What role can ethical investment play in improving the sustainability of business? See this week’s research tidbits to find out.

Responsible investment in France  
This article studies the case of the socially responsible investment industry in France. This case accounts for how the socially responsible investment category and practices have successfully moved from the margins of the industry in the late 1990s to become mainstream over two decades.

The authors bring to the forefront the importance of three complementary factors in the process of causing corporations to transition toward more sustainable businesses: the role of investors and, in particular, institutional investors; the importance of the presence of a clear category definition and of intermediary organisations, providing ratings, scores, and other calculative devices; and the role of governments and regulators.

With other studies, this case stresses the fundamental influence of investors in how corporations manage sustainability transitions.

Patricia Crifo, Rodolphe Durand and Jean-Pascal Gond. 2019. Encouraging Investors to Enable Corporate Sustainability Transitions: The Case of Responsible Investment in France.
Organization and Environment, 32(2), 125-144.

 

Is ethical finance the answer to the ills of the UK financial market?
The 2008 financial crisis exposed the dark side of the financial sector in the UK. It brought attention to the contaminated culture of the business, which accommodated the systemic malpractices that largely contributed to the financial turmoil of 2008.

In the wake of the crisis there seems to be a wide consensus that this contaminated culture can no longer be accepted and needs to change. This article examines the ills of the UK financial market, more specifically the cultural contamination problem, which was uncovered by the 2008 financial crisis, in order to explore its genesis and the suitable solutions for it.

In this regard, the article analyses the ethical finance sector from theoretical and practical perspectives in order to assess its role in addressing the cultural contamination problem of the UK financial market.

Read this Open Access article for free online

Abdul Karim Aldohni. 2019. Is Ethical Finance the Answer to the Ills of the UK Financial Market? A Post-Crisis Analysis.
Journal of Business Ethics, 151(1), 265–278.

 

Sports and investment ethics: The Norwegian Oil Fund, Formula 1 and the 2014 Russian Grand Prix 
As a sovereign wealth fund, the $1 trillion Norwegian Government Pension Fund-Global (‘the Oil Fund’), which is managed by Norges Bank Investment Management on behalf of the welfare of Norway’s citizens, is supposed to be a flagship for socially responsible investments through its Council of Ethics.

However, its investment in Delta Topco, the holding company of Formula 1 world championship that, through Formula One Group, brokered a deal with Russia to host a Formula 1 Grand Prix in 2014, raises the question of whether the Oil Fund should enhance its due diligence processes. Although no evidence of corruption related to the race is introduced, the complex relation between financial logic and the world of sports still raises questions about the ethical solidity of the Oil Fund’s investment.

Drawing upon reports of the relationship between political economy and sporting events, this paper therefore analyses, in light of the Oil Fund’s ethical guidelines, the complexities of its investment in Delta Topco. As a result, it is argued that a new set of examination methods by the Council of Ethics may be warranted.

Hans Erik Næss. 2019.  Investment Ethics and the Global Economy of Sports: The Norwegian Oil Fund, Formula 1 and the 2014 Russian Grand Prix.
Journal of Business Ethics, 158(2), 535–546.

 

Bond investors and engagement auditors’ negative experiences?
Using data from China, where the identity of engagement auditors is disclosed, the authors find significant relationships between engagement auditors’ negative experiences and the costs of corporate bonds.

Further tests differentiate field and review auditors’ experiences, and the authors find that both field and review auditors’ negative experiences are significantly related to higher costs of corporate bonds. In addition, the authors find that the above results are significant only when the engagement auditors are affiliated with non-Big10 audit firms. Using path analysis, the authors find that credit rating is a possible channel through which information on engagement auditors’ negative experiences can transfer to bond investors.

Regarding non-price terms, the authors conclude that engagement auditors with negative experiences are associated with smaller bond sizes, shorter bond maturities, a higher likelihood of requiring collateral, and more restrictive covenants. Further analyses also show that the effects of engagement auditors’ negative experiences on the costs of corporate bonds are less pronounced for well-governed firms.

To show that the results obtained from China’s corporate bond market are relevant to loan markets, the authors replicate the above tests using a Chinese sample, and the results from the loan market are consistent with those from the corporate bond market. Overall, the empirical results suggest that investors are indeed concerned with engagement auditors’ negative experiences.

Guangming Gong, Liang Xiao, Si Xu and Xun Gong. 2019. Do Bond Investors Care About Engagement Auditors’ Negative Experiences? Evidence from China.
Journal of Business Ethics, 158(3), 779–806.

 

Investors’ and analysts’ perceptions of CSR and disclosure
We conjecture that corporate social responsibility (CSR) can be indicative of managerial ethics and integrity and examine whether equity investors and financial analysts consider CSR performance when they assess firms’ disclosures of actual and forecasted earnings.

The authors find that only adverse CSR performance affects investors’ assessments of these disclosures. In contrast, the authors find that both positive and adverse CSR performance affect analysts’ forecast revisions in response to firms’ disclosures. The authors also find that firms with adverse CSR performance exhibit lower disclosure quality and earnings persistence, but do not find that firms with positive CSR performance exhibit higher levels of both measures.

This asymmetric result is consistent with investors’, but not analysts’, assessments of the effect of CSR performance on corporate disclosures. The results are robust to using a three-stage least squares approach to address endogeneity concerns and to a battery of robustness and sensitivity analyses.

Overall, the findings suggest that investors and analysts consider CSR when assessing the information in earnings-related corporate disclosures.

Audrey Hsu, Kevin Koh, Sophia Liu and Yen H. Tong. 2019.  Corporate Social Responsibility and Corporate Disclosures: An Investigation of Investors’ and Analysts’ Perceptions. 
Journal of Business Ethics, 158(2), 507–534.

 

Employee treatment and contracting with bank lenders 
Adopting an instrumental approach for stakeholder management, the authors focus on two primary stakeholder groups (employees and creditors) to investigate the relationship between employee treatment and loan contracts with banks.

The authors find strong evidence that fair employee treatment reduces loan price and limits the use of financial covenants. In addition, the authors document that relationship bank lenders price both the levels and changes in the quality of employee treatment, whereas first-time bank lenders only care about the levels of fair employee treatment.

Taking a contingency perspective, the authors find that industry competition and firm asset intangibility moderate the relationship between good human resource management and bank loan costs. The cost reduction effect of fair employee treatment is stronger for firms operating in a more competitive industry and having higher levels of intangible assets.

Bill Francis, Iftekhar Hasan, Liuling Liu and Haizhi Wang. 2019. Employee Treatment and Contracting with Bank Lenders: An Instrumental Approach for Stakeholder Management. 
Journal of Business Ethics, 158(4), 1029–1046.