ESG: From negative screening to human capital analysis

Abstract

Abstract Purpose – Institutional investors need to move beyond first- and second-generation interpretations of Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI) (based on negative filters), and also beyond third and fourth generations (based on positive and integrated filters), which are more sophisticated but still limited, and toward a fifth generation of SRI and CSR. A fifth-generation model systematically incorporates critical intangibles, such as human capital analysis, into the Environmental, Social, and Governance (ESG) investment process. Methodology – This chapter incorporates a literature review and draws on a range of qualitative research and case studies on the current and potential role of regulators to regulate nontraditional measures of value. Findings – The power of institutional investors is currently based on incomplete information from listed companies on how they create value, yet it rests on superior knowledge and insight into the workings of the companies in which they invest, and is only as strong as the quality of the information it uses to make investment decisions on behalf of clients. Research implications – More research on the role of human capital analysis, and its regulatory consequences, is required. Practical implications – Regulators need to act within the context of these fifth-generation models in order to create the environment for more transparent investment recommendations. Originality of chapter – This chapter contributes a qualitative and conceptual perspective to the debate on the role of regulation beyond the global financial crisis.