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What matters for socially responsibleinvestment (SRI) in the naturalresources sectors? SRI mutual fundsand forestry in North AmericaWilliam Nikolakis a , David H. Cohen b & Harry W. Nelson ba Faculty of Forestry, The University of British Columbia,2653-2424 Main Mall, Vancouver, BC, Canada, V6T 1Z4b Faculty of Forestry, The University of British Columbia, 2424Main Mall, Vancouver, BC, Canada

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To cite this article: William Nikolakis, David H. Cohen & Harry W. Nelson (2012): Whatmatters for socially responsible investment (SRI) in the natural resources sectors? SRImutual funds and forestry in North America, Journal of Sustainable Finance & Investment,DOI:10.1080/20430795.2012.690724

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What matters for socially responsible investment (SRI) in the naturalresources sectors? SRI mutual funds and forestry in North America

William Nikolakisa∗, David H. Cohenb and Harry W. Nelsonb

aFaculty of Forestry, The University of British Columbia, 2653-2424 Main Mall, Vancouver,BC, Canada V6T 1Z4; bFaculty of Forestry, The University of British Columbia, 2424 Main Mall,

Vancouver, BC, Canada

(Received 7 March 2012; final version received 1 May 2012)

Socially responsible investment mutual funds have played an active role in encouragingsustainability in the natural resources sectors, particularly in North America’s forest industrywhich tends to be reactive in adopting sustainable practices. A survey of sociallyresponsible investment mutual funds in Canada and the US was first undertaken in 2006and then replicated in 2010–11 to understand the implications of this growing investmentpractice on the natural resources sector, with a focus on forestry. While we did not expect tofind a convergence in environmental, social or governance criteria among funds, this studyfound that environmental criteria are most important to respondents in evaluating naturalresource stocks, and that this is stable over time and consistent according to fund size.Governance criteria became prominent in 2010–11, perhaps a result of the Global FinancialCrisis. These results build on literature examining the investment evaluation process forsocially responsible mutual funds. What the findings highlight is that evaluation criteria aredynamic, responding to changing attitudes and firms should consider this in developing theirsustainability agenda. Some socially responsible mutual funds have played a unique role inthe forest sector, working collectively with Non-Government Organisations and civil actorsto influence forest companies to improve sustainability, and have divested shares in forestcompanies that do not comply with their demands. Our results improve understanding forwhat is important to socially responsible mutual funds in evaluating the forest sector. Thestudy shows a decline in importance for forest certification over the period and that theForest Stewardship Council scheme is viewed as most credible by respondents. However,poor financial returns in the forest sector may constrain further attention from sociallyresponsible mutual funds.

Keywords: socially responsible investment; mutual funds; shareholder activism; sustainabledevelopment; corporate responsibility

1. Introduction

The purpose of this study was to build understanding to the perceptions and attitudes of sociallyresponsible investment mutual fund managers regarding North America’s natural resource sector.We focus on the forest sector, as forests are unique in that they are renewable and hold an impor-tant place in the minds of the public (Sharma and Henriques 2005). Stakeholders have played animportant role in driving sustainability in forest sector companies, namely around introducing

ISSN 2043-0795 print/ISSN 2043-0809 online

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∗Corresponding author. Email: William.Nikolakis@ubc.ca

Journal of Sustainable Finance & InvestmentiFirst article 2012, 1–16

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forest certification in the early 1990s with a focus on how forests are managed. Increasingly, thesustainability dialogue in the forest sector is moving beyond forest stewardship to broaderenvironmental stewardship, involving topics such as impact on greenhouse gas emissions andcontribution to mitigation, as well as social issues – though there are concerns that forest com-panies have not gone far enough in meeting stakeholder expectations (Sharma and Henriques2005). Some socially responsible investment funds have been active in lobbying for change inforest sector companies, but we do not know if there are uniform or converging expectationsof the sector, or what factors are important to socially responsible investment funds and, onbalance, whether or not forestry is seen as sustainable (based on current practices) in thebroader context against other sectors. The results from this work will contribute to literature onwhat factors are important to socially responsible mutual funds in evaluating the forest sector.

On reviewing scholarly literature there is surprisingly little on how the natural resource sectors(forestry, mining and energy) are treated in the socially responsible investment evaluation process.The findings from this study improve understanding on what is important to socially responsiblemutual funds in evaluating natural resources stock and whether this changes over time. Informedby the results from surveys with representatives from socially responsible investment funds in2006 and then replicated in 2010–11, this work aims to: (i) clarify which ethical or environ-mental, social and governance (ESG) criteria are most important to socially responsible invest-ment mutual funds in their assessment of natural resources firms; (ii) describe how thesecriteria have changed in importance over time; (iii) examine which ESG criteria will becomemore important to socially responsible investment funds in relation to the natural resourcessectors; and (iv) identify perceptions on forest certification, and the sustainability of NorthAmerica’s forest products sector.

