Skip to main content

Advertisement

SpringerLink
Log in

Finance as a Driver of Corporate Social Responsibility

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

Finance is grease to the economy. Therefore, we assume that it may affect corporate social responsibility (CSR) and the sustainability of economic development too. This paper discusses the transmission mechanisms between finance and sustainability. We find that there is no simple one-to-one relationship between financial development and sustainable development but there are various – often indirect – linkages. It appears that most of the literature concentrates on the role of public shareholders when it comes to changing corporate policy and performance in a more sustainable direction. However, this focus neglects the potential impact of the credit channel and private equity on a firm’s non-financial policies and performance. These very powerful mechanisms can govern business policies and practices. Therefore, there appears to be much more scope for finance to promote socially and environmentally desirable activities and to discourage detrimental activities than has been acknowledged in the academic literature so far.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Admati A. R. and Pfeiderer P. (1994) Robust Financial Contracting and the Role of Venture Capitalists, Journal of Finance 49:371–402

    Article  Google Scholar 

  • Allen F. and Santomero A. M. (2001) What do Financial Intermediaries Do? Journal of Banking and Finance 25:271–294

    Article  Google Scholar 

  • Allen F. and Gale D. (2000) Comparing Financial Systems. MIT Press, Cambridge, Mass. and London

    Google Scholar 

  • BankTrack (2004) Principles, Profits or just PR? Triple P Investments under the Equator Principles. BankTrack, Amsterdam

    Google Scholar 

  • BankTrack (2005) Unproven Principles. The Equator Principles at Year Two. BankTrack, Amsterdam

    Google Scholar 

  • Bator F. M. (1958) Anatomy of Market Failure. Quarterly Journal of Economics 72:351–379

    Article  Google Scholar 

  • Bauer R., Koedijk K. and Otten R. (2005) International Evidence on Ethical Mutual Fund Performance and Investment Style. Journal of Banking and Finance 29:1751–1767

    Article  Google Scholar 

  • Becchetti, L., R. Durante and S. Sambataro: 2005, ‘A Matching of Two Promises: Microfinance and Social Responsibility’, University of Tor Vergata mimeograph

  • Bello Z. Y. (2005) Socially Responsible investing and Portfolio Diversification. Journal of Financial Research 28:41–57

    Article  Google Scholar 

  • Bhattacharya S. and Thakor A. V. (1993) Contemporary Banking Theory. Journal of Financial Intermediation 3:2–50

    Article  Google Scholar 

  • Boot A. W. A. and Thakor A. V. (1997) Financial System Architecture. Review of Financial Studies 10:693–733

    Article  Google Scholar 

  • Boyd J. H. and Prescott E. C. (1986) Financial Intermediary Coalitions. Journal of Economic Theory 38:211–232

    Article  Google Scholar 

  • Buxton, A.: 1997, ‘Business ethics: getting on the right track’, CIB News, February, 1–4

  • Corbett, J. and T. Jenkinson: 1994, ‘The financing of industry, 1970–1994: An international comparison’, CEPR Discussion Paper 948, London

  • Coulson A. and Monks V. (1999) Corporate Environmental Performance Considerations within Bank Lending Decisions. Eco-Management and Auditing 6(1):1–10

    Article  Google Scholar 

  • Coulson A. B. and Dixon R. (1995) Environmental Risk and Marketing Strategy: Implications for Financial Institutions. International Journal of Bank Marketing 13(2):22–29

    Article  Google Scholar 

  • Cox P., Brammer S. and Millington A. (2004) An Empirical Examination of Institutional Investor Preferences for Corporate Social Performance. Journal of Business Ethics 52:27–43

    Article  Google Scholar 

  • Cull R., Demirgüc-Kunt A. and Morduch J. (2005) Contract Design and Microeconomic Performance: A Global Analysis. World Bank, Washington D.C.

    Google Scholar 

  • Denis D. J. (2004) Entrepreneurial Finance: An Overview of the Issues and Evidence. Journal of Corporate Finance 10:301–326

    Article  Google Scholar 

  • Diamond D. W. and Dybvig P. (1983) Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy 91:401–419

    Article  Google Scholar 

  • Dillenburg S., Greene T. and Erekson H. (2003) Approaching Social Responsible Investment with a Comprehensive Ratings Scheme: Total Social Impact. Journal of Business Ethics 43:167–177

    Article  Google Scholar 

  • Diltz J. D. (1995) The Private Cost of Socially Responsible Investing. Applied Financial Economics 5:69–77

    Google Scholar 

  • Dinda S. (2004) Environmental Kuznets curve hypothesis, A survey. Ecological Economics 49:431–455

    Article  Google Scholar 

  • Domini A. (2001) Socially Responsible Investing. Making a Difference and Making Money. Dearborn, Chicago, Ill

