Saturday, 23 February 2008

Do NGOs really just want to increase the cost of capital?

I was having a chat with a mate who works in the socially responsible investment (SRI) world yesterday and we started talking about what NGOs hope to gain from their involvement in SRI. I said I thought NGO activity in the UK seemed to split between company-specific campaigns (for example War On Want shareholder resolution at Tescos last year) and attempts to get pension funds to develop SRI policies.

He made the interesting point that in the latter case, and in broader attempts at mainstreaming SRI, part of the drive was to increase the cost of capital of companies involved in, for want of a better word, 'irresponsible' activity. This should therefore act as an incentive for companies to do the right thing. However he said that even if there was an impact on the cost of capital, it might be slight and therefore not enough to shift company behaviour, except over the long term, which might be too long to address some issues (ie climate change). This sort of chimes with something I heard from another contact at a fund management house last year, who said that NGOs should be a lot clearer about the outcomes they expect from companies when active in the SRI world.

What I take from these conversations is that NGOs could waste a lot of time trying to change 'the system' to make it transmit useful information about corporate social responsibility issues more effectively. Although personally I probably find systemic reform a more interesting proposition, I think for civil society groups it arguably shouldn't be a priority. Financial markets and the products within them are continually changing, whilst many people in the NGO world have probably only just got their heads around trying to use equities as a route in. Therefore trying to develop a sort of investment counter-culture as some seem to be attempting will be a very tough job (though I think we should still be trying to do it over the long term).

In the short term I think NGOs interested in capital markets are going to have more joy if they prioritise company-specific campaigns with an investor element to them over attempting systemic change. Focused campaigns can work, even if companies only make change to get NGOs off their backs rather than because it's economically rational to do so. At the moment trying increase the cost of capital seems a very long shot.

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