Construction companies that fail to respond to the challenge could be cutting themselves off from much-needed capital and customer goodwill. Already, companies can find themselves demonised as despoilers of the environment and abusers of human rights, as Balfour Beatty found when activists targeted it for its involvement in the Ilisu Dam in Turkey.
On the other hand, the benefits of embracing SRI go beyond impressing City analysts. Companies that address issues flagged up by SRI – as have Carillion and Countryside Properties – report improved customer relations, satisfied workforces, and a positive contribution to the bottom line.
"There's no doubt that SRI is becoming increasingly high profile," says Ray Johnston, company secretary of Morgan Sindall. The company is one of only nine in the industry selected for inclusion in the FTSE4Good UK index, an initiative that helps investors select ethical stocks. "If you run your business in a socially responsible way, that should enhance profitability," says Johnson.
78% of fund managers consider ethics
More and more City institutions are investing ethically and setting up SRI-compliant funds, as members of the public are no longer prepared to let their retirement nest-egg bolster companies that make arms, poison rivers, or carry out unnecessary tests on animals. In addition, institutions would rather not be on the receiving end of the PR fall-out when direct action protesters target offending companies.
Sarah Durham, a construction analyst at Jupiter Asset Management, which has a total of £11bn under management, is following the SRI trend and its impact on the industry. "Seventy-eight per cent of fund managers say environmental and social factors affect their investment decisions. That's why its important for the construction industry to show and communicate what they are doing environmentally," she says.
The City institutions taking on SRI exercise their conscience in two ways: they make investment decisions on ethical as well as financial grounds, and use shareholder power to influence companies' behaviour. In 1996, the volume of investment funds going into ethically "screened" investment opportunities was £1bn. Last year, the figure had risen to £4bn and it is still moving up.
The most powerful tool in the socially responsible investor's arsenal is the FTSE4Good UK index, a list of firms in the FTSE All-Share index with the best policies for environmental sustainability, stakeholder relations and human rights.
As funds increasingly choose to invest ethically, it's the FTSE4Good companies they are turning to. And this is where the construction industry – already given a rough ride in the City – stands to lose out. With only nine construction companies making the grade, the sector would have to quadruple its presence on the index to achieve average representation: construction firms make up 1.8% of the FTSE All-Share index but only 0.5% of FTSE4Good.
If this doesn't change, the industry could be slowly starved of funds. "Whenever a company is on an index, it tends to attract more investors," says Peter de Graaf, managing director of FTSE Europe. He explains that tracker funds, an increasingly popular investment tool, buy all the companies in a particular index. Fund manager Close Fund Management has a tracker fund for FTSE4Good UK 50, and Direct Line opened one earlier this month that is available to ordinary private investors as well as institutional players.
So how can construction companies ensure that they meet the FTSE4Good criteria? De Graaf says the obvious first step is to find out exactly what requirements they will have to meet: "They need to come to us and find out what the criteria are – they're very transparent. Then they have to make sure they have the right policies in place."
If you run your business in a socially responsible way, that should enhance profitabilty
Ray Johnston, company secretary, Morgan Sindall
FTSE has hired research organisation EIRIS to determine which companies make the grade. According to Stephen Hine, head of international relations: "Lots of construction companies are kept out of the index because they don't meet FTSE's requirements on environmental reporting and management." He adds that a few companies are excluded because they operate in countries with poor human rights records without having a sufficiently robust human rights policy.
The Balfour story
Balfour Beatty's recent experiences illustrate how business strategy can no longer be divorced from ethical considerations. Campaigners including Friends of the Earth alleged that the Ilisu Dam in Turkey would wreck the local environment and displace thousands of families from Turkey's persecuted Kurdish minority. A shareholder resolution at the annual general meeting last May called for withdrawal from the project; more than 40% of institutional investors refused to back Balfour management when the issue came to a vote. The firm cut its losses and withdrew from the project in November after extensive negative publicity.
"The sector as a whole has historically not been as good as it could be," says Jupiter's Durham, part of a four-strong team researching companies' environmental credentials. She highlights the issue of environmental reporting, in which she says she would only give construction a mark of "five or six out of 10". However, on a more positive note, she adds: "The industry is improving at a great rate, so the mark will go up to seven or eight in the next 12 or 18 months".
Durham stresses that the industry should not simply see SRI as a slap on the wrist from the do-gooders: it also represents a business opportunity. "I've talked to several companies who say that having superior social and environmental standards helps them beat their competition and win contracts," she says. They include FTSE4Good member Countryside Properties. It secured its place partly thanks to a social and environmental report it issued in January. "Countryside is branding itself as a sustainable housebuilder," says Durham.
Stephen Brazier, of Bovis Homes, another member, emphasises the importance of commitment to social responsibility among senior management. He says: "We're very conscious of our environmental responsibility at board level." The potential benefits of FTSE4Good membership include an enhanced share price and better access to capital, not to mention good PR. "A lot of social and environmental issues are in the financial interests of our shareholders," he says.
De Graaf cautions that companies on the index cannot rest on their laurels. He says: "FTSE4Good is a moving standard. We want to move the criteria up so that companies in the index have to improve to keep up." He says three companies left the index after this month's semi-annual review, and warns: "As soon as we crank up the criteria, more companies will drop out." But this is not a prospect that worries Noel Morrin, international environment director of RMC. "I'm all for ratcheting up FTSE4Good standards provided it's done in a transparent way," he says.
As more and more funds wake up to SRI, it is no longer a question of whether construction companies can afford to have an excellent ethical record – the question is whether they can afford not to. "The construction industry could play a big role in sustainable development," says Hannah Griffiths, a spokesperson for Friends of the Earth. "There's massive potential for these companies to do good if they take off their dinosaur costumes."
For more information on the FTSE4Good index, including the criteria firms must meet to be included in the index, log on to www.ftse4good.com.
But the ethical revolution is a two-way – advocates of social responsibility say that not only is it worthwhile in itself, it also improves a company's bottom line.
In the past, consumers investing in pension funds and equity-based savings plans had no way of knowing where their money was going.
Construction firms on the FTSE4Good
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