Social Communications on Ecology and Risk: The Systems-Theoretic Analysis of Socially Responsible Investing
Akira TOKUYASU
4342 Aihara-Machi, Machida-shi, Tokyo 194-0298 JAPAN
atokuyas@mt.tama.hosei.ac.jp
In 1980s so-called Socially Responsible Investing appeared, and since then it has been growing rapidly in the North America, especially in the United States. Socially responsible investing is a kind of investing, that is, an economic activity. It pursues, however, not only monetary returns, but also realization of certain societal values, such as environmental improvement, avoidance of the risks of alcohol and tobacco, reduction of military weapons, protection of the human rights, good labour relations and employment, development of communities, and so on. Especially with respect to environmental improvement, we can consider socially responsible investing as a kind of social communication on ecology and risk.
Socially responsible investing has several aspects. It is an economic activity, because it pursues monetary profits. It is a kind of resource mobilization, because it mobilizes money as a special medium or resource to make business companies improve the environmental side effects of their economic activities. It is a kind of public discourse on ecology and risk, because it promotes conversations between shareholders and companies on the environmental aspects of the economic activities of these companies. And finally it is an ecological movement, because it tries to spread ecological values and to make enterprises change their attitudes toward the environmental problems and risks.
We can investigate this socially responsible investing from various perspectives. There are several conventional perspectives such as social movement, public discourse, and public policies. Theories of social movement are most popular, especially those of new social movements and those of resource mobilization. Theories of public discourse are also popular, especially in relation to Habermas' theory of communicative action. They focus on the rational discourse and consensus on societal problems in the public sphere. Today emergence of new public spheres on the Internet is also argued. The arguments of public policies might be relatively different, for their perspective is, so to say, a top down perspective, that is, political and/or legal control directly over economy.
Instead of these perspectives we use here the systems-theoretic perspective as an alternative. One of the fundamental assumptions of the social systems theory is functional differentiation of the modern society. Talcott Parsons, the great founder of the social systems theory, emphasizes societal integration in spite of differentiation. Niklas Luhmann, the great successor of the social systems theory, emphasizes autonomy of differentiated subsystems and impossibility of societal integration. We combine these two points of view to interpret the societal function of socially responsible investing.
In the beginning it should be made clear what socially responsible investing is. The biannual report of the Social Investment Forum (2001) defines socially responsible investment as follows:
Socially responsible investing (SRI) is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis. It is a process of identifying and investing in companies that meet certain baseline standards or criteria of Corporate Social Responsibility (CSR) and is increasingly practiced internationally.
Social investing, socially aware investing, ethical investing, mission based investing, and natural investing: all these terms describe the almost same concept as SRI. These terms are often used interchangeably to describe an approach to investing that integrates social and environmental concerns into investment decisions.
There are various standards or criteria for socially responsible investing. For example, the Social Investment Forum classifies twelve criteria: alcohol, tobacco, gambling, defence/weapons, animal testing, products/services, environment, human rights, labour relations, employment/equality, community investment, community relations. Usually several criteria are combined to evaluate company's activities. Environmental criterion is one of the most broadly used criteria. It is used in 50% or more screened portfolios.
Social investors include individuals, businesses, universities, hospitals, foundations, pension funds, religious institutions, and other non-profit organizations. Social investors consciously put their money to work in ways designed to achieve specific financial goals while working to build a better, more just and sustainable economy. To put it another way, social investors put their money to work to build a better tomorrow while earning competitive returns today. Socially responsible investing requires investment managers to overlay a qualitative analysis of corporate policies, practices, and impacts onto the traditional qualitative analysis of profit potential.
Socially responsible investing incorporates three strategies that work together to promote socially and environmentally responsible business practices and, in turn, encourage improvements in the quality of life throughout society:
• Screening : it is the practice of including or excluding publicly traded securities from investment portfolios or mutual funds based on social and/or environmental criteria. Generally, social investors seek to own profitable companies that make positive contributions to society. Conversely, they avoid investing in companies whose products and business practices are harmful. The criteria of screening have been just mentioned before.
• Shareholder Advocacy : it describes the actions many socially aware investors take in their role as owners of corporate America. They include dialoguing with companies on issues of concern, as well as filing, co-filing, and voting proxy resolution. Proxy resolutions on social issues are generally aimed at influencing corporate behaviour toward a more responsible level of corporate citizenship, steering management toward action that enhances the well-being of all the company's stakeholders, and improving financial performance over time.
• Community Investing : it is financing that generates resources and opportunities for economically disadvantaged people in urban and rural communities in the U.S. and abroad that are underserved by traditional financial institutions. This type of investment is rapidly growing in recent years, but still remains relatively small.
The Social Investment Forum refers to some historical roots of socially responsible investing. In early biblical times, Jewish laws laid down many directives on how to invest ethically. In the mid-18 th century, John Wesley, the founder of Methodism, noted the fact that the use of money was the second most important subject of New Testament teachings. As Quakers settled North America, they refused to invest in weapons and slavery.
