practitioners. The research agenda for SRI studies should include examining poorly studied engagement strategies; identifying the factors that govern SRI effectiveness; elucidating the relationship between shareholders and other actors, such as NGOs, governments and media; and building theoretical frameworks to understand and analyse SRI, for which the theory of stakeholder salience and ecological modernisation theory provide promising starting points.

Keywords::

• ethical investment
• corporate social responsibility
• environmental management
• stakeholders
• shareholders

Introduction

Shareholders have been a frequent object of academic research, often with a strong focus on the financial motives and behaviour of shareholders and the economic consequences of their strategies for companies and markets. However, over the past two decades, an increasing number of shareholders have begun to consider non-financial criteria, such as social and environmental criteria, in making investment decisions and executing shareholders rights. In Europe alone, environmental and social criteria play a substantial role in €6.7 trillion Euros of investments annually (Eurosif 2012). Although several labels are used for this type of investment, such as ethical investment and sustainable investment, we apply the more common label of socially responsible investment (SRI). Arguably providing the most clear and concise definition, Cowton (1994) defines SRI as

… the exercise of ethical and social criteria in the selection and management of investment portfolios, generally consisting of company shares (stocks). This contrasts with standard depictions of investment decision-making in finance textbooks, which concentrate solely on financial return in the form of dividends and capital gains, and risk ….

While a useful starting point, Cowton's definition focuses on the management of portfolios rather than the use of the rights and influences associated with these portfolios. The latter activities should also be included as part of SRI.

The rapid growth of SRI has not remained unnoticed in the academic literature. Most studies on SRI are rather empirical in nature and centre on investment management and the financial performance of SRI (often in comparison with conventional investment) (Capelle-Blancard and Monjon 2012). Less attention has been paid to the effectiveness of SRI strategies in improving environmental, social and corporate governance (ESG) performance. While several case studies have focused on the effect of SRI strategies, no study has summarised the findings from these case studies in a general review. In addition, few theoretical schemes are offered in the literature to study and interpret SRI strategies and their impacts on corporate social and environmental behaviour. Hence, in reviewing the literature on SRI, our main interest and focus are twofold:

• Which factors govern the effectiveness of SRI strategies in influencing ESG performance of public companies?

• Which theoretical frameworks are promising in studying and interpreting SRI developments?

In answering these research questions, a secondary analysis of existing studies is applied. For this secondary analysis, Web of science, Scopus, Google Scholar and the references of the found articles were used. In total, more than 200 scientific articles have been systematically analysed and reviewed. The next section provides an overview of the actors in SRI and their motives for SRI, as they are identified in the literature reviewed. Section 3 focuses on the main strategies applied by SRI investors. The descriptions of actors, motives and strategies all contribute to a better understanding of the effectiveness of SRI, which is discussed in Section 4. In Section 5, the various theoretical frameworks for studying and interpreting SRI are assessed. Finally, conclusions are drawn.

SRI: actors and motives

The present SRI sector has old roots. As early as the seventeenth century and in particular at the beginning of the twentieth century, examples can be found of shareholders whose behaviour was guided by moral considerations, rather than financial motives. The Quakers and Methodists were the first investors to exclude certain stocks from their portfolio for moral considerations, in this case, because of the involvement of companies in tobacco or alcohol (Beloe 2001; Sparkes 2002; Sparkes and Cowton 2004; Louche 2004; Arjaliès 2010). The more recent growth of SRI started in the last quarter of the twentieth century. The Social Investment Forum (2010) states that in the USA in 2009, US$3.01 trillion was managed following SRI strategies, a growth of 380% compared with 1995 levels. For Europe, Eurosif (2012) calculated an annual growth rate of 35% for SRI since 2009.

Actors in SRI

To gain more understanding of the effectiveness of SRI, it is important to consider that different groups with their own motives and characteristics exist. In total, four main groups of shareholders and actors can be distinguished. Institutional investors, such as pension funds, insurance companies and bank trusts, form the first important group, as the most prominent shareholders of public companies. For example, pension funds in the UK hold 35% of all publicly quoted companies in the UK (Sparkes 2002). These institutional investors are also important actors in corporate governance and in prompting company management to increase performance (Thompson and Davis 1997). Card Charron (2007) considers their concentrated ownership and strong monitoring of management to explain their prominent role. The implementation of SRI by institutional investors is linked with the development of various (inter)national agreements, practices and networks. One of these international agreements and related networks is the United Nations Principles for Responsible Investment (UNPRI). In this network, investors work together to bring principles of responsible investment into practice (UNPRI 2011). The Global Reporting Initiative (GRI), as another example, advocates for a standardised way of environmental and social reporting. Moreover, the Institutional Investor Group on Climate Change (IIGCC) is a forum of European institutional investors who are concerned with climate change (IIGCC 2011). Shareholders who support the Principles of Responsible Investment, the GRI, the IIGCC and other agreements encourage public companies to adopt these principles in reporting on ESG issues (GRI 2011; UNPRI 2011).

