Why Do They Care? The Market for Corporate Global Responsibility and the Role of Institutional Investors
Environment and Planning A, Forthcoming
Posted: 31 Aug 2005
Institutional investors, primarily pension funds, drive global financial markets. The result is investors vulnerable to the risks companies face in global consumer and capital markets. While some market risks are inevitable, others such as reputation risk can be mitigated through increased corporate social and environmental standards and the increased transparency that such higher standards demand. The transparency necessitated by reputation management has a dual role in monitoring corporate behaviour and providing all stakeholders (internal and external) with the information to evaluate corporate behaviour. Driving this process is the belief that higher standards of corporate responsibility pay off for investors over the long-term through both potential equity premia and risk reduction. This paper presents a model for understanding how and why institutional investors may encourage firms to adopt higher standards. To illustrate our argument, we rely upon the experience of two large pension funds: the UK Universities Superannuation Scheme's strategy of corporate engagement and its attempts to encourage firms to raise their environmental standards by focusing on the climate change impacts of USS investments, and CalPERS' policy of company-screening in emerging markets using both the CERES and Sullivan Principles to monitor corporate behaviour. Investor engagement in corporate responsibility offers an insight into investors' role in global standard-setting and global citizenship.
Keywords: Corporate responsibility, pension funds, brand image, reputation
JEL Classification: D23, G14, G23, L14
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