Financial and Social Performance of Socially Responsible Investments in the Netherlands

• Author: Bert Scholtens
• Published date: 01 November 2007
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00633.x
• Date: 01 November 2007

Financial and Social Performance of

Socially Responsible Investments in

the Netherlands

Bert Scholtens*

We analyse the performance of socially responsible investments in the Netherlands. It appears

that the f‌inancial performance of the various types of socially responsible investments differs

considerably. We construct a proxy for mutual funds’ CSR policies and use information about

the environmental and social impact of activities f‌inanced by “green” f‌inancial institutions.

We f‌ind preliminary evidence that f‌inancial and CSR performance substantially differs per

category of f‌inancial instrument analysed. In the Netherlands, tax policy signif‌icantly affects

f‌inancial results and the government can affect the CSR impact of some f‌inancial instruments

too. More coherent and consistent information about CSR is required to establish whether

f‌inancial and social performance interact.

Keywords: Banks, corporate governance, corporate social responsibility, investment funds,

f‌inancial markets, performance

1. Introduction

Socially responsible savings and invest-

ments are becoming well-established

notions in the f‌inancial services industry. The

f‌inancial institutions are coming round to the

idea that there is more to investing than just

checking the f‌igures. In the US, every one out

of eight dollars invested currently is subject to

some social or ethical screen (Social Invest-

ment Forum, 2006). In most countries, private

households have the opportunity to save or

invest their money not only on the basis of

f‌inancial rewards, but also in the face of the

non-monetary value of savings and invest-

ments. In many OECD countries, specialised

banks offer savings accounts to the public

while promising that the savings will be used

to f‌inance environmentally sound projects or

for operations of entrepreneurs who f‌ind it

hard to get access to f‌inance from more con-

ventional institutions. Women and minorities

have been targeted specif‌ically in this respect

in the US on the basis of the so-called commu-

nity investments (Social Investment Forum,

2006). In more than 40 countries – including

several developing countries like Brazil and

South-Africa – people can put their savings in

socially responsible investment funds that in

some way or another check for corporate social

responsibility (CSR) of the f‌irms in which

they invest (International Finance Corporation

(IFC), 2003).

So far, most of the economic research has

concentrated on the impact on risk and return

of taking CSR into account when making

investments (see Statman, 2000; Gezcy et al.,

2003; Bello, 2004; Bauer et al., 2005; Kreander

et al., 2005). These studies usually f‌ind that

taking account of CSR has only a very small

effect on the risk and return of the investments.

Usually, this effect is not signif‌icant. However,

surprisingly little attention has been paid to

the impact of socially responsible savings and

investments on corporate social responsibility.

An exception is Munˇoz-Torres et al. (2004),

who investigate the CSR performance of

Spanish investment funds on the basis of

social ratings. The key question this paper tries

to answer is if and how social responsibility

and f‌inancial performance of socially respon-

sible investment funds are related. The aim of

*Address for correspondence:

University of Groningen, Cen-

tre for International Banking,

Insurance, and Finance(CIBIF),

Departmentof Finance, PO Box

800, 9700 AV Groningen, The

Netherlands. Tel: +31 50 363

7064; Fax: +31 50 363 8252;

E-mail:

L.J.R.Scholtens@RUG.NL

1090 CORPORATE GOVERNANCE

Volume 15 Number 6 November 2007

© 2007 TheAuthor

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA

the paper is to make an early attempt to

multidimensional performance evaluation of

socially responsible investment. To this extent,

we will use an alternative criterion to Munˇoz-

Torres et al. (2004) to assess the CSR perfor-

mance of investment funds, namely the extent

to which particular screens are employed.This

method has the advantage of being a more

transparent way of assessing CSR conduct

than the “art” of assigning ratings (Krahnen

and Weber, 2001). We focus on the f‌inancial

and CSR performance of socially responsible

investments in the Netherlands, a country

with numerous innovations with respect to

socially responsible savings and investments.

The total size of these savings and investments

in relation to their conventional counterparts is

one of the largest in Europe (Eurosif, 2006).