As a second main group of SRI actors, individual investors engage in SRI mainly by investing in retail funds. These retail funds have strongly facilitated the growth of SRI among individual investors (Sparkes 2002), although a recent study by Eurosif (2012) shows that in Europe individual investors make only 6% of all SRI investments, down from 8% in 2009. Research on the characteristics of individual SRI investors shows that they are more likely to be religious, to have liberal and green political views, and to have service professions, such as health and education (Carter and Huby 2005).

Third, a wide range of NGOs are active in SRI. Several religious organisations have played a pioneering role in SRI, and more recently, environmental NGOs, labour unions, human rights organisations and several other civil society organisations have become involved in SRI. Waygood and Wehrmeyer (2003) and Carter and Huby (2005) argue that NGOs are active in SRI in two ways. First, NGOs can become shareholders themselves and use their shareholder rights and power to exert influence on company behaviour and investments. Second, in addition to being active as a shareholder, NGOs use more indirect strategies by cooperating with or influencing other shareholders (Waygood and Wehrmeyer 2003; Guay et al. 2004): they act as advocates of SRI towards institutional investors such as pension funds, they become advisors for structuring specific SRI funds, and/or they become sponsors or co-founders of SRI funds. For instance, the Sierra foundation in the USA has founded an investment funds according to its own values. Figure 1 illustrates how Guay et al. (2004) interpret these and other forms of cooperation and involvement of NGOs in shareholder activities and strategies.

Figure 1 Multiple roles of NGOs in SRI (Guay et al. 2004).

Finally, the financial industry is an important actor in SRI, performing a dual role: as a SRI shareholder and as a facilitator for other SRI investors. Louche (2004) reports that the financial industry in the Netherlands strongly facilitated a transition from SRI with a focus on activism to a more institutionalised form of SRI. The financial sector now provides the infrastructure and knowledge base for SRI, with their SRI funds, rating organisations specialised in SRI and sustainability indices, such as the DOW Jones sustainability index and the FTSE4Good. These developments resulted, in the Netherlands and elsewhere, in a shift from an investment sector in which NGOs played a large role to a sector in which larger financial institutions have guided and shaped SRI into a more mainstream form of investment.

Motivations of SRI investors

Investors have different reasons and motives for engaging in SRI. Especially for institutional investors, legislation is a main reason for initial engagement in SRI. For example, in 2000 in the UK, legislation was passed that forced pension funds to report the social, environmental or ethical considerations involved in investment decisions (Sparkes 2002; Clark and Hebb 2004; Guay et al. 2004; Sparkes and Cowton 2004; Carter and Huby 2005; Aguilera et al. 2006; Wen 2009). In the early 2000s, similar legislation was passed in Sweden, Norway and Denmark (Bengtsson 2008). This legislation strongly motivated pension funds to move towards SRI.

Sparkes and Cowton (2004) find that pressure by actual and future beneficiaries is a second reason for institutional investors to start practising SRI. Although such pressure is generally considered a major motivation for engagement in SRI, little research is available that actually proves the influence of beneficiaries and analyses their role in driving pension funds towards SRI.

Financial motives as reason for engagement in SRI have received much greater attention in the literature. Since the late 1990s, increasingly more shareholders have examined the relationship between the social and environmental performance of companies and their financial performance and have even requested that companies disclose information on this relationship (O'Rourke 2003b). While there may be financial motives for SRI, one cannot conclude that SRI always leads to better financial results. There is abundant literature available investigating the effect of SRI on financial results. Although we do not fully review this extensive literature, some of the key conclusions and remaining controversies need to be emphasised.

Several studies claim that engaging in SRI and investing in leading SRI companies or avoiding investment in companies with a poor social and environmental track record does not compromise companies' financial and economic goals (Aslaksen and Synnestvedt 2003; Derwall et al. 2004). Derwall et al. (2011), however, note that the effect of SRI is dependent on the type of investor (financially or value driven) and the way SRI is practised. Investing in leading SRI companies compared with other companies can result in superior financial results, although Derwall et al. argue that these superior results sometimes disappear in the long run. One possible explanation is that leading SRI companies are less vulnerable to environmental accidents or poor social conditions, which often result in additional costs and harm companies' reputation. For example, the share prices of British petroleum (BP) dropped by 34% in the months after the Deepwater Horizon accident in 2010, which heavily polluted the Gulf of Mexico and US shores (NRC 2010). Similarly, the news that Swedish fashion chain H&M used child labour in their garment production led to a drop in their share price (Bengtsson 2008). In the same vein, Schaltegger and Figge (2000) argue that corporate environmental protection is not by definition a cost that is negatively linked with shareholder value. Environmental management can result in financial gains when it reduces material use, reduces the payment of environmental fees and widens margins, and when these measures are capital extensive and cost effective (Schaltegger and Figge 2000). Vogel (2006) balances claims that strong environmental management causes strong financial performance for a company. Strong financial performance also enables a company to invest in environmental management. Vogel (2006), however, also argues that since their existence, the FTSE4Good and the DOW Jones Sustainability Index have underperformed the market by 3% and 8%, respectively. In addition, several other studies do not find a positive correlation between firm economic performance and high social and environmental standards. In a review, Renneboog et al. (2008) conclude that firms with high environmental and social standards even have a lower rate of return than that suggested by standard asset pricing models.

