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Unformatted text preview: Finance as a Driver of Corporate Social Responsibility Bert Scholtens ABSTRACT. Finance is grease to the economy. There- fore, we assume that it may affect corporate social responsibility (CSR) and the sustainability of economic development too. This paper discusses the transmission mechanisms between finance and sustainability. We find that there is no simple one-to-one relationship between financial development and sustainable development but there are various often indirect linkages. It appears that most of the literature concentrates on the role of public shareholders when it comes to changing corporate policy and performance in a more sustainable direction. How- ever, this focus neglects the potential impact of the credit channel and private equity on a firms non-financial pol- icies and performance. These very powerful mechanisms can govern business policies and practices. Therefore, there appears to be much more scope for finance to pro- mote socially and environmentally desirable activities and to discourage detrimental activities than has been acknowledged in the academic literature so far. KEY WORDS: banks, corporate social responsibility, development, ethics, financial markets, socially responsi- ble investments, sustainable development JEL Classification: G200, G300, L210, M140, Z130 Introduction Finance is grease to the economy. As such, it can also affect the sustainability and social responsibility of the firm. The World Business Council for Sustainable Development sees the financial industry as a leader with respect to sustainability, and the industry itself claims it makes the world a better place to live in (Schmidheiny and Zorraqun, 1996). Socially responsible investing and shareholder advocacy would promote socially and environmentally desirable activities. Academics are more skeptical. They find that the theoretical arguments as well as the empirical evidence so far are rather poor. Financial performance is only weakly linked to corporate social responsible behavior; many papers even find a negative relation- ship between the two (see Margolis and Walsh, 2001). Furthermore, socially responsible investments do not earn significantly higher returns than investments that do not take account of the firms non-financial behavior (Bello, 2005). In addition, the sheer size of current socially responsible investments seems much too small to have any effect on the cost of capital or the direction of corporations (Heinkel et al., 2001). This has been a reason to qualify the impact of shareowners on firm behavior as rather limited (Haigh and Ha- zelton, 2004; Johnsen, 2003). The enthusiasm by some and the skepticism by others bear resemblance to the debate about the link between finance and economic development. Here too, we have enthusiasts and skepticists. Schumpeter (1912) is a member of the first group. He stressed the essential function of entrepreneurs as innovators, creating new products and new distribution methods...
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