Socially responsible investing

Socially responsible investing (SRI), or social investment, also known as sustainable, socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by proponents.

Recently, it has also become known as "sustainable investing" or "responsible investing". There is also a subset of SRI known as "impact investing", devoted to the conscious creation of social impact through investment.

In general, socially responsible investors encourage corporate practices that they believe promote environmental stewardship, consumer protection, human rights, and racial or gender diversity. Some SRIs avoid businesses perceived to have negative social effects such as alcohol, tobacco, fast food, gambling, pornography, weapons, contraception/abortifacients/abortion, fossil fuel production or the military.[1] The areas of concern recognized by the SRI practitioners are sometimes summarized under the heading of ESG issues: environment, social justice, and corporate governance.

Socially responsible investing is one of several related concepts and approaches that influence and, in some cases, govern how asset managers invest portfolios.[2] The term "socially responsible investing" sometimes narrowly refers to practices that seek to avoid harm by screening companies included in an investment portfolio.[3] However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy and community investing.[4] According to investor Amy Domini, shareholder advocacy and community investing are pillars of socially responsible investing, while doing only negative screening is inadequate.[5]


The origins of socially responsible investing may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade – buying or selling humans.

One of the most articulate early adopters of SRI was John Wesley (1703–1791), one of the founders of Methodism. Wesley's sermon "The Use of Money" outlined his basic tenets of social investing – i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers. Some of the best-known applications of socially responsible investing were religiously motivated. Investors would avoid “sinful” companies, such as those associated with products such as guns, liquor, and tobacco.

The modern era of socially responsible investing evolved during the political climate of the 1960s. During this time, socially concerned investors increasingly sought to address equality for women, civil rights, and labor issues. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the beginning model for socially responsible investing efforts. King combined ongoing dialog with boycotts and direct action targeting specific corporations. Concerns about the Vietnam War were incorporated by some social investors.[6][7] Many people living during the era remember a picture in June 1972 of a naked nine-year-old girl, Phan Thị Kim Phúc, running towards a photographer screaming, her back burning from the napalm dropped on her village. That photograph channeled outrage against Dow Chemical,[8] the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War.

During the 1950s and 1960s, trade unions deployed multi-employer pension fund monies for targeted investments. For example, the United Mine Workers fund invested in medical facilities, and the International Ladies' Garment Workers' Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects.[9] Labor unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions. In 1978, SRI efforts by pension funds was spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.[10]

SRI had an important role in ending the apartheid government in South Africa. International opposition to apartheid strengthened after the 1960 Sharpeville massacre. In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the Sullivan Principles. However, reports documenting the application of the Sullivan Principles said that US companies were not trying to lessen discrimination in South Africa. Due to these reports and mounting political pressure, cities, states, colleges, faith-based groups and pension funds throughout the US began divesting from companies operating in South Africa. In 1976, the United Nations imposed a mandatory arms embargo against South Africa. From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid. The subsequent negative flow of investment eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone did not bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

The mid and late 1990s saw the rise of SRI's focus on a diverse range of other issues, including tobacco stocks, mutual fund proxy disclosure, and other diverse focuses.

Since the late 1990s, SRI has become increasingly defined as a means to promote environmentally sustainable development.[11] Many investors consider effects of global climate change a significant business and investment risk. CERES was founded in 1989 by Joan Bavaria and Dennis Hayes, coordinator of the first Earth Day, as a network for investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns.[12]

In 1989, representatives from the SRI industry gathered at the first SRI in the Rockies Conference to exchange ideas and gain momentum for new initiatives. The name has since changed to The SRI Conference which meets annually at Green Building certified establishments and has attracted over 550 persons annually since 2006.[13] This conference is produced by First Affirmative Financial Network, an investment advisory firm that works with advisors nationwide providing portfolios specialized in sustainable and responsible investing.

The first sell-side brokerage in the world to offer SRI research was the Brazilian bank Unibanco. The service was launched in January 2001 by Unibanco SRI analyst Christopher Wells from the São Paulo headquarters of the bank. It was targeted at SRI funds in Europe and the US, although it was sent to non-SRI funds both in and out of Brazil. The research was about environmental and social issues (but not governance issues) regarding companies listed in Brazil. It was sent for free to Unibanco's clients. The service lasted until mid-2002.

Two good things came out this research:

  1. The idea was picked up by Mike Tyrrell, who worked at Jupiter, an SRI fund manager in London, and who developed it into something much bigger and better at WVH Ethical HSBC and then Citigroup.
  2. ABN AMRO's operation in Brazil used this research to create the first SRI fund in an emerging market, launched in November 2001. As of late 2008, this fund, called Fundo Ethical, was the Brazilian operation's biggest and best performing stock fund of any kind. (ABN AMRO's operation in Brazil was bought by Santander in 2007.)