Finally, there are ethical motivations to engage in SRI, especially for individual investors and NGOs. Cowton (1994) finds that 87% of the individual investors participating in the ‘Friends Provident NM Conscience Pension Fund’ did so because of the fund's ethical investment policy, while only 7% mentioned financial reasons and motivations. Pasewark and Riley (2010) concludes that for individual investors concerned with negative societal side effects of company behaviour, financial criteria play a smaller role in their investment decisions. Michelson et al. (2004) also conclude that individual SRI investors are especially motivated by their personal values, their desire for social change and the ‘feel good’ factor. Still, few individual investors invest only in SRI funds, and most of them also have financial motives. Individual investors balance the complicated trade-off between their values and the desired financial return in investment decisions (Michelson et al. 2004).

Distinguishing motivations

Two important factors distinguish the motivations of SRI investors (see Figure 2). The first factor relates to the internal or intrinsic versus external motivations of SRI investors. For example, an NGO might have an intrinsic motivation to engage in SRI because SRI can help to achieve the NGO's goals. By contrast, legislation and pressure from beneficiaries are external motivations for a pension fund to engage in SRI.

Figure 2 Motivations of different types of shareholders for engaging in SRI.

A second factor relates to what Beloe (2001) calls the difference between ‘market-led’ and ‘value-led’ shareholders. NGOs and some individual investors are more (socially/environmentally) value-led shareholders, while institutional investors are more (financially) market-led shareholders, in part because of the fiduciary duty of institutional investors. Because of their fiduciary duty, institutional investors, such as pension funds, insurance companies and bank trusts, are obliged to obtain the best financial return on their assets for their beneficiaries. Therefore, the presumed or expected effects of SRI on financial results co-determine whether and how institutional investors become active in SRI. Aguilera et al. (2006) find that, in practice, financial motives are used as an argument in favour of as well as against SRI. A United Nations Environment Programma (UNEP) Finance Initiative report on fiduciary responsibility argues that because of fiduciary duty, ESG issues should be considered in investment strategies, because neglecting these issues creates long-term financial risks (UNEP 2009).

Sparkes (2001) illustrates the differences and tensions between shareholders who are primarily ethically/value driven (NGOs) and those who are financially driven. Individual and institutional shareholders are not interested in NGO activities, which may jeopardise share prices. Because NGOs focus on changing the environmental or social behaviour of companies, the effect of their activities on share prices is of little importance to them. Although the advocacy-based activities of NGOs correspond with other SRI activities, a fundamental tension does exist between a focus on financial returns and an advocacy campaign focus on stopping harmful activities.

Strategies of SRI investors

There is a wide range of classifications used in the literature for categorising the different SRI strategies. For a useful overview, see Eurosif (2012). On the basis of this overview, we identify three main categories to structure the discussion in this article:

• Screening: The use of ESG information in the investment process (including ESG integration, exclusion and best-in-class).

• The use of shareholder rights: The use of the formal rights associated with the share ownership (including voting and filing shareholder proposals).

• Engagement: The informal dialogue between shareholders and a specific company.

After giving a description of each category, we focus on their use by the different actors as a base for the discussion of their effectiveness.

Screening

A common SRI strategy is for investors to use certain sustainability criteria in their portfolio management. This strategy can take the form of negative screening in which companies failing to meet specified sustainability standards are excluded from the investment portfolio. It also can take the form of positive screening (best-in-class) in which investments focus on companies that are frontrunners according to sustainability criteria (Derwall et al. 2004). In the screening process, a wide range of criteria can be used, ranging from environmental performance to labour conditions. Some investors specialise in environmental screening criteria, some specialise in social criteria and some specialise in a combination of the two.

Screening is used by several pension funds, such as Calpers in the USA, Pensioenfonds Zorg & Welzijn in the Netherlands, the British Coal pension funds and several pension funds of religious organisations worldwide (Sparkes 2002; VBDO 2011). In addition, several investment funds use screening and are open for individual investors, such as the Calvert Social Investment Fund in the USA, the Friends Provident Stewardship Funds in the UK (Sparkes 2002) and the ASN Aandelenfonds in the Netherlands (ASN 2010). Juravle and Lewis (2009) identify three ways in which screening for SRI is integrated into pension and investments funds:

• Only one or two experts are responsible for SRI, and they buy information from specialised firms.

• An in-house expert team provides conventional analysts and fund managers with information regarding social and environmental issues. In this way, SRI remains a separate theme, and the expert team providing information usually has no formal role in the final investments decisions.