1.1. Background

There is no common definition of socially responsible investment, but the Social InvestmentForum (SIF), a leading association in the US, identifies three forms of activity considered partof the mandate for socially responsible investment: (i) incorporating ESG criteria into investmentdecisions; (ii) shareholder advocacy on ESG issues with companies breaching ESG standards;and (iii) investing in community development projects (Social Investment Forum (SIF) 2011).Renneboog, Ter Horst, and Zhang (2008) identify an evolving approach to socially responsibleinvestment evaluation processes, which they categorize into four phases. First to be used bysocially responsible investment funds were negative screens, where ‘sin’ industries are excludedfrom investment (e.g. tobacco, gambling or munitions); the second phase involved the develop-ment of positive screens, where best of class companies within sectors are identified in terms oftheir performance in areas such as water management, climate change and renewable energy; andthe third phase is the evaluation of companies according to in-depth ESG criteria. These criteriago far beyond conventional analysis in its diligence, looking at a company’s performance on arange of non-financial information, such as health and safety, pollution controls and relationswith indigenous peoples. The fourth phase involves moving into an active role; it involves theapplication of ESG criteria combined with a shareholder advocacy programme to help maintainor improve a firms’ ESG performance. This kind of engagement can include shareholder resol-utions and direct contact with company officers through phone calls, emails or face-to-face meet-ings. However, there are weaknesses in the application of ESG criteria, for example, there is nocertainty as to how external stakeholders may influence the nature and extent of these criteria, andthere is no uniform approach to measuring the efficacy of ESG criteria (Cadman 2011a).

Socially responsible investment is viewed as a ‘values’-driven approach compared to conven-tional investment, allowing investors to more closely align their values with the communities in

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which firms operate (Sparkes 2001). There are a multitude of drivers in the growth of sociallyresponsible investment across North America. These include recent corporate scandals whichmean investors want more in-depth information on firm performance (Martin 2009); a publicexpectation of higher corporate social responsibility (CSR) (Petersen and Vredenburg 2009);heightened environmental and social values, as well as evidence that socially responsible invest-ment funds provide competitive financial returns (Schwartz 2003); and, a trend of ‘ethical consu-merism’ where people are willing to pay premiums for products consistent with their values(Renneboog, Ter Horst, and Zhang 2008). Benson and Humphrey (2008) confirm this lastpoint by finding that socially responsible investment fund flows are not as sensitive to fund per-formance as conventional funds, suggesting socially responsible investors are more values driventhan conventional investors.

Sparkes (2001) argues that socially responsible investment acts as a counterbalance to thelimited liability protection afforded to corporations, by allowing individuals collectively as inves-tors to influence corporate policies in ways consistent with their personal values. As well, throughconsidering broader non-financial factors in investment decisions, socially responsible investmentis claimed to allow institutional investors a better opportunity to meet their fiduciary duty to theirclients by undertaking rigorous assessment of ESG-related risk which can affect a company’sbottom line, but may not be flagged in conventional analysis (Sethi 2005).

Socially responsible investment is growing across North America. In the US in 2007, 11% ofall funds under professional management ($2.7 trillion USD) were invested using socially respon-sible investment screening (Social Investment Forum (SIF) 2009). This figure increased to $3.7trillion USD in 2011 or $1 in $8 of all funds under professional management (Social InvestmentForum (SIF) 2011). In Canada, assets held in socially responsible investment have increased sig-nificantly, from $65.4 billion in 2004, to $530.9 billion in 2010 (Social Investment Organization(SIO) 2011). Socially responsible investment mutual funds have grown from $171.7 billionacross 173 fund products in 2007 (Social Investment Forum (SIF) 2007), to 250 fund productswith assets of $316.1 billion in 2010 (Social Investment Forum (SIF) 2011). In Canada, sociallyresponsible investment mutual funds were valued at $4.4 billion in 2006 (Social InvestmentOrganization (SIO) 2007) and grew to $12.4 billion in 2010 (Social Investment Organization(SIO) 2011). The two key differences between US and Canadian socially responsible investmentmutual funds are that Canadian equity markets are smaller and weighted heavily to mining andenergy stocks. An outcome of this is that socially responsible investment evaluation in Canadais focused on a best in class approach and resource stocks are not precluded (Carlson 2007).

The growth of socially responsible investment has and may continue to have important impli-cations for North America’s natural resources sector, demanding different ESG standards than thatexpected by lawmakers and shareholders. But there remain questions about the overall credibility ofsocially responsible investment (Laufer 2003; Schepers and Sethi 2003). This is largely because nocommon standards have emerged to evaluate socially responsible investment, nor are ESG consider-ations easily quantified or well understood (Schwartz 2003; Sethi 2005; de Colle and York 2008;Richardson 2009). The values underlying socially responsible investment funds have had a signifi-cant influence on the high degree of environmental scrutiny received by the North American forestproducts sector over the past two decades. These values are likely to continue to guide how sustain-ability is defined, and how forestry practices and their products are perceived.

2. The impact of socially responsible investment on natural resources companies: focuson North America’s forest sector

Forest companies in North America have been the centre of considerable controversy as theiractivities conflict with the forest values of environmentalists and First Nations (Cashore et al.

