This paper reports on a questionnaire survey of 1146 ethical investors in the UK. Ethical investing usually means that certain companies are excluded from one's portfolio on non-economic grounds, e.g. because they manufacture armaments, test chemicals on live animals, or have poor pollution records. Is this an example where moral commitment rather than economics is driving economic decision making? Ethical investors were found to be neither cranks nor saints holding both ethical and not so ethical investments at the same time. A case is made that people are prepared to put their money where their morals are although there is no straightforward trade-off between principles and money. A broader analysis than that based on rational economic man is recommended: an economic psychology.

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Abstract:This paper is a report of an empirical psychological study of the relationship between the ethical and financial beliefs and desires of ethical investors. Semi-structured interviews of 20 ethical investors have been carried out by the project 10 of which have been analysed using qualitative data analysis software. All of our participants faced the problem that, while they had ethical concerns, they were not prepared to sacrifice their essential financial requirements to address them. We found four common ways of dealing with this problem: they divided up their money into core and surplus accounts; they decided that it was enough to only be a partial ethical investor; they avoided detailed consideration of the costs of ethical investment; and they avoided rigorous ethical thinking. One equilibrium position arising from these responses is a portfolio approach to ethics, which allows people to assuage their consciences by investing only a small proportion of their investments ethically, while leaving the rest in non-ethical investment vehicles.

Boards of large UK companies are devoting more time to the governance of corporate social responsibility (CSR). This is in line with the Combined Code on Corporate Governance's requirement that boards set standards and values for companies and ensure they meet their social obligations. But is board activity in this area as effective as it could be at achieving corporate compliance with CSR standards? This paper draws on the economic literature to offer an analysis of the primary causes of breaches of corporate responsibility standards. Based on a small survey of the board CSR activities of 20 of Britain's largest companies, it assesses whether boards are addressing these causes effectively. The tentative conclusion is that board activity might usefully be reoriented to do more to address the fundamental incentives problems that often cause corporate responsibility failures, namely market failure and misaligned performance management systems. Copyright (c) 2007 The Author; Journal compilation (c) 2007 Blackwell Publishing Ltd.

Manuscript Type: EmpiricalResearch Question/Issue: This study investigates the impact of a responsible investment index on environmental management practices. Firms that were included in the FTSE4Good index but failed to meet enhanced requirements were subject to both engagement by FTSE and the threat of expulsion from the index. We examine the combined effect of these actions, estimate the contribution of both elements separately, and the influence of concentrated equity ownership, corporate governance, and the institutional environment. We also evaluate whether the effect is persistent or transitory. Research Findings/Insights: For a sample of 1,029 firms from 21 countries, our findings demonstrate that engagement combined with the threat of expulsion from the FTSE4Good index doubles the probability that a firm failing to meet the environmental management criteria in 2002 would comply by 2005. The higher compliance rate for the firms receiving engagement persists until the end of our study in 2010. We also find that compliance is positively associated with low levels of concentrated ownership and with firms based in coordinated rather than liberal market economies. Theoretical/Academic Implications: Our results contribute to the understanding of the complexities of governance, where decision makers are constrained or influenced by equity holders, the firm's governance system, institutional arrangements, and collective engagement by institutional equity holders. Our findings are consistent with both institutional and agency issues impacting on decision making. Practitioner/Policy Implications: Our study suggests that engagement via a responsible investment index reinforced by the threat of public expulsion from the index provides an effective route for large-scale collaborative investor engagement on corporate social responsibility issues targeting large and internationally diverse firms. It also demonstrates why regulators may wish to encourage engagement of this type to achieve social benefits.