• SRI experts are fully integrated into the financial team. This form, however, is relatively rare.

Screening is not beyond debate, as Schepers and Sethi (2003) report. Screening criteria can be arbitrary, and results of screening heavily depend on which of the numerous available screening methodologies is chosen. Screening can have arbitrary outcomes when, for instance, a company sells organic products but also practises discriminatory hiring practices. Investors are also highly dependent on the information provided by companies, as companies may selectively publish and present relevant information.

Using shareholder rights

Shareholders also use their rights to take a proactive role in the social and environmental management of a company, a relatively popular and widely studied theme among academic scholars. Shareholders can use their voting rights or file proposals in (annual) shareholder meetings to pressure companies to report on, and improve, their environmental and social performance. Filing proposals is common among a wide range of shareholders, such as pension funds, unions, religious organisations, social organisations and SRI consumer funds (Tkac 2006). Individual shareholders, however, rarely file proposals.

Filing proposals at shareholder meetings is more common in the USA and is less common in European (except for the UK) and other countries because of the practical difficulties of filing proposals in these countries (Sparkes 2002). In the USA, barriers to put a (SRI) proposal on the agenda of a shareholder meeting are relatively low, in contrast to other countries. In the USA, a shareholder who wants to file a proposal must have held shares worth at least $2000 for one year or own at least 1% of firm value. According to US Securities and Exchange Commission rule 14a-8, the proposal itself should (1) not reflect a personal grievance; (2) not require the firm to violate any law; (3) relate to operations accounting for less than 5% of the firm's assets, sales and revenue and (4) deal with a matter relating to the company's ordinary business operations (Tkac 2006). In the UK, requirements are more stringent, and filing a proposal is only possible when the filer has the support of 100 separate investors with a nominal value each of at least 100 pounds or when the filer owns more than 5% of the total voting capital (Sparkes 2002).

Whether voting power is used to pressure a company depends on the type of company. Manufacturing firms are more frequently targeted than service-oriented firms. Moreover, large firms, or firms with a high profile, are more often targeted than smaller, lesser known, firms (Karpoff 2001; Rehbein 2004; Tkac 2006). Monks et al. (2004) and Clark et al. (2008) find that in the USA, only a small number of corporations are targeted more intensively: the largest US corporations dominating the stock market indices. This focus can be explained by their economic significance and the general public's familiarity with these corporations. The most common topics of shareholder proposals are international conduct, environmental issues and antidiscrimination (Tkac 2006). The filed proposals often demand changes in corporate policy, changes in production or disclosure of information.

From an analysis of 671 proposals filed during a 4-year period, Monks et al. (2004) concludes that 55% of the proposals related to corporate governance, 38% concerned corporate social responsibility and 7% were crossover proposals. Crossover proposals are proposals on corporate social responsibility that are framed in traditional corporate governance language and address traditional corporate governance issues in order to improve the proposal's chances of being admitted to the shareholder agenda. In terms of subject, 47% of the proposals addressed human rights and social issues (including global labour standards, public health, humane treatment of animals, and certain types of military production and contracts); a further 28% addressed environmental issues (including reporting on environmental performance, Arctic drilling, genetically modified organisms, nuclear power, climate change, pollution and recycling); 14% addressed equal employment opportunities and employment discrimination; 9% addressed the use of corporate funds for political donations, lobbying and political bias in the workplace and 3% addressed corporate charity donations.

Different types of shareholders differ in the type of proposals that they bring forward and the success their proposals achieve. Across the spectrum of shareholders, public pension funds appear to achieve the highest levels of support for their proposals (Monks et al. 2004). One reason for this higher success rate is the focus of pension funds on non-controversial issues, such as antidiscrimination (Tkac 2006). NGOs focus on more controversial topics in a more confrontational manner. NGOs can be more confrontational because high share prices are not their primary goal or interest (Sparkes and Cowton 2004). NGO proposals are more than incidentally part of a wider coalition and campaign. For example, Greenpeace initiated the coalition ‘Shareholders against new oil exploration’ as part of their campaign to pressure BP into investing in renewable energy rather than in oil (Carter and Huby 2005).

Engagement

In addition to filing proposals at annual shareholder meetings, shareholders can encourage companies to improve their ESG performance behind closed doors, which is usually referred to as engagement or shareholder dialogue (Carter and Huby 2005). Compared with the formal filing of a proposal at a shareholder meeting, the engagement process is a more informal and discrete approach. For many institutional investors, engagement offers an opportunity to discuss ethical concerns without making their concerns public through a shareholder proposal. This private communication diminishes the possible negative effects on share prices (Vandekerckhove et al. 2007) and keeps the option open of filing a proposal at the next shareholders meeting if the engagement is not effective (Sparkes and Cowton 2004). Most companies are responsive to engagement activities. From 18 companies addressed by Portfolio 21, a joint initiative of continental institutional investors, 13 responded adequately to the concerns raised (Vandekerckhove et al. 2007).