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2001). Under a neo-classical approach the firm only has duties to maximize value to its share-holders without violating laws (Friedman 1962). However, increasingly the public and financialinstitutions have a higher expectation of firms, particularly those firms using publicly ownedresources like forests, to meet a sustainability agenda. Being viewed as ‘sustainable’ or sociallyresponsible can reduce reputational risk which can improve access to natural resources (Richard-son 2009). For the forest sector, Li and Toppinen (2011) argue that sustainability should be centralto strategy formulation to maintain social legitimacy and be responsive to stakeholder needs –thereby maximizing their financial viability over the long term.

Non-Government Organisations and socially responsible investment funds have often workedcollectively to pressure forest product firms to improve their environmental and social perform-ance. For example, when Home Depot announced that its timber suppliers would require ForestStewardship Council (FSC) certification, companies rushed to adopt the standard (Cashore, Auld,and Newsom 2003). Klooster (2005) defines the growth of certification as a ‘retailer imposed dis-cipline’ (414). Socially responsible investment funds, such as Domini Social Investments, haveplayed a key role in re-shaping the rules of the game for the forest sector, influencing HomeDepot’s decision to phase out the sale of old growth wood through its stores (Guay, Doh, andSinclair 2004). It is important to note that on examining Home Depot’s website their policystates that the company started giving preference to FSC certified wood products in 1999, butit also purchases wood from certified and well managed forests wherever feasible, of which94% comes from North America (Home Depot 2012). Hence, while FSC is preferred, timberis also likely to come from other certification schemes.

Socially responsible investment can also influence companies by: (i) reducing the availabilityof capital for firms excluded by socially responsible investment, which can increase the firmscosts of capital and potentially affect their competitiveness, and (ii) using shareholder advocacy,in which the socially responsible investment funds can influence corporate policies throughformal shareholder mechanisms, such as resolutions and proxy voting, and informal processes,such as meetings and phone calls (Haigh and Hazelton 2004). Typically, socially responsibleinvestment funds are constrained by their small size in enacting these strategies, but to overcomethis, activities have often been coordinated with Non-Government Organisations and civil actors,with positive effect (Guay, Doh, and Sinclair 2004).

From a stakeholder perspective, socially responsible investment funds are but one of a mul-titude of actors that work collectively to improve sustainability in the forest sector. Sharma andHenriques (2005) highlight that while Canadian forest companies have voluntarily pursued pol-lution and waste control because of their effect on the bottom line; they have only pursued themore complex and costly practices of eco-design and environmental stewardship (such as certi-fication) under pressure from ecological and social stakeholders, and in some cases economic sta-keholders. The unique position of socially responsible investment funds is that they straddle theposition of economic, social and ecological stakeholder in driving sustainability and may be ableto exert more influence through formal shareholder mechanisms, giving them more legitimacyunder a neo-classical view of the firm.

Socially responsible investment funds have played an active role in enhancing sustainabilityin the natural resource sector – leveraging their role as a shareholder to effect change in com-pany’s policies and practices. Calvert Investments, one of the largest socially responsible invest-ment funds in North America, has been pressing firms in the extractive industries to embracestandards such as Free Prior and Informed Consent in negotiations with indigenous peoples,which they argue is particularly important in Canada’s Boreal Forest (Calvert Investments2011). Alongside Non-Government Organisations and other socially responsible investmentfunds they are working with First Nations and forestry companies on the Canadian Boreal Initiat-ive (CBI). The CBI seeks to promote conservation in the Boreal Forest, and includes socially

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responsible investment mutual funds such as Calvert, Domini Social Investments from theUS, and Northwest Ethical Investments and Desjardins Funds from Canada (Canadian BorealInitiative 2011).

If firms do not respond to the demands of socially responsible investment funds to improvetheir ESG standards, they may be divested. In 2000, Ethical Funds Inc. (now part of NorthwestEthical Investments) divested $1.5 million dollars in West Fraser Timber shares when after dia-logue the company ignored a moratorium to log in British Columbia’s Great Bear Rainforest(Social Investment 2000). Later on, West Fraser relinquished its cutting rights in the region. In2009, Northwest Ethical Investments divested shares of forestry company AbitibiBowater,because of tensions with the Grassy Narrows First Nation (Northwest and Ethical Investments(NEI Investments) 2009). Calvert engaged Weyerhaeuser, one of the largest forestry businessesin the world, around violations of indigenous peoples rights in Ontario. Calvert first lodged share-holder resolutions in 2008 because of concerns around the company’s influence on treaty nego-tiations between the Province of Ontario and Grassy Narrows First Nation, as well as the FirstNations opposition to logging in their traditional territory. This led to Weyerhaeuser’s removalfrom a Calvert Social Index and eventually to divestment (Calvert Investments). Despite this,Weyerhaeuser was named to the Dow Jones Sustainability World Index in 2011, and has beenon the North American index since its inception in 2005 (Weyerhaeuser 2011). This exampleillustrates that socially responsible investment is indeed heterogeneous with no uniform standardson what constitutes good practice.

