In recent years the notions of ‘ethical business’ and ‘ethical investment’ have been regularly recurring items on the agenda.
The notion of ethics is often connected with morality and decency. However, it will be useful to make a distinction between these three notions: ethics, morality and decency. Morals and morality are terms used to designate certain qualities of personal actions, practices and convictions. Decency, by contrast, has a more ‘public’ loading, ie, it has to do with commonly shared actions, practices and convictions. Ethics, finally, involves a reflection on particular actions or, to put it more philosophically, it is the theoretical discipline which concerns itself with considering questions of morality or decency.
The interest in sustainable business and investment originated in the years following the publication in 1972 of the report Limits to growth by the Club of Rome, which was followed by the Brundtland report Our common future (1987), named after the former prime minister of Norway. These reports appeared against the backdrop of a number of important processes of social change, such as the gradually retreating government and the changing role of businesses, the increasing size and complexity of national and international enterprises, the greater importance of economic, political and social pressure groups.
Sustainable business not only relates to the question of how enterprises – whether or not listed companies – should treat the environment, but also how they should treat people inside and outside the company and how the profit aims of the business are formulated in relation to the first two aspects.
The University of Groningen identifies four different types of business in this.
q Type 1 places the emphasis on profit maximisation and assumes virtually no social responsibility (the traditional free market philosophy).
q Type 2 has a greater awareness of the interests of society in the proper functioning of the enterprise (the ethics of utility).
q Type 3 is characterised by wide social commitment and sees this more or less as a duty (the ethics of duty).
q Finally, type 4 has moved a very long way towards social objectives and in doing so moves outside its primary field of activity (Christian ethics).
Enterprises are increasingly judged by the outside world on the basis of the ‘three Ps’ (people, planet, profit), a development reflected in the fact that periodic company reports have taken on a broader form than in the past. Additionally, more and more companies and sectors are coming into contact with internal and external codes of conduct (eg, DSI, OECD) aimed at promoting and securing ethically responsible and decent actions by company managements and personnel.
Research in the Netherlands shows that 38% of the 100 largest companies there have a code of conduct. Ethical conduct by the people connected with the enterprise is not only desirable but also necessary, as is a critical attitude to present-day business ethics. In my view there is a need for a continuous process with regard to what is ethically responsible now and in the future.

However, sustainable business is not just a matter for enterprises, but also for consumers and the government. According to the Dutch Consumer Association (Consumentenbond), producers and consumers have a shared interest in sustainable business, particularly now that the distance between the two parties is increasing in a number of cases. Consumers should be given objective information on the conduct of enterprises, the Consumer Association argues. Reporting and the provision of information, including via the internet, can fulfil a useful role here.
The processes of change which were under way at the time of the emergence of sustainable business and investment have taken on larger form and become more complex over the years, and the method of approaching them has become global in nature. Globalisation, the ‘introduction’ of new technology (new economy or renewing economy?), the changes in the supervision and management of listed companies and the changed behaviour of markets with regard to the three Ps, provide the framework within which present-day sustainable business can be placed.
In recent years enterprises have become increasingly international; the global financial and economic system is a network in which everything is intertwined; and people have increasingly begun to act as world citizens, with the result that ecological, economic or social problems have taken on a global character. An awareness has therefore gradually dawned that these large and complex problems demand global solutions.
Several Dutch financial institutions, such as ASN Bank (Algemene Spaarbank voor Nederland), Triodos Bank and SNS Bank have been active for many years in the field of sustainable or ethical investment. Following in the footsteps of their American counterparts in particular, these banks recognised early on the importance and opportunities of this form of investment, their clients primarily being church institutions and foundations with an ideological basis. Under the motto “Improve the world; start with your investment portfolio!”, these parties have been investing ethically for many years, not with undivided success.
The president of the advisory board of the SNS ECO Fund recently added the following to this: “We cannot expect anything from a government which is increasingly playing a back-seat role and is blinded by the ideology of the free market.” In other words, members of the public must take responsibility themselves. Recently a number of institutional players such as pension funds have also joined this specific market as investors
It was in this context that the publication Socially Responsible Investment: A Guide for Pension Funds and Institutional Investors by M Mansley appeared in the autumn of 2000, which looks at this subject in detail and in an interesting way.