Engagement is a common strategy for pension funds, banks or large investment funds (Chow 2010). Those that practise engagement in SRI (and use their shareholder rights) are also the shareholders who screen their investments using environmental and social criteria (O'Rourke 2003b). Quite similar to the conclusions regarding screening, engagement regarding social and environmental issues is still largely confined to SRI analysts, and these issues play little role in the overall investment decisions (Wales 2006).

The advantage of engagement is that shareholders can receive ‘early warning’ information from the company regarding sensitive issues, such as environmental and social risks. According to Aguilera et al. (2006), this is also a reason why companies in the USA are more cautious about engagement: through engagement, shareholders can have an information lead, and US regulations state that all actual and potential shareholders should have access to all information a company discloses. Although they do not specifically discuss shareholders, van Huijstee and Glasbergen (2008) identify several advantages of active engagement for companies and stakeholders, such as an improved relationship and trust. As a result, both sides may gain knowledge, and their partnership may strengthen, but corporate activities may also be amended.

Differentiating SRI investor strategies

The strategies used by SRI investors differ within and among the different types of investors. These strategies can be plotted along two axes (Figure 3). The first axis determines the level of contact between shareholders and a company. The SRI strategy of screening is normally implemented by an internal team, and apart from sending questionnaires, contact between shareholders and the company is scarce. Explicit pressure from a shareholder on a company is not part of the screening process. Engagement, on the other hand, involves frequent contact between shareholders and companies. A shareholder actively brings forward a topic and strives to change corporate behaviour accordingly. Beloe (2001) makes a similar distinction between passive (such as screening) and more active (engagement) strategies.

Figure 3 Profiling strategies used by SRI investors.

The second (vertical) axis determines the power of a shareholder vis-à-vis companies. Engagement is only open to investors with sufficient power and a relatively large percentage of shares in a company. Therefore, this strategy is largely reserved for institutional investors. Bringing forward proposals at annual shareholder meetings is also open to smaller investors, but the percentage of shares owned is an important factor. Screening is open to even the smallest (individual) investor, although some clout is needed to execute the necessary research. This is an important reason why individual investors mainly invest in specialised SRI funds that are set up by the financial sector.

The analysis of SRI investor strategies reveals characteristic tensions between the motives and strategies of SRI investors. NGOs tend to have intrinsic motivations and to aim at more frequent contact with companies. The strategies matching goals of NGOs are, therefore, engagement and the use of shareholder rights. NGOs, however, own few shares compared with institutional investors and consequently have less power to successfully use engagement strategies. Institutional investors often have sufficient shareholding power, but because of their primary focus on financial motives, they are less inclined to use their power for SRI, unless financial and SRI motives are strongly linked.

SRI: making a difference?

Central in many studies on SRI is the effect of different SRI strategies of shareholders on the social and environmental management of companies.

Effects of screening

One supposed effect of screening in relation to portfolio-management is that because investors do not invest in companies with poor environmental or social track records, the cost of acquiring capital for these companies rises and their competitiveness decreases (Aslaksen and Synnestvedt 2003). On the basis of a market share analysis of SRI in the countries where SRI is most developed, Haigh and Hazelton (2004) conclude that these effects are small to non-existent. Aslaksen and Synnestvedt (2003) arrive at a similar conclusion and explain that the effect is small because the size of SRI is small in relation to the entire financial sector. For polluting firms, more than 20% of the investors need to be ‘green’ to pressure a polluting firm into reforming (Heinkel et al. 2001). Another reason is that other shareholders will buy the shares of companies whose share price is reduced because of lower demand by SRI investors. One the other hand, Aslaksen and Synnestvedt (2003) do find an effect of using a best-in-class screening method. The use of such methods can lead to a rise in share prices of selected companies, thereby incentivising companies to improve their environmental and social track record. Another indirect effect is that sending questionnaires to companies during a screening process motivates them to reflect on their social and environmental performance (O'Rourke 2003a).

Shareholders practising SRI are subject to higher risks because of the limited number of stocks in which they invest. However, this disadvantage can be offset by using information from the screening procedure, which is not available to the wider market; this may result in outperformance (Pearce et al. 2002). The use of best-in-class screening methods has been reported to be associated with positive financial results (O'Rourke 2003a). Still, further research is necessary to indeed confirm the causal relationship between screening methods and financial results.

Effects of using shareholder rights

The rate of direct success of shareholder proposals is relatively small. In an empirical study by Tkac (2006) on SRI investors, only 4 out of 1472 filed proposals gained a majority of shareholder votes. Although proposals that do not obtain a majority of shareholder votes can still be a strong signal for corporate management, the direct effect of SRI shareholder proposals remains hardly significant, particularly because proposals that are supported by the majority of shareholders are not always binding for corporate management (Thompson and Davis 1997; Tkac 2006). In an interesting contrasting study, Smith (1996) empirically analyses the targeting and effects of non-SRI shareholder proposals by the Californian pension fund Calpers. He finds that 72% of the proposals of this large institutional investor resulted in changes in corporate policy. This finding leads to the question regarding what factors cause this high-success rate of non-SRI shareholder proposals, in comparison with SRI proposals.