3. How natural resource companies have responded to demands for improvedsustainability: the experience of North America’s forest sector

Natural resource companies have responded to demands for improved sustainability primarily intwo ways: (i) participating in certification schemes, thereby obtaining an independent seal ofapproval for their activities; and (ii) there have been increases in firms preparing corporate respon-sibility reports on a range of ESG measures (Maclean and Rebernak 2007).

3.1. Certification

In response to sustainability concerns there has been immense growth in the voluntary certifica-tion of forestry activity, to further the aspiration of ‘sustainable forest management’ (Rametsteinerand Simula 2003). While certification standards have emerged in a variety of sectors, certificationis most highly advanced in the forest sector (Auld, Gulbrandsen, and McDermott 2008). Inmining there are voluntary codes and guidelines such as the International Council on Mining& Metals (ICMM) Sustainable Development principles, but there are no uniform standards orglobal governance arrangements (Jenkins and Yakovoleva 2006). Forest certification typicallycreates standards on environmental and social performance, with third parties auditing forest com-panies to ensure compliance in areas such as forest harvesting operations, community consul-tation, biological outcomes and labour standards (Auld, Gulbrandsen, and McDermott 2008).Humphreys’ (2006) describes the emergence of forest certification after failed efforts todevelop an international forest convention at the 1992 Rio Earth Summit. He describes thatadvancing forest governance through prescriptive and uniform standards in the marketplacebecame a more expedient approach than attempts to get national governments to implement sus-tainable forest management programmes. Auld, Gulbrandsen, and McDermott (2008) explain thatthe FSC was founded in 1993 by various Non-Government Organisations and civil actors with theaim of encouraging sustainable forest management through more ‘environmentally appropriate’practices at a global level. In response, forest producers sought to create their own certification

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standards. In the US, the Sustainable Forestry Initiative (SFI) was developed (which also appliesin Canada), and in Canada the Canadian Standards Association (CSA) adopted Sustainable ForestManagement principles. Globally, the Program for the Endorsement of Forest Certification(PEFC) has developed as a competitor to FSC, and endorses both the SFI and CSA (Auld, Gul-brandsen, and McDermott 2008).

PEFC is the largest certification system across the globe with 238 million hectares of forestand 8,672 companies certified under this system (Program for the Endorsement of Forest Certi-fication (PEFC)). In Canada alone, the amount of forest certified under at least one of the schemeshas increased from 400,000 hectares in 1999, to some 151 million hectares in 2011 – with 53million hectares under SFI; 41 million hectares under FSC; and 63 million under CSA (Certifica-tion Canada, 2012). There has been competition between the certification schemes over morallegitimacy, with some trading arrangements and procurement policies allowing only FSC produ-cers access, including the Green Building Certification Institute and its Leadership in Energy andEnvironmental Design (LEED) program (Schepers 2009). It is argued that FSC has gained morallegitimacy over other schemes because of their stakeholder engagement, including indigenousinvolvement, as well as the FSC’s intensity of monitoring (Leigh Taylor 2005; Schepers 2009).Humphreys’ (2006) views the demand for FSC as having an upward pull on forest governance,enhancing the rigour of overall standards. Bouslah et al. (2010) argue that industry led schemeslike CSA and SFI are penalized by financial markets, while FSC is not disadvantaged because it isNon-Government Organisation-led, hence it is seen as more credible in the marketplace and hasbroader market access. However, there remains little understanding on the certification standardspreferred by investors, like the socially responsible mutual funds.

3.2. Corporate responsibility reporting

Public perception is important for the image of companies, particularly for firms that are depen-dent on social license to access publicly owned resources (Jenkins and Yakovoleva 2006).Increasingly, firms will prepare corporate responsibility reports for social and environmental dis-closure, to manage ‘reputational risk’. The number of firms producing corporate responsibilityreports has increased significantly over the last decade, and these reports are now produced byall of the world’s largest firms, particularly in the mining, energy and forest sectors (KPMG2011). However, the kind of information presented is not uniform, with some firms followinga Global Reporting Initiative framework and others not (Jenkins and Yakovoleva 2006;Maclean and Rebernak 2007). While US and Canadian firms were seen to be lagging behindEuropean firms in corporate responsibility reporting, the Forestry, Pulp and Paper Sector wasconsidered one of the ‘leading the pack’ sectors (KPMG 2011). Corporate responsibilityreports, along with others sources of information (e.g. Non-Government Organisation publi-cations) are typically used by socially responsible investment funds in their investment analysis(Nikolakis et al. 2012), and are a legitimizing activity for forest companies (Li and Toppinen2011).

The kinds of issues covered in corporate responsibility reports for global forest companiesfrom 2000 to 2005 included sustainable forestry, economic issues (such as efficiency, competi-tiveness and job creation), human resources, certification, health and safety, accountability,employment and governance (Vidal and Kozak 2008). There are more categories, and it is impor-tant to note that climate change and water issues are not mentioned frequently during the periodsof analysis (with a decline in ‘water’ in 2005), and indigenous communities were virtually notmentioned at all. From their analysis, Vidal and Kozak (2008) identify a more holistic perspectiveof sustainability in the sector, and social factors are increasingly considered, though the sectortends to be reactive in its approach to sustainability.