What is sustainable investment? Mansley gives us a clear definition: “Investment where social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investment, and the responsible use of rights (such as voting rights) attaching to investments.” He also refers to a number of misunderstandings in relation to ethical (sustainable) investment.
In the UK, the government has therefore introduced the term SRI. Sustainable investment is regularly associated with religious institutions and the adoption of a purely moral approach to investment. This is by no means still the case.
Sustainable investment not only involves the screening of investments on purely ethical criteria, but also has to do with processes in the area of things such as corporate governance. The inclusion of these criteria by institutional investors when evaluating companies is therefore not in conflict with rules governing investment as set out in their articles of association, etc.
It is also by no means the case that sustainable investment is by definition unfavourable for the ultimate investment result, as past experience proves – in the US, for example.
The last accusation which is regularly heard is that there is no consensus concerning the question of what is ethically responsible. According to Mansley this is incorrect. There always have been and always will be a number of basic ideas in relation to this question on which there is a general consensus in society.
According to recent estimates by the the International Labour Organisation (ILO), more than e1,000bn is invested in sustainable enterprises in the US.
The amount invested this way in the Netherlands has increased tenfold since 1987, to e3.25bn. The share of sustainable saving in the total savings of the nation has also increased sharply in percentage terms over the same period, from 0.5% to 1.8%.2

Figure 1 puts sustainable investment in a European perspective. Among other things, the table shows that a striking amount (in millions of euros) is now invested in sustainable investment funds in Italy via the retail segment. The figures exclude the separate accounts maintained by institutional investors and invested in accordance with SRI criteria, but also the stocks which are selected in accordance with SRI criteria but which are not presented to investors as such.
For Mansley, the selection criteria are a point for criticism because, he argues, there is no uniformity as regards the criteria. It is therefore particularly difficult to make a proper comparison of the risk-adjusted returns of the various stocks. In his view, therefore, there is a need for uniformity and standardisation.
To assess the results of an investment fund with a strong focus on sustainability, or a direct investment in sustainable enterprises, it is desirable that there should be a means of comparing the performance with a benchmark. With this in mind, the Domini 400 Social Index was launched in 1990 in the US by Kinder, Lydenberg & Domini, a research bureau that evaluates approximately 650 companies, including all companies in the S&P 500. In the Netherlands a similar index has existed for some time, the ASN Trouw Index, which is published weekly by ASN Bank in conjunction with the Dutch newspaper Trouw. Figure 2 shows the recent performance of this index compared to an adjusted MSCI World equity index.
Institutions have become increasingly aware of their social responsibility in recent years. Roderick Munsters from major Dutch pension fund PGGM recently said: “Once pension funds began investing in companies, they became dependent on the profits of those companies and indirectly shared responsibility for the investments carried out by those companies. This created a social responsibility.”
In recent years the assets managed by institutions of this sort have increased greatly, as have the assets invested in equities, and this has given rise to a concomitant increase in the social responsibility.
In essence there are two business models. In the theory a distinction can be made between the Anglo-Saxon and Rhineland variants. In the English-speaking countries, the notion of the ‘corporate enterprise’, as an extension of the shareholders, has taken root. The appointment and dismissal of supervisory directors is the province of the shareholders. Voting by proxy and/or solicitation of votes are regularly recurring activities in this model.
In practice, maximisation of shareholder value often proves to be nothing more than a form of satisfying needs without considering the consequences for other stakeholders. It can therefore be argued that this interpretation of utility is more aligned with the Anglo-Saxon business model.

The Rhineland model was until recently popular mainly in countries such as Germany and the Netherlands. In this model, the enterprise is an independent umbrella entity whose aim is continuity and within which the interests of the various stakeholders (employees, suppliers, etc) are protected by the management; the interests of shareholders must not be of decisive importance. This model is characterised by the fact that substantial holdings in companies are in the hands of a limited group of shareholders. Research carried out at the KUB revealed that following an inventory of shareholdings in the context of the Dutch Disclosure of Major Holdings in Listed Companies Act (WMZ), 39 of the 177 listed Dutch companies had a major shareholder holding more than 50% of the shares.