For many filers, SRI shareholder proposals are only one step in a broader SRI campaign to improve ESG performance. A proposal can be considered a tool to open the door for dialogue with the firm (Tkac 2006). For example, when a proposal is filed, companies often enter into negotiation in an attempt to influence shareholder activists to withdraw the proposal before it is distributed to all company shareholders (O'Rourke 2003b). Even when a resolution is not approved, a company can still take action. This occurred, for example, with an NGO proposal to the infrastructure firm Balfour Beatty to stop their engagement in building the Ilisu dam in the Tigris River in Turkey. Although the proposal received only 1.9% of the votes, the company nevertheless decided to stop their engagement in the project (Waygood and Wehrmeyer 2003).

David et al. (2007) provide an interesting perspective on the causal relationship between shareholder proposals and the behaviour of a company. Based on a statistical analysis, the authors conclude that shareholder proposals often correlate with low corporate social performance. Proposals do not have a disciplining effect on corporate management but rather signal the reluctance of corporate management to address the concerns of shareholders and unwillingness to communicate more informally with these shareholders to avert the proposal being submitted.

Effects of engagement

Until now, little research has been carried out on engagement activities and their effect on the social and environmental performance of companies (Vandekerckhove et al. 2007). Engagement is particularly difficult to investigate, as it largely takes place behind closed doors and little data are available, in contrast to shareholder meetings where proposals and voting results are public. Gifford (2010), therefore, has done an interesting case study at engagement cases in the UK, instead of using more quantitative methods. This gives an interesting perspective on how the impact of engagement can successfully be analysed. But due to the low number of cases, it is at the moment still difficult to draw general quantitative conclusions on the effectiveness of engagement.

Explaining marginal SRI effectiveness

Determining the effects on ESG performance when SRI methods are combined is difficult. Few studies address this topic. One such study is research by González-Benito et al. (2011), who find that the more the pressure from stakeholders, including shareholders, a company perceives, the better its environmental performance will be. Liu and Anbumozhi (2009) conclude that the influence from shareholders on environmental disclosure by listed companies in China is still small.

There are at least three explanations for the absence of unambiguous and abundant evidence and conclusions in this field. First, even when changes in environmental and social performance are quantifiable, it is difficult to causally relate these changes to shareholder activism. These changes may also be caused by external factors, such as governmental regulations, public opinion or the implementation of new management systems. Second, the effects of SRI strategies can also be insignificant in comparison with the effects of these and other external factors. On the basis of qualitative interviews with business leaders, key academics, corporate analysts and environmentalists, Dummett (2006) claims that SRI from shareholders is a small driver in comparison with other drivers, such as legislation or consumer pressure. Finally, major time lags may exist between SRI activities and their effects on corporate governance, making causal relationships difficult to prove (Sjöström 2008).

Which factors explain the small impact of SRI, and can changes regarding these factors lead to larger effects of SRI? The answer to this question is particularly interesting for practitioners in the field of SRI. Below, we summarise five explanations provided by various authors in the field regarding why SRI is currently not a major driver for social and environmental change.

First, there exist low levels of cooperation between shareholders. SRI investors hardly work together in their attempts to influence companies. Haigh and Hazelton (2004) find that investors, large institutional investors in particular, have much to win if they would coordinate their attempts to change corporate behaviour. However, SRI funds hardly work in an orchestrated manner, partly because their criteria differ significantly (Schepers and Sethi 2003). Moreover, differences in motivation between types of shareholders, such as NGOs and pension funds, can be a reason for their low level of cooperation in SRI, although this has not been investigated empirically yet.

Second, the percentage of SRI in the total amount invested in shares is so small that SRI funds have little bargaining power and hardly influence the capital market (Schepers and Sethi 2003; Haigh and Hazelton 2004).

Third, the focus on short-term shareholder value matches poorly with long-term SRI values. Guyatt (2005), Juravle and Lewis (2008) and Wen (2009) state that the Anglo-American corporate governance model focuses on shareholder value that favours short-term economic value and, therefore, disfavours SRI with a focus on long-term value. This focus on short-term value is an impediment for the success of SRI. From a survey among 129 corporations from the Fortune 500 list, Neubaum and Zahra (2006) conclude that long-term ownership and activism have positive effects on social corporate performance. However, they also find that shareholder activism alone is not correlated with corporate social policy; a correlation only exists when this activism is combined with long-term holdings of institutional investors. Hence, institutional investors hold more salience for corporate management. The combined impact of activism and institutional holdings increases with a higher frequency of interaction with corporate management and with higher levels of coordination between activism and long-term institutional shareholders.

