A selection of interesting articles we found recently looking at sustainability and finance.

Securitization and ethics
Securitization is considered to be one of the biggest financial innovations of the last century. It is also regarded as both a catalyst and a solution to the 2008 financial crisis. Once a popular method of financing the mortgage and consumer credit markets, aspects of the global securitization market are now struggling to revive.

In this paper, the author discusses the role that ethics played in securitization prior to the 2008 financial crisis and finds that it is not an obvious story of moral failures, but rather that it lies in more subtle elements of the financial system. The ethics uncertainty role in the securitization story is one of flawed incentives and the shifting of responsibility for handling risk.

The role of securitization and the ethics of risk transfer have rarely been discussed explicitly in the literature. The historical origins of securitization and lessons learned from previous flawed uses of the process are also provided. Also detailed are the various global institutional reform proposals that have taken place. Moving forward, it is crucial to understand the causes, consequences, and ethical implications of securitization in the financial crisis so as to help individuals and managers better assess risk, align incentives, and design appropriate policy responses.

More detail is available at: Buchanan, B.G. 2016. Securitization: A Financing Vehicle for All Seasons?
Journal of Business Ethics, 138(3), 559–577.


What is different about Socially Responsible Funds? A holdings-based analysis
Humphrey, Warren and Boon provide a comprehensive analysis of differences between socially responsible investment (SRI) and conventional funds in terms of manager characteristics, performance and fund styles.

The authors use holdings-based analysis to evaluate fund performance and style, which allows us to perform a more in-depth analysis than the extant literature. The researchers find that SRI managers have longer tenure and are more likely to be a female. However, these differences do not result in any significant difference in the performance of SRI and conventional funds. Further, it is possible to find an SRI fund of any style, although these funds are under-represented in value styles.

Humphrey, J.E., Warren, G.J. & Boon, J. 2016. What is different about Socially Responsible Funds? A holdings-based analysis. 
Journal of Business Ethics, 138(2), 263–277.


ESG integration and investment management 
Van Duuren, Plantinga and Scholtens investigate how conventional asset managers account for environmental, social, and governance (ESG) factors in their investment process. The authors do so on the basis of an international survey among fund managers. The researchers find that many conventional managers integrate responsible investing in their investment process.

Furthermore, van Duuren et al. find that ESG information in particular is being used for red flagging and to manage risk. The researchers find that many conventional fund managers have already adopted features of responsible investing in the investment process. The authors argue and show that ESG investing is highly similar to fundamental investing, and reveal that there is a substantial difference in the ways in which U.S. and European asset managers view ESG.

Read the full text for free in this Open Access article: van Duuren, E., Plantinga, A. & Scholtens, B. 2016. ESG Integration and the Investment Management Process: Fundamental Investing Reinvented.
Journal of Business Ethics, 138(3), 525–533. 


Detecting fraud via anonymous reporting channels
The purpose of this paper is to examine whether anonymous reporting channels (ARCs) are effective in detecting fraud against companies. Fraud, which comprises predominantly asset misappropriation, represents a key operational risk and a major cost to organisations (ACFE, http://www.acfe.com/uploadedFiles/ACFE_Website/Content/rttn/2012-report-to-nations.pdf, 2012; KPMG, http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Fraud-Survey/Documents/fraud-bribery-corruption-survey-2012v2.pdf, 2012).

The fraud triangle (incentives, opportunities and attitudes) provides a framework for developing our understanding of how ARCs can increase detection of fraud. Using publicly listed company survey data collected by KPMG in Australia—where ARCs are not mandated— Johansson and Carey find a positive association between ARCs and reported fraud.

These results indicate that ARCs are effective in detecting fraud. Additional analysis reveals that small firms derive the greatest benefit from adopting ARCs. The authors also find that independent boards do not directly influence the detection of fraud, but companies with independent boards detect more fraud because they implement ARCs.

For full details: Johansson, E. & Carey, P. Detecting Fraud: The Role of the Anonymous Reporting Channel.
Journal of Business Ethics, 139(2), 391–409.


Securities lending activities in mutual funds and ETFs: Ethical considerations
Securities lending has been a lucrative business for mutual funds and exchange-traded funds (ETFs) over the past decade. Unfortunately for investors, the sponsors of these funds have not been very transparent with the details of their securities lending programs, and consequently most investors in these funds are unaware of their exposure to the risks inherent in securities lending.

Interestingly, most funds do not return the full profits from securities lending activities to their investors. In this paper, Dunham et al. examine and discuss the ethical considerations related to the securities lending activities of mutual funds and ETFs and offer a series of best practices that the authors believe will provide better transparency of these activities to fund investors.

Find the full paper at: Dunham, L.M., Jorgensen, R. & Washer, K. Securities Lending Activities in Mutual Funds and ETFs: Ethical Considerations. 
Journal of Business Ethics, 139(1), 21–28.


Financial disclosure and customer satisfaction: Do companies talking the talk actually walk the walk?
Using the emerging technology of large-scale textual analysis, this study examines the use of the term ‘customer satisfaction’ and its variants in the annual reports issued by publicly traded U.S. corporations and filed with the Securities and Exchange Commission as Form 10-K. Balvers, Gaski and McDonald document the frequency of the term’s occurrence in 10-Ks over the 1995–2013 period and the differences in usage across industries.

The authors then relate the term’s usage in 10-Ks to subsequent scores from the American Customer Satisfaction Index (ACSI) to determine whether management’s discussion of customer satisfaction in financial disclosures is credible. The commitment of management to shareholders versus, more broadly, stakeholders is a central question in business ethics, and the integrity of management communication is a fundamental construct in the American Marketing Association’s Statement of Ethics.

Balvers et al. document a complex relation between management’s discussion of customer satisfaction and subsequently reported satisfaction. They find that the general use of customer satisfaction (and similar terms) in 10-K documents is negatively correlated with subsequent ACSI scores. However, for retail firms, when the phrase is located near words indicating measurement or monitoring of the phenomenon, the empirical relation is reversed and becomes positive.

For the full paper, see: Balvers, R.J., Gaski, J.F. & McDonald, B. Financial Disclosure and Customer Satisfaction: Do Companies Talking the Talk Actually Walk the Walk? 
Journal of Business Ethics, 139(1), 29–45.


Collectivism and corruption in commercial loan production: How to break the curse?
Recent research suggests that collectivism breeds corruption in bank lending. This finding, together with the stickiness of culture, poses a direct challenge to economic growth in collectivist societies. In this paper, El Ghoul and team address this grim outlook by examining the types of firms that are susceptible to the detrimental effect of collectivism on lending integrity and the formal institutions that can help alleviate such effect.

The authors find that the adverse effect of collectivism on bank corruption is more severe in small and medium-sized firms, privately owned firms, and non-exporting firms, while it is considerably weaker in countries with more effective private monitoring, a higher (lower) fraction of foreign-owned (government-owned) banks, a more competitive banking sector, better information sharing, and stronger legal and political institutions.

The findings are robust to using alternative measures of collectivism and alternative dependent variables. These results highlight how firm-level characteristics and formal institutions interact with collectivism in affecting firms’ access to bank credit.

Access the article at: El Ghoul, S., Guedhami, O., Kwok, C.C.Y. et al. Collectivism and Corruption in Commercial Loan Production: How to Break the Curse? 
Journal of Business Ethics, 139(2), 225–250.