By way of comparison, in Germany this was the case for 57% of the 171 largest listed companies outside the financial sector, while for the UK figure was 6% of the 173 major listed companies. In France there is virtually no such thing as a spread of shareholdings, while in Italy the five largest shareholders hold an average of 87% of the shares in each company (compared with 49% in the Netherlands). These percentages will undoubtedly have changed since the study, but the message remains clear.
The Rhineland model aligns much more closely with the Kantian ethics of duty and responsibility for others, but also shares a number of features with the Christian ethics (conscience, responsibility), while the Anglo-Saxon variant is regularly associated with the generally short-term strategy (satisfying needs!) of the shareholder.
Enterprises structured on the basis of the Anglo-Saxon model have as it were moved towards the Rhineland model in the sense that they have developed a greater awareness of the interests of third parties associated with the enterprise. The same can be said for Rhineland enterprises, in the sense that shareholders have been afforded a more important place. The influence of the Anglo-Saxon business model in the Netherlands and Europe has increased over the past 20 years.
Reviewing the entire debate on corporate governance since the middle of the 1980s, we can say that improvements have taken place within the Dutch business climate in terms of openness, transparency for and accountability to shareholders. That the debate is by no means at an end is borne out by the continuing differences in viewpoint of the representatives of the various stakeholders. Corporate governance is evidently an ongoing process.
“Shareholder value as an objective does however marry well with sustainable business, though it requires a long-term view by the enterprise.” These words are by A W Boot in Economie en ethiek (ESB). A little further on Boot argues that: “Shareholder value increasingly depends on the satisfaction and quality of the workforce.” Both quotes hit the nail on the head with regards to the topic of this study. The emergence of sustainable business and the developments in the area of corporate governance are parallel processes which are inextricably linked.
The importance of the Anglo-Saxon business model in the Netherlands and Europe (and also in Japan) has increased enormously over the past 20 years. The central plank of this model is the maximisation of shareholder value.
Given the prevailing definition of the enterprise the Rhineland approach, which long prevailed in continental Europe, was concerned with the various constituent interests of the entire body of stakeholders. The conclusion that this latter model is much more closely attuned to the concept of sustainable business is therefore highly defendable. This is understandable on the European continent if we bear in mind the influence of the Christian (conscience and accountability) and Kantian (duty and responsibility) ethics on people’s thoughts and actions. However, the Anglo-Saxon concept of shareholder value, which is much more closely allied with the ethics of utility, need not be in conflict with the vision of sustainable business provided the long-term view advocated by Boot is clearly taken on board. If this is taken to mean that the interests of all stakeholders, not just of the shareholders, are important with a view to the longer term, then this business concept can also be reconciled with sustainable business. After all, the creation, maintenance and improvement of the internal and external working environment by company managers in line with the three Ps, is ultimately in the interests of all stakeholders. Only then is maximisation of shareholder value equal to optimisation in a social or sustainable sense.
Ultimately, therefore, we are left with the free market model, but with a human face. H W de Jong in Drie benaderingen van ondernemingen (ESB, 1997) points out that the social performance capacity of a company can be measured by the net added value per employee. Research shows that this variable has a higher value at companies which are based on the Rhineland model than at companies adopting the Anglo-Saxon approach; the latter are too concerned with the return on capital employed. Ideally, the developments outlined in the area of sustainable business and corporate governance will help to reduce the differences between the two models in terms of the added value per employee.
This does not however mean that the differences in the definitions of the two models will disappear. The primary objective of the Anglo-Saxon model will simply be pursued in a different way. The enterprise will continue to be a sort of extension of the shareholders (in the future increasingly including employees), but management does now have an implicit awareness of the interests of all stakeholders.
Jacques Grubben is head of research at Insinger de Beaufort in Amsterdam

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