Fourth, the dual role of institutional investors is crucial. Institutional investors play a dual role of being owners as shareholders and being intermediaries for their beneficiaries. Thus, they also have a fiduciary duty to focus on high financial returns. As discussed earlier in this article, financial returns do not necessarily have to suffer from SRI. However, Juravle and Lewis (2008) claim that institutional investors try to conform to mainstream investments because making unconventional investments and then obtaining lower financial returns would bear the risk of damaging their reputation and imposing liability. Therefore, institutional investors tend to follow existing practices in which financial gains are the sole rational, rather than follow SRI practices that are not currently mainstream. In addition, shareholders in general are influenced by the so-called herding (Guyatt 2005). It is riskier for the reputation of an investor to make a wrong investment decision using less conventional data and strategies, such as SRI, than to make a wrong investment decision using mainstream data and strategies.

Finally, the low level of knowledge on SRI among shareholders impedes great involvement in SRI. Brown et al. (2009) conclude that mainstream institutional investors hardly utilise sustainability reports in their work. A survey conducted on pension funds trustees in the USA (Hess 2007) shows that 29% of the respondents had a policy on corporate governance in general, 10% had a policy on environmental issues, 17% had a policy on other social issues and 53% had a policy on how to vote at annual shareholder meetings. In addition, the term SRI itself is not well received in the sector. Hess (2007) quotes an executive director of a large pension fund who states that the term SRI ‘terrifies’ the fund's trustees. This anxiety towards SRI is more due to the image of SRI itself, as the trustees are quite comfortable with many of the ideas behind SRI and approve initiatives on sustainability and good governance.

Institutional investors also lack sufficient information for taking an active stand in corporate governance (Wen 2009). Research analysts in Europe have been reluctant to integrate relevant SRI data in their reports (Juravle and Lewis 2008), because their professional background makes them ill-prepared for SRI issues, much SRI Information is qualitative and not quantitative, and SRI information is not structured in a standardised way. The frequent existence of two investment teams, one SRI team and one regular investment team, impedes the integration of different data and prevents frequent use of SRI data in final investment decisions (Guyatt 2005).

Theories on SRI and environmental governance

Most SRI studies and assessments are empirical in nature. Theoretical studies on SRI have largely been absent until now, although they would be valuable in formulating more concise hypotheses for empirical research, reaching a higher level of abstraction and investigating relationships between the factors that govern SRI effectiveness. Several theories provide interesting starting points for developing a theory on SRI.

Louche (2004) shows that institutional theory can be fruitfully applied in analysing the Dutch SRI sector to gain insight into the institutionalisation of SRI and its effects on the position and interactions between the different actors.

To gain more knowledge on SRI and its effects on environmental management, insight is needed regarding the relationship between shareholders and corporate management. Three prominent theories conceptualise this relationship: agency theory, stakeholder theory and stewardship theory. In agency theory, a corporation is interpreted to be an aggregation of contracts with individuals who all aim to maximise their own utility (Clarke 2004). An important assumption is that the different actors within a company, such as management, employees and shareholders, all have different and sometimes conflicting interests. For a corporation to be successful, these interests must be aligned in (often formalised) contracts between actors. Agency theory regards shareholders as the ‘principals’ in whose financial interest the company should be run by its management (Clarke 2004; Eisenhardt 2004; Guillén 2004; Lazonick and O'sullivan 2004). Marinetto (1999) argues that agency theory is too efficient and financially oriented and, therefore, lacks the capability to explain the actions of shareholders practising SRI.

The basis and origins of stakeholder theory are found in the work of Freeman (1984). Stakeholder theory identifies both internal and external stakeholders, which are claimed to be equally important. A normative starting point of this theory is that company management is supposed to maximise the total wealth that a company creates for all stakeholders, not solely the dividend to their shareholders. This focus is an important difference with agency theory, in which only shareholder value plays a central role (Clarke 2004). Stakeholder theory is closer to the Rheinländische culture of corporate governance than to an Anglo-Saxon corporate governance culture (Rhodes and van Apeldoorn 2004).

In stewardship theory, the behaviour of company management is modelled on the basis of a steward who acts in a pro-organisational and collectivistic manner (Davis et al. 2004). The interest of an organisation as a whole is aligned with the interests of the different actors within the company, such as management, shareholders and employees. Even in more politically charged environments, stewardship theory assumes that most parties strive for a viable and successful enterprise (Clarke 2004).

Of these frameworks, the framework that is most suitable for analysing the relationship between shareholders and company management in SRI depends on not only the research question to be answered but also the corporate governance culture that is prominent in a country and a company. In the Anglo-Saxon culture, shareholders play a prominent role, while in the Rheinländische corporate governance culture, shareholders share a prominent role with other actors in pushing companies to improve social and environmental corporate management.

