Institutional Investors and Corporate Social Responsibility: The Role of Islamic Financial Institutions

Abstract

Institutional investors have emerged as an integral force in the equity market and they are pushing companies to take long-term decisions that account for the welfare of communities- corporate social responsibility in the broader sense-where they operate. One potential motivation is that institutional investors are interested in the long-term cash flows of their investments which are increasingly linked to good CSR performance. Yet, another reason is growing regulatory pressure on investment companies in some countries e.g. UK to take care of the social responsibility record of the companies they invest in. But when it comes to Islamic Financial Institutions (IFIs), social responsibility and ethical investment are embedded in the very soul of this growing financial sector. In this paper we argue that IFIs can play an important role in moulding the behaviour of corporate entities toward greater attention to CSR and ethical decisions by incorporating ethical principles in their portfolio companies.