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4. Research method

To address the research aims the researchers had to delve more deeply than literature, as infor-mation on perceptions of the natural resources sectors is not publicly available and ESG criteriaare often proprietary. Access to respondents is difficult as fund managers have considerable timeconstraints and are increasingly inundated with surveys on sustainability (Wallace 2011). A tele-phone survey was seen as most efficient to address the objectives. Semi-structured interviewswere used with anonymity offered to respondents to obtain rich data on their perceptions and atti-tudes to the natural resource sectors. Personal contact can facilitate the trust necessary for sharingsensitive information between interviewee and the researcher (Weiss 1995). A survey was firstconducted in the US and Canada 2006, and then replicated again in 2010–11. The sample wasdrawn from the member list of the SIF in the US and Social Investment Organisation inCanada, which are leading associations for the social investment community.

The survey instrument comprised open-ended and -closed responses and focused on evalu-ation criteria related to the natural resources sector, as well as Likert scales for perceptions ofthe forest sector. Data were entered into a database and the completed survey was sent back torespondents for verification. The response rate was high: in 2011, 67 socially responsiblemutual funds were contacted resulting in 31 respondents for a response rate of 46%, while in2006, 73 socially responsible mutual funds were contacted resulting in 34 respondents, a responserate of 46.5%.

Qualitative data were analysed using NVIVO and involved content analysis. Codes were devel-oped to create descriptive statistics in the form of proportions, which were obtained by dividing thefrequency (i.e. how many respondents mentioned a particular code) by the sample size (2006 n ¼34 2010/11 n ¼ 31). For these questions, the missing values (answers) are not indicated. Forexample, if 10 persons had mentioned ‘certification’ as a criterion for socially responsible invest-ment, the analysis would divide 10 by 31 respondents and report a proportion of 32%.

Likert scales asked respondents to provide levels of agreement or disagreement with a numberof statements on a scale ranging from 1 (strongly disagree) to 5 (strongly agree). Ninety-five percent confidence intervals were computed for the means of each statement to determine if therewere significant differences between respondents from the US and Canada.

5. Results

In 2006, 34 firms completed the study with an investment value of $36.5 billion, representing20.75% of the North America’s socially responsible investment mutual funds (Social InvestmentOrganization (SIO) 2007; Social Investment Forum (SIF) 2007). While the number of respon-dents decreased in 2010–11 to 31 firms, the value of investment increased to $41.2 billion, repre-senting 12.5% of North America’s socially responsible mutual funds (Social Investment Forum(SIF) 2011; Social Investment Organization (SIO) 2011). Nineteen firms responded to bothsurveys. There had been consolidation and new entrants into the socially responsible investmentsector. The mean fund value of respondents in 2006 was just over $1 billion, increasing to $1.3 in2010–11, suggesting growth in the size of funds. Table 1 summarizes basic respondent infor-mation for both time periods. There were changes from 2006 to 2010–11 in terms of the locationof respondents, with the proportion of Canadian respondents increasing. The greater responsefrom Canadian fund managers may be due to the milder impact of the Global Financial Crisisof 2008 in Canada relative to the United States.

Results are presented as (i) the proportion of the number of firms, and (ii) the proportion ofcapital invested. This is because there are large differences in the value of funds invested, exem-plified by the high standard deviation of investment size between respondents (see Table 1). There

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can be substantive differences when comparing the results, such as in Figure 1 which uses pro-portion of respondents, and Figure 2 which shows proportion of capital invested.

In 2006, 31 of the 34 respondents invested in the natural resource sector and these investmentsrepresented 8.3% of the $36.5 billion invested by responding firms. The proportion of a firm’stotal funds invested in the natural resource sector varied from 0 to 39%. Mining stocks madeup the majority of these investments. In 2006, 94% of respondents were willing to invest inthe forest sector, but only 0.2% of their funds were invested there. This willingness declined to81% of respondents in 2011. However, those firms interested in the forest sector tended to bethose with larger investments representing 94% of the total capital invested by respondentswilling to invest in the sector.

Figure 1. Most important ESG criteria based on proportion of firms.

Figure 2. Most important ethical criteria based on capital ($) invested.

Table 1. Basic respondent information.

2006 millions (US$) 2010–11 millions (US$)

Mean 1072 1323Median 343 350St. deviation 1590 2282Max 7029 11,000Min 6 3Total of investments 36,453 41,025Total of respondents 34 31Location of firms USA – 71% USA – 58%

Canada – 29% Canada – 42%

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5.1. Most important ESG criteria

In 2006, environmental criteria were identified by 77% of respondents as most important in eval-uating natural resources stocks. This declined slightly in 2010–11 when it was noted by 70% ofthe respondents (see Figure 1). Figure 1 also highlights that governance criteria increased inimportance over time, mentioned by 15% in 2006 to 50% in 2010–11, perhaps a result ofthe Global Financial Crisis bringing more attention to this area. Risk management was mentionedby 22% of respondents in 2010–11; while sustainable forest management was not mentionedthat year, a decrease from 26% in 2006. Certification became less important over the study period.