    Google Scholar 

  • Esty B. C. (2004) Why Study Large Projects? An Introduction to Research on Project Finance. European Financial Management 10:213–224

    Article  Google Scholar 

  • Esty B. C., Knoop C. and Sesia A. (2005) The Equator Principles: An Industry Approach to Managing Environmental and Social Risks. Harvard Business School Case Study 9:205–114

    Google Scholar 

  • Financing the Future (2002) The London Principles The Role of UK Financial Services in Sustainable Development. Corporation of London, London

    Google Scholar 

  • Gezcy C. C., R. F. Stambaugh and D. Levin: 2003, ‘Investing in Socially Responsible Mutual Funds’, Wharton School, University of Pennsylvania, mimeograph, May

  • Goldsmith R. W. (1969) Financial Structure and Development. Yale University Press, New Haven/London

    Google Scholar 

  • Greenwood J. and Jovanovic B. (1990) Financial Development, Growth, and the Distribution of Income. Journal of Political Economy 98:1076–1107

    Article  Google Scholar 

  • Grossman B. R and Sharpe W. F. (1986) Financial Implications of South African Divestment. Financial Analysts Journal 42:542–555

    Article  Google Scholar 

  • Grossman G. E. and Krueger A. B. (1995) Economic Growth and the Environment. The Quarterly Journal of Economics 110:353–377

    Article  Google Scholar 

  • Gylfason T. (2001) Natural Resources, Education, and Economic Development. European Economic Review 45:847–859

    Article  Google Scholar 

  • Haigh M. and Hazelton J. (2004) Financial Markets, A Tool for Social Responsibility? Journal of Business Ethics 52:59–71

    Article  Google Scholar 

  • Hamilton S., Jo H. and Statman M. (1993) Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds. Financial Analyst Journal 49:62–66

    Article  Google Scholar 

  • Haupt U. and Henrich U. (2004) Sectoral Policy Paper on Financial System Development. Bonn, German Federal Ministry for Economic Cooperation and Development

    Google Scholar 

  • Heinkel R., Kraus A. and Zechner J. (2001) The Effect of Green Investment on Corporate Behavior. Journal of Financial and Quantitative Analysis 36:431–450

    Article  Google Scholar 

  • Jappelli T. and Pagano M. (2002) Information sharing, lending and defaults, Cross-country evidence. Journal of Banking and Finance 26:2017–2045

    Article  Google Scholar 

  • Jensen M. C., and Meckling W. H. (1976) Theory of the Firm, Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics 3:305–360

    Article  Google Scholar 

  • Johnsen D. B. (2003) Socially Responsible Investing, A Critical Appraisal. Journal of Business Ethics 43:219–222

    Article  Google Scholar 

  • Kindleberger C. P. (1993) A Financial History of Western Europe. 2nd edition Oxford University Press, New York and Oxford

    Google Scholar 

  • King R. G. and Levine R. (1993) Finance and Growth, Schumpeter Might Be Right. Quarterly Journal of Economics 108:717–737

    Article  Google Scholar 

  • La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R. W. (1998) Law and Finance. Journal of Political Economy 106:1113–1155

    Article  Google Scholar 

  • La Porta R., Lopez-de-Silanes F., Shleifer A. and Vishny R. W. (1999) The quality of government. Journal of Law, Economics and Organization 15:222–279

    Article  Google Scholar 

  • Levine, R.: 2004, Finance and Growth, Theory and Evidence, NBER Working Paper 10766, Cambridge, Mass., NBER.

  • Lucas R. E. (1988) On the mechanics of economic development. Journal of Monetary Economics 22:3–42

    Article  Google Scholar 

  • Lundgren M. and Catasus B. (2000) The Banks’ Impact on the Natural Environment. Business Strategy and the Environment 9:186–195

    Article  Google Scholar 

  • Margolis J. D. and Walsh J. P. (2001) People and Profits? The Search for a Link Between a Company’s Social and Financial Performance. Lawrence Elbaum, London and Mahwah, N.J.

    Google Scholar 

  • Matthews J. A. (2002) Schumpeterian Competitive Dynamics and Economic Learning, An Economy-wide Resource-based View, Macquarie University, mimeograph

  • Mayer C. (1988) New Issues in Corporate Finance. European Economic Review 32:1167–1183

    Article  Google Scholar 

  • Merton R. C. (1995) A Functional Perspective of Financial Intermediation. Financial Management 24:23–41

    Google Scholar 

  • Moore B. and Wüstenhagen R. (2004) Innovative and Sustainable Energy Technologies: The Role of Venture Capital, Business Strategy and the Environment. Business Strategy and the Environment 13:235–245

    Article  Google Scholar 

  • Morgera E. (2004) From Stockholm to Johannesburg: From Corporate Responsibility to Corporate Accountability for the Global Protection of the Environment?. Review of European Community & International Environmental Law 13:214–228

