ics have suggested, negative screening undermines sound investment management processes. Perhaps a better approach would be to identify those companies in the relevant sectors that are the most environmentally and socially responsible and are governed most effectively. In this way, some companies would be rewarded for responsible and ethical behavior by having greater access to capital. Companies that act irresponsibly and unethically will be punished by being denied access. A second drawback to socially responsible investing has been that it has historically been nondemocratic. As a practical matter, the raw input data needed to define ESG efficiency is extensive and highly complex. Significantly, the key metrics must be applied to a broad universe of thousands of global stocks and bonds. Its sheer complexity makes ESG data inaccessible - and often incomprehensible - to the vast majority of investors. Only when investors are fully empowered with fair, impartial and transparent tools for measuring a company’s ESG compliance with socially responsible principles will socially responsible investing become relevant in the vast cross-section of global capital formation. As long as standards are expensive, arcane and inconsistent, broad-based acceptance will fall short. A final drawback is that, to date, many corporate executives have viewed corporate social responsibility (CSR) at best as an investor relations’ initiative - and at worst as a cynical public relations stunt. This has tarnished the image of ESG investing.
For example, BP had to deal with major environmental issues - pipeline leaks on the Alaskan tundra, a refinery fire in Texas and an offshore oil rig blowout in the Gulf of Mexico - even as it stood behind its totally organic sunflower logo. Apple has presented itself as socially responsible, a friend to man and child alike, even as it employed sweatshop labor through its Chinese contractors. Similarly, JPMorgan Chase had presented itself as the very model of good governance, a position that lost some credibility with the revelation of losses caused by a corporate deformity known as the “London Whale.” The point here is not to single out these three companies, although our opprobrium may be fully warranted. Rather, it is to underscore the complex issue of duplicitousness in corporate principles. The only effective way to diminish this duplicity - and to mitigate the risks associated with it - is for owners of capital to make corporate managements increasingly more accountable for maintaining sustainable ESG operations. Only when there is consensus that strict adherence to sound ESG principles is a positive determinant of corporate performance and risk - and not some Pollyannaish expression of do-goodism - will it take hold. Today, these drawbacks are being addressed both by market forces and the technology that drives those forces. ESG investing is rapidly transitioning to a “best in class” approach that is inclusive and respectful of key investment considerations. ESG data and ratings are becoming more readily available at lower cost, democratizing the functionality of the process. And shareholders are becoming more cognizant of the risks associated with noncompliance with ESG standards and what that means in terms of risk and reward. These three steps will put capital back in control of capitalism and allow CSR investing to finally come of age. *Richard Phillips is the senior index analyst for S-Network Global Indexes, a publisher of over 200 stock market indexes that are widely used by financial services organisations around the world. Among his responsibilities is the compilation, maintenance and analysis of the S-Network Eurozone Bank Index, a capitalisation weighted index of the 52 largest eurozone banks.