When the value of assets invested by respondents is considered there are changes in what cri-teria are most important (see Figure 2). In 2006, environmental criteria were most important, butdeclined more sharply in 2010–11 than firm-based results. Governance became more important(almost doubling from 26 to 50%), as with the firm-based results, indicating that its importancegrew among respondents of all sizes. Risk management too increased in significance, as did healthand safety. Like the firm-based results, sustainable forest management was not mentioned by anyparticipants in 2010–11 (a decrease from 35%). Certification decreased but remained relativelystable over the study period. There was an increase in importance for human rights, whichmay have encompassed relations with First Nations in 2010–11.

5.2 Future expectations for ESG criteria

In 2011, respondents identified changes in ESG criteria over the next five years for the naturalresource sector. Some 71% of respondents answered that environmental issues will becomemore important. This was followed by 13% of respondents who only expected a refinement ofexisting criteria. In terms of capital invested, respondents representing 55% of capital investedstated environmental issues will become more important, followed by enhanced disclosure(28%), refinement of existing criteria (17%) and certification (12%). The firms with larger invest-ment funds had broader concerns with recognition of the need for enhanced disclosure.

5.3 What are ‘environmental’ criteria?

Qualitative analysis of the responses provided more detail on what was meant by ‘environment’.Respondents identified environment as water, then climate change, followed by certification andbiodiversity (as seen in Figure 3). There was little difference between what constituted the‘environment’ based on number of respondents and capital invested.

5.4 Investment in the forest sector

It is important to note that financial criteria are critical to assessing investments for respondents. Acompany with high CSR but poor financial performance will not attract investment. In 2006,

Figure 3. Description of environmental criteria comparing number of respondents and capital invested in2010–11.

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respondents were asked if they expected any changes in their level of investment in forest pro-ducts firms in the next three years. Most did not expect any change in investments without finan-cial improvement in this sector (Table 2). In 2011, this sentiment remained relatively stable.

5.5 Certification

We first asked about the credibility of different forest certification systems among respondents,with a response of 1 ¼ strongly disagree, 3 ¼ neutral to 5 ¼ strongly agree.

Respondents did not agree that ‘all certification schemes (e.g. FSC, PEFC, SFI) are equallycredible’, with an average response of 2.2. US respondents were more likely to disagree thatall certification schemes are equally credible, with an average score of 2.05, while Canadianrespondents averaged 2.3. There was agreement (3.8) for the statement that ‘FSC has moremarket acceptance than other schemes’; no respondents disagreed with this statement.

Since forest certification was developed in the 1990s, there has been broad growth in certifi-cation for more sustainable business practices. This has been accompanied by an evolution fromcertifying raw material supply such as the various forest management schemes, to certifyingsupply chains, and to certifying whole organizations. Currently, several sustainability certificationschemes and guidelines for organizations are being developed such as ISO 26000 Guidance onSocial Responsibility (released 1 November 2010) and UL 880 Standard for Sustainability forManufacturing Associations (released December 2011). Respondents were asked if they expectedthird party certification schemes for businesses to gain market acceptance, of which 42% ofrespondents and 49% of capital agreed. When asked about the importance of business certifica-tion, 23% of respondents and 20% of capital saw it as helping with their verification ofinformation.

5.6 Socially responsible investment funds’ perceptions of North America’s forest sector

Respondents were asked to indicate whether they have a good understanding of the forest sector.The average score was 2.8, where 0 ¼ no understanding, 2 ¼ some understanding, 3 ¼ goodunderstanding and 5 ¼ expert understanding. Hence, respondents’ understanding of the sectorwas close to a ‘good understanding’.

Respondents indicated their level of agreement or disagreement with a number of statementsrelating to the North American forest products industry, with 1 ¼ strongly disagree, 3 ¼ neutral,and 5 ¼ strongly agree. Most respondents (average score of 4.0) agreed with the statement that‘The forest product sector fits in your investment universe’. There was stronger agreement amongCanadian respondents (average of 4.4), where the Toronto Stock Exchange is heavily weighted toresources and materials, compared to US respondents (average of 3.7). Respondents were neutral(average 3.0) regarding ‘The forest sector is attractive for investment’ with slightly more favour-able attitudes in the US (3.3) compared to Canada (2.7).

Table 2 Changes in investment in forest products firms in next three years.

Response % Of respondents

No increased investment 48Only if there is financial improvement 24Only if there is financial and environmental improvements 18Only if there is environmental improvements (e.g. FSC) 6Yes we will increase investment 3

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Respondents were somewhat positive that the forest sector would become more profitable asthe global economy recovered with an average of 3.7 for Canadian and US respondents. Theywere also slightly positive (average of 3.4) as to whether the sector would become more profitableonce Payment for Environmental Services became more accepted. US respondents were morepositive (3.6) than Canadian respondents (3.2), which may be due to the greater concentrationof publicly owned forests in Canada where payments would likely accrue to the government.Respondents disagreed (average of 2.1 both in the US and Canada) with the statement that‘There will always be an oversupply of wood’, suggesting there are perceptions of potentialtimber supply constraints in global markets.