Drawing on the industry's experience using divestment as a tool against apartheid, the Sudan Divestment Task Force was established in 2006 in response to the genocide occurring in the Darfur region of the Sudan.[14] Support from the US government followed with the Sudan Accountability and Divestment Act of 2007.

More recently, some social investors have sought to address the rights of indigenous peoples around the world who are affected by the business practices of various companies. The 2007, SRI in the Rockies Conference held a special pre-conference specifically to address the concerns of indigenous peoples. Healthy working conditions, fair wages, product safety, and equal opportunity employment also remain headline concerns for many social investors.[15] In the mid-2010s, some funds developed gender lens investing strategies to promote workplace equity and general welfare of women and girls.[16]

Current strategies

Socially responsible investing is a growing market in both the US and Europe. In particular, it has become an important principle guiding the investment strategies of various funds and accounts.[17]

Government-controlled funds

Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behavior, respect the rights of workers, consider environmental concerns, and avoid violations of human rights. One outstanding endorsement of such policies is The Government Pension Fund of Norway, which is mandated to avoid "investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages".[18]

In the 2000s and 2010s, pension funds were under pressure to disinvest from the arms company BAE Systems, partially due to a campaign run by the Campaign Against Arms Trade (CAAT).[19] Liverpool City Council has passed a successful resolution to disinvest from the company,[20] but a similar attempt by the Scottish Green Party in Edinburgh City Council was blocked by the Liberal Democrats.[21]

Mutual funds and ETFs

Socially responsible mutual funds counted by the 2014 Trends Report increased in number to 415 in 2014, up from 333 in 2012, 250 in 2010, 173 in 2005 & 2007, 189 in 2003, and 167 in 2001. The overall number of mutual funds incorporating environmental, social and corporate governance (ESG) has increased four-fold since 2012. Additionally, 20 exchange-traded funds (ETFs) that incorporate ESG criteria were identified with $3.5 billion in assets at the end of 2011, an increase from the 8 ETFs with $2.25 billion in net assets identified in its 2007 report—the first Trends report to track ETFs [11]. Unlike the Employee Retirement Income Security Act of 1974 (ERISA), which severely limits the extent to which socially responsible goals can be considered in managing corporate and Taft-Hartley pension assets (due to ERISA's overriding goal of protecting employees' pensions),[22] registered investment companies can take these factors into account so long as the disclosure and other requirements of the Investment Company Act of 1940 are met.[23] US SIF maintains charts describing the socially responsible mutual funds offered by its member firms.

