Promoting Ethical Behaviour in Business and Finance: Drivers, challenges and incentives

1 Introduction Ethics in finance and more generally in business practices is a phenomenon that has 
emerged in the last decade, but that only in recent years has seen a strong development, 
pushed even further by the last environmental catastrophes and especially by the economic 
crises of 2008 that started from the finance sector. As it has been stated in the Sustainable 
Value - EABIS Research Project:
“Business and society face multiple challenges: the immediate financial crisis which 
has triggered a wider economic crisis; and a deeper, longer-term sustainability crisis 
caused by climate change, pollution, resource depletion, burgeoning global population, and 
unsustainable production and consumption. These multiple crises intensify what was already 
an emerging debate about the purpose of business: how, and under what circumstances, 
business needs to internalise the externalised costs of doing business; and whether existing 
methods for calculating the value of a business are any longer fit for purpose”.
Unfortunately, adding an ethic dimension in a business world that has always been 
dominated by dimensions such as competitive pressure, profitability, and economic drivers, 
it is not an easy task. Indeed, extensive research has been done in the last years, trying to 
enlighten the possible correlation between a firm’s ethical conduct and its profitability and 
risk. Many interesting results has been found, however, there is not any substantial evidence 
of any significant impact neither in a negative, nor in a positive way. Notwithstanding these 
(not apparently encouraging) results, the evidence is that there has been a great increase in 
ethical investments at a world wide level, above all in developed economies. However, the 
amount of conventional investments currently exchanges in the stock market is still much 
larger than the amount of ethical funds. This means that there is still a long way to go for the 
ethic philosophy to be completely integrated into everyday business and investing decisions.
This thesis has the aim to analyses the most recent research about ethic business and 
finance in order to provide a comprehensive framework in which to base some 
considerations relative to how to improve the current situation. The second chapter will 
discuss the concept of business ethics, its evolution and how it is impact firms behaviour and 
performance. Furthermore, the emerging need of integrating sustainable criteria in business 
evaluation will be presented. The third chapter will explore the main aspects of ethical 
finance, presenting a comprehensive description and defining the main ethical investing
methods. Subsequently, the market performance of ethical investments will be examined, 
based on a   review of the main literature.  The forth chapter will examine the development 
of sustainable finance firstly from an historical point of view and secondly  analysing the 
growth trend that Sustainable Responsible Investments has enjoined during the past years in 
developed economies (i.e. in the Unites States and in the European Union). This fifth chapter 
will present an overview of some among the most important drivers that lead ethical 
development as well as the major challenges that ethical business and finance is facing in 
order to progress from a secondary segment to a mainstream position. Moreover there will 
be presented a critical review of possible incentives and initiatives that might help the 
process of making ethical practices to become mainstream.
2 Business Ethics This chapter will debate the concept of business ethics, its evolution during the years 
and how it is applied to companies conduct. In this regards, there will be describe some main 
aspects such as Corporate Governance Responsibility (CSR) and Environmental Social 
Governance (ESG) factors. It will be further discussed how these aspects may impact a 
firm’s performance and the reasons why they should be integrated into everyday business 
practices and financial investment decisions.
1.1 Business Ethics framework Business ethics is a practice of morals and concrete shared principles applied in all 
aspects of business conduct, pertaining to individuals working in the firm as well as the 
company as a whole. Cohen, (2010), described it as: “Business ethics is the application of 
values - honesty, integrity and fairness, for example - to corporate behaviour. It's about 
'how' a company does business rather than 'what' it does. It applies to any or all aspects of 
commercial conduct - from boardroom strategies to sales and marketing techniques, and 
from accounting practices to the treatment of suppliers and customers.” 
Ethical norms evolves over time, according with ever changing belief and values, and 
many behaviours that might have been generally accepted in the past might become no 
longer accepted. For instance, the issue of obesity and healthy eating has become important 
in the corporate responsibility agenda in the developed countries in the last few years, 
whereas it was not considered as a social problem until the last decade or so, and it is still not 
considered as a major issue in underdeveloped economies. The same happened for other 
issues such as climate change, renewable energy and water scarcity. Therefore, it is 
reasonable that business ethics and the relative practices evolves accordingly (Boswell, 
1997). 
The term business ethics became firstly known in the United States in the early 1970s 
(George, 1987). Major corporations and academia paid an increasing attention to this field, 
especially during the 1980s and 1990s, conceivably because companies were trying to 
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distance themselves from the business scandals that arisen in that period about savings and 
loan crisis. Since then, the concept of business ethics has been widely recognized and mostly 
supported above all by international organisations and institutions 1
 as well as an increasing 
coverage and attention in the media 2
. 
Economist Milton Friedman, (1970), sustained that business executives were 
responsible for their action, and that the company itself cannot be considered responsible. In 
this respect, their responsibility should be about: "(...) generally will be to make as much 
money as possible while conforming to their basic rules of the society, both those embodied 
in law and those embodied in ethical custom" . Thus, according to Friedman corporate 
executives, provided that their actions are not illegal, have the only responsibility to 
maximize shareholders’ return. In other words, if a firm's aim is to maximize profit for 
shareholders, then incurring to extra expenses and reducing profits in order to benefit social 
purposes, could be considered a violation of its fiduciary responsibility.
Many decades has passed since Friedman declaration and nowadays the main, mostly 
accepted view supports the employment of ethical values in business behaviour. Ethical 
behaviour is not considered any more necessarily in contrast with economic profits. Instead, 
these two concept ought to coexist: “A sustainable enterprise is one that contributes to 
sustainable development by delivering simultaneously economic, social and environmental 
benefits” (Hart and Milstein, 2003). In fact, the current concept of business ethics reflects 
the interaction of profit-maximizing practices with non-economic issues, called also non-
financial performance. Business ethics practices, thus, requires the commitment of the 
management to non-financial aspects of performance. The use and description of such 
practices might be declared in an organisational code of ethics or conduct. Usually these 
practices are different across companies, sectors and regions, and they can cover many 
different issues.  Ethical concerns take into considerations many aspects of the activities of a 
company, such as the rights and obligations between the firm and its workers (i.e. labour 
conditions), suppliers, customers (i.e. consumer protection), the surrounding area, including 
1
 Many organisations  and institutions world wide are engaged in promoting ethical business concerns, or 
related issues such as ethical investments and so on, launching programmes and studies to improve and 
enhance it at a broader level. In Europe, for example, there is the Eurosif (the European Sustainable Investment 
Forum), which is a pan-European network with the aim of developing sustainability through European financial 
markets. Eurosif launched many different research programmes, such as the Energy Efficiency Report, and 
collaborates for the development of EU policy, as, for instance the Non-Financial Reporting Position Paper. 
Notably, it is just one within many others, such as, to name but a few, the Sustainable Investment Forums 
(SIFs) and the European Business Ethics Network (EBEN). 
2
A search in the Financial Times,Wall Street Journal and the Australian Financial Review revealed a significant 
increase in articles published on the topic since 2006-2007.“Environmental, social and governance” were used 
as key words.
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