However, given the relatively small amount of

funds investigated and the short time-period

for which CSR performance data are available,

the evidence is still to be regarded as prelimi-

nary. Furthermore, the lack of data makes it

impossible to come up with a thorough analy-

sis with respect to the interaction between

social and f‌inancial performance. The data

problems in part result from the fact that

(f‌inancial) institutions are getting used to take

account of their internal CSR but most of them

do not yet assess the more indirect impact of

their operations. Especially for f‌inancial inter-

mediaries there appears to be a very signif‌i-

cant indirect potential CSR impact (see IFC,

2003).

The structure of this paper is as follows.

Section 2 deals with how f‌inancial intermedi-

aries select environmentally and ethically

sound projects. It also discusses how f‌inancial

performance and corporate social responsibil-

ity might be related. Section 3 describes the

structure and development of socially respon-

sible savings and investments in the Nether-

lands. Section 4 investigates the f‌inancial

and social responsibility performance of the

socially responsible investment funds. Section

5 concludes.

2. Background

La Porta et al. (1997, 1998) argue that a well-

functioning legal system facilitates the

operation of both f‌inancial markets and

intermediaries. Such a legal system is a pre-

condition for the eff‌icient and effective alloca-

tion of f‌inancial funds within our society that,

in turn, is responsible for economic develop-

ment. A crucial function of f‌inancial interme-

diaries is the screening and selection of

projects. Once approved,they monitor projects

throughout the contract period and, in the

event that anything goes wrong, they act

to enforce the contract terms (Allen and

Santomero, 2001).

It exactly is this screening and monitoring

role of the f‌inancial intermediaries that be-

comes important when we analyse “green”

f‌inance. In this respect, we abstract from the

normal business practices of f‌inancial interme-

diaries with respect to screening and monitor-

ing f‌irms and projects. These practices often

already include queries after the proper and

sound behaviour of the managers of these

f‌irms/projects and analyse, on the basis of

legal requirements, the environmental impact

of the project to be undertaken. The ways in

which the intermediaries (especially banks)

screen and select f‌irms and projects affects

the activities being undertaken (Allen and

Gale, 2000). With green f‌inance, the f‌inancial

intermediary explicitly takes account of non-

f‌inancial issues. In this respect, we can distin-

guish between negative and positive screening

(Stone, 2000). Negative screening rules out

lending to or investing in f‌irms that are con-

nected to particular activities. For example,

f‌irms that are involved in nuclear or weapons

technologies, tobacco, gambling, corruption,

oppressive regimes, child labour, etc. Positive

screening also scrutinises f‌irms and projects

with respect to all kinds of characteristics.

Here, the f‌inancial intermediary selects the

f‌irms with the desired non-f‌inancial character-

istics. The intermediary ranks f‌irms on the

basis of their score on the characteristics and

then allows lending to or investing in, for

example, above average f‌irms/projects or top-

10 per cent f‌irms/projects. Of course, positive

and negative screening can be combined.

Screening results in a “universe” from which

the lending off‌icers or fund managers pick

f‌irms/shares to achieve the f‌inancial goals.

We distinguish between green lending and

green investing. With the former, the money-

lender builds up a relationship with the client,

at least for the time during which the loan

matures. There is contact before (screening,

selecting) and during (monitoring and – in

some cases – enforcement) the contract. It is

this type of f‌inancing which presumably offers

the greatest scope for interaction between the

entrepreneur and the f‌inancier (Levine, 2004).

It contrasts with investing where people buy

shares on the stock exchange. The share offers

dividend rights and some control rights

(mainly the right to speak up during the

annual general meeting (AGM) of sharehold-

ers of the f‌irm). As such, they can participate

directly or indirectly, via mutual funds, in the

capital of the f‌irm. Here, it is the legal gover-

nance structure that to a great extent dictates

the dialogue between the market and the f‌irm.

FINANCIAL AND SOCIAL PERFORMANCE OF SOCIALLY RESPONSIBLE INVESTMENTS IN THE NETHERLANDS 1091

Volume 15 Number 6 November 2007© 2007 TheAuthor

Journal compilation © BlackwellPublishing Ltd. 2007