    Article  Google Scholar 

  • Murdoch J. (1999) The Microfinance Promise. Journal of Economic Literature 37:1569–1614

    Google Scholar 

  • National Community Reinvestment Coalition 2004, ‘America’s Best and Worst Lenders: A Consumer’s Guide to Lending in 25 Metropolitan Areas’, Washington

  • Pagano M. (1993) Financial Markets and Growth, An Overview. European Economic Review 37:613–622

    Article  Google Scholar 

  • Rajan R. G. and Zingales L. (1995) What Do We Know About Capital Structure? Some Evidence from International Data. Journal of Finance 50:1421–1460

    Article  Google Scholar 

  • Randjelovic J., O’Rourke A. R. and Orsato R. J. (2003) The Emergence of Green Venture Capital. Business Strategy and the Environment 12:240–253

    Article  Google Scholar 

  • Robinson J. (1979) The generalisation of the general theory. In: Robinson J. (eds), The Generalisation of the General Theory and Other Essays. London and Basingstoke, MacMillan, pp 1–76 (first edition as The Rate of Interest and Other Essays, 1952)

    Google Scholar 

  • Rudd A. (1981) Social Responsibility and Portfolio Performance. California Management Review 23:55–61

    Google Scholar 

  • Saint-Paul G. (1992) Technological Choice, Financial Markets and Economic Development. European Economic Review 39:5–30

    Google Scholar 

  • Saunders A. and Allen L. (2002) Credit Risk Measurement. 2nd edition, John Wiley and Sons, New York

    Google Scholar 

  • Schmidheiny S. and Zorraquín F. J. L. (1996) Financing Change. MIT Press, Cambridge, Mass.

    Google Scholar 

  • Scholtens B. and van Wensveen D. (2003) The Theory of Financial Intermediation. SUERF, Vienna

    Google Scholar 

  • Scholtens B. (2005) What Drives Socially Responsible Investment? The Case of the Netherlands. Sustainable Development 2:129–137

    Article  Google Scholar 

  • Schumpeter J. A. (1912) Theorie der wirtschaftlichen Entwicklung. Duncker & Humbolt, Leipzig

    Google Scholar 

  • Social Investment Forum (SIF) (2003) 2003 Report on Socially Responsible Investing Trends in the United States. SIF, Washington D.C.

    Google Scholar 

  • Social Investment Forum (SIF) (2004) 2004 Report on Socially Responsible Investing Trends in the United States. SIF, Washington D.C.

    Google Scholar 

  • Social Investment Forum (SIF) (2005) Mutual Funds, Proxy Voting, and Fiduciary Responsibility, How Do Funds Rate on Voting Their Proxies and Disclosure Practices?. SIF, Washington D.C.

    Google Scholar 

  • Soppe, A.: 2004, `Sustainable Corporate Finance', Journal of Business Ethics 53, 213–224

    Article  Google Scholar 

  • Sparkes R. and Cowton C. J. (2004) The Maturing of Socially Responsible Investment, A Review of the Developing Link with Corporate Social Responsibility. Journal of Business Ethics 52:45–57

    Article  Google Scholar 

  • Statman M. (2000) Socially Responsible Mutual Funds. Financial Analysts Journal 35:30–39

    Article  Google Scholar 

  • Statman M. (2005) Socially Responsible Indexes: Composition and Performance. Santa Clara University, Santa Clara, CA.

    Google Scholar 

  • Stern D. I. (2004) The Rise and Fall of the Environmental Kuznets Curve. World Development 32:1419–1439

    Article  Google Scholar 

  • Stiglitz J. E. and Weiss A. (1981) Credit Rationing with Imperfect Information. American Economic Review 71:393–410

    Google Scholar 

  • Stulz R. M. and Williamson R. (2003) Culture, Openness, and Finance. Journal of Financial Economics 70:313–349

    Article  Google Scholar 

  • Stulz R. M. (1988) Managerial Control of Voting Rights, Financing Policies and the Market for Corporate Control. Journal of Financial Economics 20:25–54

    Article  Google Scholar 

  • Thompson P. and Cowton C. J. (2004) Bringing the Environment into Bank Lending: Implications for Environmental Reporting. British Accounting Review 36:197–218

    Article  Google Scholar 

  • Unwin B. (2002) Corporate Social Responsibility & Socially Responsible Investing. Federal Trust for Education and Research, London

    Google Scholar 

  • Watchman P. (2005) Beyond the Equator. Environmental Finance 6 (June):16–17

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Finance, University of Groningen, PO Box 800, Groningen, 9700 AV, Netherlands

    Bert Scholtens

Authors
  1. Bert Scholtens
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Bert Scholtens.