The modern roots can be traced to the impassioned political climate of the 1960s. During that decade, a series of social and environmental movements, from civil rights and women's rights, to the anti-war and environmental movements, served to escalate awareness around issues of social responsibility. These concerns also broadened to include management and labour issue, and anti-nuclear sentiment. In the late 1970s, the concept of social investing began attracting a considerably larger group of American investors due to concerns about the racist system of Apartheid in South Africa.
Over the past 20 years, the Bhopal, Chernobyl, and Exxon Valdez incidents, along with vast amounts of new information about global warming, ozone depletion, and the concomitant risks to life on the planet, have brought the seriousness of environmental issues to the forefront of social investors' minds. Investors also began to look more deeply at the employment practices of companies in the U.S. Most recently, issues of human rights and healthy working conditions in factories around the world producing goods for U.S. consumption have become rallying points for investors.
In recent years, many socially responsible portfolios have moved beyond selecting companies that are working to halt their negative environmental and social impacts to choosing companies that are actively working to improve their social and environmental performance. In addition, there is a growing realization among corporate leaders and academics that the adoption of principles of sustainability can co-exist with long-term corporate profitability.
Here, we had better examine the economic impact of socially responsible investing. In 2001 the amount of socially responsible investing in the U.S. is $2.34 trillion. It accounts for nearly 12 percent of the total $19.9 trillion in investment assets under professional management in the U.S. Among the total amount, more than $2 trillion are invested through screening, and more than $900 billion through shareholder advocacy. Socially responsible investing is growing very rapidly in the U.S. It is even said that market slump is providing unexpected boost to socially responsible investing. The economic impact of socially responsible investing is considerably big (Social Investment Forum 1995, 1997, 1999, 2001).
Now, we have to analyse socially responsible investing from the theoretical point of view. The first perspective is integrative. It assumes the hierarchical structure of the society. Talcott Parsons once provided the conception of cybernetic hierarchy of control, in which four functional subsystems are vertically ordered, that is, from L through I and G to A. In this hierarchical structure, cultural values are superior to economic interests. And in the broader scheme of the human condition, the telic system serves as a transcendental base of cultural values (Parsons/Smelser, 1956; Parsons 1971).
In this perspective, socially responsible investing is considered as directly controlling the economic system through environmental ethics. It seems that environmental ethics require or even order the economic system to realize some cultural values, that is, substantial rationality. In the American society, so-called civil religion occupies the transcendental position in the scheme of the human condition. If it is true that socially responsible investing has the deep historical roots in the religious traditions, then particularistic values of these traditions have been generalized into the universalistic values of American civil religion. And it is these universalistic values that serve as a transcendental base of socially responsible investing.
The second perspective is non-integrative. It assumes the heterarchical structure of the society. Niklas Luhmann emphasized the autonomy of functionally differentiated subsystems. There is no vertical ordering of functional systems, nor hierarchical control mechanism, but only resonance between subsystems. It follows that cultural values cannot directly control the economic system, but only give some disturbance that causes self-referential operations within the economic system, the total consequences of which cannot be foreseen. Furthermore there is no transcendental foundation like Parsons' telic system (Luhmann 1982, 1989).
In this perspective, socially responsible investing is considered as the mere disturbance for the economic system that operates autonomously. Social investors cannot directly control the economic system through environmental ethics, but they should translate their ecological ideals into monetary terms. Only money can serve as an effective communication medium in the economic system. If socially responsible investing functions at all, it is not because of its ecological ideals, but because of the impact of invested money. It is not environmental ethics but money that has universalistic validity in the economic system. And at last there are no universalistic values that serve as a transcendental base of socially responsible investing.
The argument of socially responsible investing in the U.S. strongly claims its effective influences on the improvement of companies' practices. It might seem that socially responsible investing is more and more realizing Parsons' conception of integrative society. If the proportion of socially responsible investing might grow up to 20 or 30 percent in the near future, this conception would be realized more perfectly. Ecological thought might provide better ethics and realize a “good society”.
But we should ask whether environmental values are superior to all other human values, or whether all the human values can be completely integrated. Socially responsible investing might be a better alternative to the conventional investing, but we cannot foresee all the side effects inside and outside of the economic system. It follows that we cannot foresee and manage future risks perfectly. In this sense we should not underestimate the significance of socially responsible investing, but at the same time we had better hope not so much that socially responsible investing will solve the environmental problems in the future.
Luhmann, Niklas, 1982, The Differentiation of Society , New York: Columbia University Press.
Luhmann, Niklas, 1989, Ecological Communication , Cambridge UK: Polity Press.
Parsons, Talcott, 1971, The System of Modern Societies , Englewood Cliffs, N.J.: Prentice-Hall.
Parsons, Talcott/Smelser, Neil J., 1956, Economy and Society: A Study in the Integration of Economic and Social Theory , New York: Free Press.
Social Investment Forum , 1995, After South Africa: The State of Socially Responsible Investing in the United State.
Social Investment Forum , 1997, 1997 Report on Socially Responsible Investing Trends in the United States.
Social Investment Forum , 1999, 1999 Report on Socially Responsible Investing Trends in the United States.
Social Investment Forum , 2001, 2001 Report on Socially Responsible Investing Trends in the United States.