“Greed is good. The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”
This quote of Gordon Gekko, portrayed by Michael Douglas in the 1987 classic Wall Street can be construed as an apt depiction of today’s era. Should the greed be unabashed just to garner profit or should it have a human face as well? This question has necessitated the concept of social responsibility to be discussed among the stakeholders, be it human beings or corporate firms. The idea of being socially responsible is being discussed now on the backdrop of a deadly pandemic.
It has been close to two years since the deadly pandemic has affected mankind. Since then governments of different nations have carried out lockdowns along different periods. The economy has got crippled as a result of a virtual halt in production as well as demand. On one hand, production declined; stock market spiralled downwards taking a cue from the dim future, whereas on the other hand ethical degradation took place among a section of corporate firms in the form of exorbitant pricing, cutting corners in search for higher margins, creation of false scarcity of health-related products etc. Investors’ sentiments and trust in corporate sectors have taken a beating as a result of the above scenario. This has necessitated the advent of ethical investing.
Peter Kinder, co-founder of KLD research and a known figure in the USA on socially responsible investing, suggested taxonomy on the social and ethical investors in 2005. He categorized them in three ways namely value-based, value-seeking and value-enhancing investors. Value-based investors have their moral standards as a guideline for investment whereas value-seeking investors try to augment their portfolio performance by using social and environmental data. It is the value-enhancing investors who are the most involved in nudging the corporate firms to focus on corporate governance and other ethical issues.
Investors use the stock market as a medium of investment to earn some handsome returns. Socially Responsible Investment (SRI), also known as sustainable or green investment, is a process by which investors put their money on companies that follow the environmental, social and corporate governance (ESG) criteria. The concept of SRI emerged during the political turmoil of the USA in the 1960s. However, Milton Friedman was completely against the idea. In Friedman’s words (Capitalism and Freedom, 1962), “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” In his famous article in ‘The New York Times Magazine on September 13, 1970, Friedman further proclaimed that socially responsible activities will affect a firm’s performance adversely. Shareholders have the first stake in the company before society and no socially responsible steps can be taken without affecting the profitability of the company and the interest of the shareholders. However, a contrarian idea emerged at the end of the century with the concept of social capital introduced by James Coleman in 1988. This concept paved the way for the creation of ESG indices across the world. For the uninitiated, the Index of a stock market is a barometer of an economy. An ESG index is one of the thematic indices. The Bombay Stock Exchange has S&P BSE Carbonex which is one of the thematic indices. The main point, however, is the ability of these indices to attract investments. Studies suggested that ESG indices have not only given an equal performance like other indices but also outperformed them in many cases. Keeping these studies in mind, if the financial markets induct and promote more ESG funds, investors will get sizeable returns and companies will also be encouraged to do more on the social front to get listed on those indices. Less corner-cutting and less malpractice by corporate firms will eventually make their stocks attractive.
COVID-19 has been an eye-opener on the ethical front. It has unfurled the greed of the corporate sector. A quantum leap in socially responsible investments and ESG indices promoted by the stock exchanges shall bring a sense of accountability among corporate firms. India has only one carbon index as of now. More indices based on the stock of companies that follow stringent environmental, social and carbon emission norms will bring India at par with developed economies where these practices are already in place.
Sabyasachi Mondal
Knowledge Cell