Responsible investment terms: what is norms-based screening?

We have previously explored what socially responsible investment (SRI) and environmental, social and governance (ESG) are. But how do investors know if a company is behaving responsibly? Which are the tools to assess a company’s commitment to ethical standards?

This is when norms-based screening comes into force. This term indicates a process through which investors can investigate a company’s policies regarding key societal or environmental issues.

Put simply, in its 2012 European SRI Study, the European Sustainable Investment Forum (Eurosif) describes norms-based screening as the “screening of investments according to their compliance with international standards and norms”.

The norms that are followed to ensure fair and right treatment of workers and of the environment are indicated by authoritative national and international bodies.

An example is the UN Global Compact – a number of business that promote respect for people and the planet.

It says that businesses should ensure that human rights are protected and that they have to make sure that the company is not involved in any abuses. It then states that employers need to guarantee workers’ rights and help tackle forced and child labour. It says a company’s environmental policies should “promote greater environmental responsibility” and that firms should work against all forms of corruption.

The UN issued a further list of Guiding Principles on Business and Human Rights, with the same aims.

There are many other sets of norms. The Organisation for Economic Co-operation and Development (OECD), for instance, published the Guidelines for Multinational Enterprises – a sum of “recommendations addressed by governments to multinational enterprises operating in or from adhering countries. They provide non-binding principles and standards for responsible business conduct in a global context consistent with applicable laws and internationally recognised standards.”

The International Labour Organisation (ILO) released the Tripartite declaration of principles concerning multinational enterprises and social policy to address large companies about duties towards employees, consumers and the environment.

In this way, shareholders can judge, positively or negatively, whether a business is conforming to those rules, which protect vulnerable people, workers and the environment.

It is an effective method to bolster the engagement process between investors and the company and more importantly, is a very good reason for companies to keep on the sustainable path and behave justly.

Further reading:

$13.6tn invested sustainably worldwide, says study

Eurosif study shows marked growth in responsible investment

The Guide to Sustainable Investment 2013

The Guide to Ownership 2013