To gain more insight into the behaviour of activist and ethically driven shareholders in SRI, theories on NGOs and social movements provide an interesting starting point. Thompson and Davis (1997) apply social movement theory to analyse shareholder activism in the USA, while Arjaliès (2010) does so for the development of the French SRI sector. Both of these studies interpret shareholder activism as a social movement, whose development and effects are to be further explained by using such a framework.

The theory of stakeholder salience has been applied to analyse the financial motives and rationality of shareholders (e.g. Magness 2008) as well as SRI in US and UK investment funds (e.g. Gifford 2010). Stakeholder salience theory distinguishes three attributes that determine the level of salience of a stake/shareholder: ‘power’, ‘legitimacy’ and ‘urgency’. Power is the ability to control resources, legitimacy relates to the social acceptance of issues and urgency refers to how pressing and trending the issue is. These attributes are socially constructed and subjectively perceived by the decision maker. Gifford (2010) applies ‘power’, ‘legitimacy’ and ‘urgency’ to shareholder engagement in SRI and concludes that not all three aspects of salience need to be present for a high level of salience by shareholders. There is a strong preference for legitimacy-based engagement, coupled with a certain frequency of contact. The frequency of contact seems to be more important than the relative size of the stake. Power is normally only used after engagement yields limited results. Gifford (2010) also concludes that in addition to these attributes, building coalitions with other investors, NGOs or policy-makers contributes to the salience of shareholders.

All the theories mentioned above help to elucidate the specific parts of and actors in SRI. However, the frameworks are less helpful for understanding the emergence of SRI as a phenomenon. The emergence of shareholders representing environmental and social rationalities in addition to – or integrated in – an economic rationality is a core subject of the theory of ecological modernisation, as suggested by Carter and Huby (2005). Ecological modernisation theory was developed in the 1980s and further matured in the 1990s, especially by Dutch, German and UK social science scholars (Spaargaren and Mol 1992; Mol and Spaargaren 1993; Mol 1995; Buttel 2000). Ecological modernisation theory conceptualises how economic growth and environmental improvement coincide when ecological rationalities start to gain relevance vis-a-vis economic rationalities in (also economic) practices and institutional developments. Although such a framework could be relevant for understanding overall SRI developments, until now, no SRI research has been conducted using an ecological modernisation framework.

It can be concluded that there are several interesting theoretical frameworks from different disciplines which can be used to explain specific aspects of SRI. The contribution of several disciplines will also be needed to develop a more coherent theoretical framework as SRI has several different aspects: from corporate governance, the financial aspects, salience to the development of SRI institutions. As there has been a strong focus on the financial aspects, especially more attention is needed for the environmental and social aspects of SRI. Can SRI, for example, become a strong force in environmental governance? SRI being a development with the goal to bridge the divide between financial ratio and the impact financial markets have on society would, therefore, be much helped with a more multidisciplinary approach.

Conclusions for a future research agenda

It is clear that a SRI shareholder is rapidly growing and is evolving from a niche market to a mainstream form of investment. Shareholders practising SRI do not form a uniform group but range from large institutional investors, such as pension funds, to small individual investors to activist NGOs. The different types of shareholders have different motivations for practising SRI and follow different strategies and methods.

Some studies have identified direct effects of SRI on ESG performance in specific cases, while others have identified more indirect effects of SRI. However, overall, the effects are quite limited and are difficult to identify and quantify among the myriad factors involved in establishing and implementing corporate environmental management. In answering our research question on which factors govern the effectiveness of SRI in influencing ESG performance, five factors can be identified that explain why the effects of SRI are currently too marginal: (1) investors have a low level of knowledge of SRI, (2) the percentage of SRI is still small compared with that of overall investments, (3) investors are focused on obtaining short-term shareholder value, (4) the interpretation of institutional investors of fiduciary duty and (5) cooperation between shareholders practising SRI is low.

This review also identified where studies on SRI are concentrated and which fields need further academic investigation and reflection. Several studies have been carried out on the methods of screening and the use of shareholder rights, while engagement and dialogue processes seem to be studied less frequently. Studies also focus on financial topics, such as financial performance and risk management, and tend to be empirical research without a theoretical underpinning. Formulating more comprehensive, multidisciplinary theoretical frameworks for understanding and further investigating SRI remains an important challenge for future research. When answering our second research question on which theoretical frameworks are promising in studying and interpreting SRI developments, several theories, as summarised in Table 1, seem to provide welcome starting points for such an endeavour.

Table 1 Promising theoretical perspectives on SRI.

Perspectives on SRI	Theory
Organisational development of SRI	Institutionalisation theory
SRI as a social movement	Social movement theory
Position of shareholders in relation to management and other stakeholders	Agency, stakeholder or stewardship theory
Influence of shareholders practising SRI	Theory of stakeholder salience
SRI in relation to environmental reform	Ecological modernisation theory

Besides developing a strong theoretical framework, it is important to focus future research on SRI on engagement, the factors that govern the effectiveness of SRI and the relationship between shareholders and other actors, such as NGOs, governments or media.