Canadian respondents remained neutral (3.2) regarding the statement that ‘Canada’s forestproducts industry is sustainable’, while US respondents indicated mild disagreement with thisstatement (2.5). The result was similar for the same statement about the US forest products indus-try, with US respondents in slight disagreement (2.5) and Canadian respondents almost neutral onwhether the US forest industry is sustainable (2.8). Canadian respondents were slightly moresceptical of the US industry than their own. There was some agreement that the forest industryin North America has become more sustainable over the last 5 years (Figure 4).

While there were slight differences between the perceptions of US and Canadian respondents,there was no discernible variance once 95% confidence intervals were considered, indicating thatthese differences were immaterial.

6. Discussion

The results highlight that almost all respondents invest in the natural resources sector. There wasgeneral agreement that the forest sector is within the respondents’ investment universe; however,there is little investment in the sector because of its poor financial performance. This point high-lights the significance of financial returns to socially responsible investment, as it is part of a com-petitive industry. There is concern that financial imperatives could thwart the potential of sociallyresponsible investment to effect change (Richardson 2009), but some socially responsible invest-ment funds like Calvert Investments and Northwest Ethical Investments have been active in

Figure 4. The forest products industry has become more sustainable in the past five years.

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lobbying for change in the forest sector using formal and informal processes to influence compa-nies ESG performance. Socially responsible investment funds have in the past worked in a coor-dinated way with environmental groups, civil actors and First Nations, with socially responsibleinvestment playing the role of economic stakeholder – working collectively with social and eco-logical stakeholders is one strategy for socially responsible mutual funds to overcome their smallsize and effect change. Socially responsible mutual funds continue to actively work with Non-Government Organisations and First Nations in Canada’s Boreal Forest, and have divestedforest companies with a poor ESG record. But socially responsible investment funds stake inthe forest sector may be reduced as poor financial returns prevent companies from investing.

The financial outlook for the forest sector is not positive, though there were indications offavourable supply conditions for the sector. Canadian respondents were more likely to agreethat the forest sector was part of their investment universe; a result of the prominence of thesector in Canada relative to the US. Given that we know the sector is not excluded from invest-ment by respondents there may be incentives for the sector to improve their ESG performance,which may also lead to reputational benefits (Adam and Shavit 2008). However, we note thatas financial criteria are of utmost importance the sector will attract little attention at present 2

although a positive reputation can secure social licence to operate and gain access to naturalresources, which may support financial outcomes over the long term. The Canadian respondentsagreed that the forest sector has become more sustainable over the last 5 years, while US respon-dents were neutral. The uptake of forest certification in Canada may explain this view.

There appears to be widespread importance on environmental criteria in assessing naturalresource stocks, which is stable over time and for fund size. The reason for this could be thatenvironmental criteria may support fund marketing efforts and be more easily quantified thansocial or governance criteria. Respondents suggested that going forward environmental criteriawill continue to be most important in evaluating natural resource stocks. Respondents describedenvironmental criteria as comprised of water, climate change, certification and biodiversity (inorder of importance). Between 2000 and 2005, global forest companies did not use the termswater or climate change frequently in their corporate responsibility reports, and there was adecline in the use of ‘water’ to 2005 (Vidal and Kozak 2008). Sustainability is cyclical in theforest sectors as companies typically adopt sustainability practices in response to stakeholderdemands, particularly when there are costs associated with such practices (Sharma and Henriques2005). Forest companies have also responded to pressure by socially responsible investmentfunds and Non-Government Organisation’s on their customers to adopt certification, or whatKlooster (2005) calls the ‘retailer imposed discipline’. The ESG criteria of importance for respon-dents in evaluating the natural resources sectors appear to be relatively stable; though there can bechanges, such as the decline in importance of sustainable forest management potentially sub-sumed under certification, which itself declined slightly. This may be due to the fact certificationitself has become an accepted standard and broadly adopted across North America by the forestsector, hence requiring less attention than emerging issues such as water or climate change.

The decline in importance of forest certification is less dramatic when looking at responses interms of capital invested, which suggests that larger funds view certification as more important, orthey have stable criteria on certification that remained unchanged. Importantly, respondents in2010–11 did not see all forest certification schemes as equally credible, and agreed that FSChas more market acceptance than other schemes. These results suggest that FSC has a greaterlegitimacy among respondents in socially responsible mutual funds. In light of the work by Sche-pers (2009), who describes the competition for moral legitimacy between PEFC and FSC overglobal forest governance, FSC appears to be the gold standard for socially responsible mutualfunds in North America and has attained ‘moral legitimacy’ within this community. But as Sche-pers (2009) describes, there are challenges to legitimacy in this competitive sphere, particularly as

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certification schemes establish themselves in the tropics and among small- to medium-sized forestenterprises. The role of these types of forest certification schemes may change if the Europeanacceptance of environmental product declarations spreads to North America (Bowyer et al.2011; O’Connor Lavoie and Mahalle 2011).