Additional information

Bert Scholtens received his Ph.D. at the University of Amsterdam in 1994. Since 1999 he has been working at the Department of Finance of the University of Groningen, the Netherlands. His research particularly looks into the interactions between financial institutions and sustainable development/corporate social responsibility. He has recently published in, among others, Ecological Economics, Journal of Banking and Finance, Finance letters, Journal of Investing, and Sustainable Development.

Appendices

Appendix I

Equator Principles

Preamble

Project financing plays an important role in financing development throughout the world. In providing financing, particularly in emerging markets, project financiers often encounter environmental and social policy issues. We recognize that our role as financiers affords us significant opportunities to promote responsible environmental stewardship and socially responsible development.

In adopting these principles, we seek to ensure that the projects we finance are developed in a manner that is socially responsible and reflect sound environmental management practices.

We believe that adoption of and adherence to these principles offers significant benefits to ourselves, our customers and other stakeholders. These principles will foster our ability to document and manage our risk exposures to environmental and social matters associated with the projects we finance, thereby allowing us to engage proactively with our stakeholders on environmental and social policy issues. Adherence to these principles will allow us to work with our customers in their management of environmental and social policy issues relating to their investments in the emerging markets.

These principles are intended to serve as a common baseline and framework for the implementation of our individual, internal environmental and social procedures and standards for our project financing activities across all industry sectors globally.

In adopting these principles, we undertake to review carefully all proposals for which our customers request project financing. We will not provide loans directly to projects where the borrower will not or is unable to comply with our environmental and social policies and processes.

Statement of principles

We will only provide loans directly to projects in the following circumstances:

  1. 1.

    We have categorized the risk of a project in accordance with internal guidelines based upon the environmental and social screening criteria of the IFC as described in the attachment to these Principles.

  2. 2.

    For all Category A and Category B projects, the borrower has completed an Environmental Assessment (EA), the preparation of which is consistent with the outcome of our categorization process and addresses to our satisfaction key environmental and social issues identified during the categorization process.

  3. 3.

    In the context of the business of the project, as applicable, the EA report has addressed:

  • (a) Assessment of the baseline environmental and social conditions.

  • (b) Requirements under host country laws and regulations, applicable international treaties and agreements.

  • (c) Sustainable development and use of renewable natural resources.

  • (d) Protection of human health, cultural properties, and biodiversity, including endangered species and sensitive ecosystems.

  • (e) Use of dangerous substances.

  • (f) Major hazards.

  • (g) Occupational health and safety.

  • (h) Fire prevention and life safety.

  • (i) Socioeconomic impacts.

  • (j) Land acquisition and land use.

  • (k) Involuntary resettlement.

  • (l) Impacts on indigenous peoples and communities.

  • (m) Cumulative impacts of existing projects, the proposed project, and anticipated future projects.

  • (n) Participation of affected parties in the design, review and implementation of the project.

  • (o) Consideration of feasible environmentally and socially preferable alternatives.

  • (p) Efficient production, delivery and use of energy.

  • (q) Pollution prevention and waste minimization, pollution controls (liquid effluents and air emissions) and solid and chemical waste management.

  1. 4.

    For all Category A projects, and as considered appropriate for Category B projects, the borrower or third party expert has prepared an EMP which draws on the conclusions of the EA. The EMP has addressed mitigation, action plans, monitoring, management of risk and schedules.

  2. 5.

    For all Category A projects and, as considered appropriate for Category B projects, we are satisfied that the borrower or third party expert has consulted, in a structured and culturally appropriate way, with project affected groups, including indigenous peoples and local NGOs. The EA, or a summary thereof, has been made available to the public for a reasonable minimum period in local language and in a culturally appropriate manner. The EA and the EMP will take account of such consultations, and for Category A Projects, will be subject to independent expert review.

  3. 6.

    The borrower has covenanted to:

    • (a) Comply with the EMP in the construction and operation of the project.

    • (b) Provide regular reports, prepared by in-house staff or third party experts, on compliance with the EMP and

    • (c) where applicable, decommission the facilities in accordance with an agreed Decommissioning Plan.

  4. 7.

    As necessary, lenders have appointed an independent environmental expert to provide additional monitoring and reporting services.

  5. 8.

    In circumstances where a borrower is not in compliance with its environmental and social covenants, such that any debt financing would be in default, we will engage the borrower in its efforts to seek solutions to bring it back into compliance with its covenants.

  6. 9.

    These principles apply to projects with a total capital cost of $50 million or more.

The adopting institutions view these principles as a framework for developing individual, internal practices and policies. As with all internal policies, these principles do not create any rights in, or liability to, any person, public or private. Banks are adopting and implementing these principles voluntarily and independently, without reliance on or recourse to IFC or the World Bank.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Scholtens, B. Finance as a Driver of Corporate Social Responsibility. J Bus Ethics 68, 19–33 (2006). https://doi.org/10.1007/s10551-006-9037-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-006-9037-1

KEY WORDS

JEL Classification

Search

Navigation