The use of third party sustainability certification schemes to provide guidance as to whether anorganization, such as a company, is sustainable received the support of almost half of capitalinvested in the study. The largest number of respondents felt these schemes would support ver-ification of ESG information. The quality of information relied upon by socially responsibleinvestment is seen as fundamental to its legitimacy (Hutton et al. 1998) and these third partyschemes could support the integrity of the socially responsible investment evaluation processthrough verification. At the same time these independent certification schemes may in theorycompete with socially responsible investment by providing signals to individual investors andother mainstream funds around firm sustainability. There is still much uncertainty as towhether these third party schemes will establish themselves in the marketplace.

Socially responsible investment funds are characterized as heterogeneous and we do notexpect a convergence in ESG criteria, or uniform standards on what constitutes best practice inthe natural resources sector from a socially responsible investment perspective. But the impor-tance of understanding ESG criteria is for the insight it provides into how these funds weightthese criteria in their evaluation processes, and to clarify what kinds of issues may trigger share-holder advocacy or lead to divestment. As Cadman (2011b) describes, there is no universalapproach to the development or weighting of these ESG criteria, which are typically conductedin house by each fund, hence he argues for a common approach for socially responsible invest-ment to retain legitimacy. There are examples of divestment in the forest sector in the US andCanada, and these examples have largely been around violations of Indigenous people’s rights,which did not figure as important to respondents or were included under human rights or commu-nity relations in 2010–11.

An important trend we identified in this study is the growth in importance of governance cri-teria in assessing the natural resources sectors, which was consistent across fund size. Governancebecame the second most important criteria for respondents in their evaluation of natural resourcesstocks, identified by 15% of respondents in 2006, to 50% of respondents in 2010–11. This may bein part a result of the Global Financial Crisis in 2008, which imposed a discipline on the financialservices sector to evaluate a broader spectrum of non-financial issues as part of their fiduciary dutyto investors. This crisis and a litany of earlier corporate scandals have been key drivers in thegrowth of socially responsible investment (Martin 2009). Following from this, risk managementtoo has increased in prominence among respondents. What this suggests is that risk mitigation hasbecome a priority for respondents, and firms with effective risk management systems will belooked upon favourably by respondents. Governance and risk management may be surrogatesfor managerial expertise, a requirement in today’s turbulent economic times, and in risk intensivebusinesses like the natural resources sector.

7. Conclusion

Sustainability in the forest sector is shaped by multiple stakeholders and socially responsibleinvestment has played an important role in furthering forest certification in North Americathrough formal and informal mechanisms. Some socially responsible investment funds continueto play an active role in the forest sector, working with Non-Government Organisations and FirstNations groups in Canada’s Boreal Forest. But the forest sector is plagued by financial problemsand this may hamper the level of attention paid to it. Although there is some agreement that theforest sector has become more sustainable, this alone will not attract investment from socially

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responsible mutual funds, which must generate competitive returns to survive. Going forward it islikely that while most socially responsible mutual funds will not invest in the forest sector, therewill be those funds (likely a small number) that see opportunities to actively engage forest com-panies and make competitive financial returns.

The forest sector is viewed as being reactionary in how it adopts sustainability practices(Sharma and Henriques 2005). This was evident in the development of forest certificationwhich required intense stakeholder pressure for its acceptance, in which socially responsibleinvestment funds played various roles including economic stakeholder. It is clear from ourwork that FSC is seen as the most credible certification scheme among respondents. Certificationby itself appears to have become a standard among the forest sector and is receiving less attentionby respondents.

While we do not expect a convergence in criteria in socially responsible investment, which ischaracterized by its heterogeneity (Sandberg et al. 2008), environmental criteria are most impor-tant to respondents in evaluating natural resources stocks, and this is stable over time and fundsize. Our results suggest this is likely to continue into the near future. Environmental criteriamay be important, as they are linked to how the fund is marketed (i.e. a climate change fund)and environmental impacts are more easily quantified compared to social impacts. There are arange of ESG criteria of importance to respondents when evaluating the natural resourcessector, and while these were stable over time there were some dramatic changes with governancecriteria becoming the second most important criteria during the study period. This may be a resultof the Global Financial Crisis imposing an increased discipline on fund managers in their evalu-ation process, evinced by the fact that risk management also increased in significance. What thesetrends highlight is that socially responsible investment funds are dynamic in how they evaluatefirms, and firms must keep abreast of changes to remain ‘best in class’.

Further research could examine the link between ESG criteria of importance to sociallyresponsible mutual funds and the information presented in corporate responsibility reports ofnatural resources companies. Examining the level of socially responsible investment activityin the forest sector may also provide insight to the trade-offs fund managers face in pursuingsustainability and financial returns.

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