Key: X = No investment; P = Positive investment; R = Restricted investment; NS = No screens.
Fund Alcohol Tobacco Gambling Defense/ Weapons Animal Testing Products/ Services Environment Human Rights Labor Relations Employment/ Equality Community Investment Proxy Voting
Access Capital Strategies Community Investment Fund[24]NSNSNSNSNSNSNSNSNSNSPX
AHA Balanced Fund – Institutional ClassNSXNSNSNSNSNSNSNSNSNSV
AHA Diversified Equity Fund – Institutional ClassNSXNSNSNSNSNSNSNSNSNSV
AHA Full Maturity Fixed Income Fund – Institutional ClassNSXNSNSNSNSNSNSNSNSNSV
AHA Full Maturity Fixed Income Fund – N ClassNSXNSNSNSNSNSNSNSNSNSV
AHA Limited Maturity Fixed Income Fund – Institutional ClassNSXNSNSNSNSNSNSNSNSNSV
AHA Limited Maturity Fixed Income Fund – N ClassNSXNSNSNSNSNSNSNSNSNSV
AHA Socially Responsible Equity IXXXXNSPPPPPNSV
AHA Socially Responsible Equity NXXXXNSPPPPPNSV
Brighter Student Fund XXXXXXXXXPXX
'Fund' Alcohol Tobacco Gambling Defense/ Weapons Animal Testing Products/ Services Environment Human Rights Labor Relations Employment/ Equality Community Investment Proxy Voting
Calvert Aggressive Allocation Fund XXXRRPPPPPPV
Calvert Capital Accumulation A XXXRRPPPPPPV
Calvert Capital Accumulation B XXXRRPPPPPPV
Calvert Capital Accumulation C XXXRRPPPPPPV
Calvert Conservative Allocation Fund XXXRRPPPPPPV
Calvert Global Alternative Energy Fund A NSNSNSNSNSPPPPPNSV
Calvert International Opportunities Fund RRNSNSNSPPPPPNSV
Calvert Large Cap Growth AXXXRRPPPPPPV
Calvert Large Cap Growth BXXXRRPPPPPPV
Calvert Large Cap Growth CXXXRRPPPPPPV
Calvert Large Cap Growth IXXXRRPPPPPPV
Calvert Mid Cap Value FundXXXRRPPPPPPV
Calvert Moderate Allocation FundXXXRRPPPPPPV
Calvert New Vision Small Cap AXXXRRPPPPPPV
Calvert New Vision Small Cap BXXXRRPPPPPPV
Calvert New Vision Small Cap CXXXRRPPPPPPV
'Fund' Alcohol Tobacco Gambling Defense/ Weapons Animal Testing Products/ Services Environment Human Rights Labor Relations Employment/ Equality Community Investment Proxy Voting
Calvert Small Cap Value FundXXXRRPPPPPPV
Calvert Social Index AXXXRRPPPPPPV
Calvert Social Index BXXXRRPPPPPPV
Calvert Social Index CXXXRRPPPPPPV
Calvert Social Index IXXXRRPPPPPPV
Calvert Social Investment Balanced AXXXRRPPPPPPV
Calvert Social Investment Balanced CXXXRRPPPPPPV
Calvert Social Investment Bond AXXXRRPPPPPPV
Calvert Social Investment Enhanced Equity AXXXRRPPPPPPV
Calvert Social Investment Enhanced Equity BXXXRRPPPPPPV
Calvert Social Investment Enhanced Equity CXXXRRPPPPPPV
Calvert Social Investment Equity AXXXRRPPPPPPV
Calvert Social Investment Equity CXXXRRPPPPPPV
Calvert Social Investment Equity IXXXRRPPPPPPV
Calvert World Values International AXXNSRNSPPPPPPV
Calvert World Values International CXXNSRNSPPPPPPV
'Fund' Alcohol Tobacco Gambling Defense/ Weapons Animal Testing Products/ Services Environment Human Rights Labor Relations Employment/ Equality Community Investment Proxy Voting
Domini European PacAsia Social Equity A XXXXNSPPPPPNSV
Domini European PacAsia Social Equity I XXXXPPPPPPNSV
Domini European Social Equity AXXXXNSPPPPPNSV
Domini European Social Equity IXXXXNSPPPPPNSV
Domini Institutional Social EquityXXXXNSPPPPPNSV
Domini PacAsia Social Equity AXXXXNSPPPPPNSV
Domini PacAsia Social Equity IXXXXNSPPPPPNSV
Domini Social Bond XXXXNSPPPPPPV
Domini Social Equity AXXXXNSPPPPPNSV
Domini Social Equity IXXXXNSPPPPPNSV
Epiphany Faith and Family Values 100 Fund – A Class RRRRNSNSPPPPNSV
Epiphany Faith and Family Values 100 Fund – C ClassRRRRNSNSPPPPNSV
Epiphany Faith and Family Values 100 Fund – N ClassRRRRNSNSPPPPNSV
Green Century EquityXXXRNSPPPPPNSV
Integrity Growth and Income Fund XXXNSRNSPRRRNSV
'Fund' Alcohol Tobacco Gambling Defense/ Weapons Animal Testing Products/ Services Environment Human Rights Labor Relations Employment/ Equality Community Investment Proxy Voting
Legg Mason Prt Social Awareness Fund ANSRNSRNSNSPPPPNSV
Legg Mason Prt Social Awareness Fund BNSRNSRNSNSPPPPNSV
Legg Mason Prt Social Awareness Fund CNSRNSRNSNSPPPPNSV
Praxis Growth Index Fund A XXXXNSPPPPPPV
Praxis Growth Index Fund IXXXXNSPPPPPPV
Praxis Impact Bond Fund AXXXXNSPPPPPPV
Praxis Impact Bond Fund IXXXXNSPPPPPPV
Praxis International Index Fund AXXXXNSPPPPPPV
Praxis International Index Fund IXXXXNSPPPPPPV
Praxis Small Cap Index Fund AXXXXNSPPPPPPV
Praxis Small Cap Index Fund IXXXXNSPPPPPPV
Praxis Value Index Fund AXXXXNSPPPPPPV
Praxis Value Index Fund IXXXXNSPPPPPPV
Neuberger Berman Socially Resp Inv XXXXRPPPPPNSV
New Alternatives Fund XXXXXPPPPPPX
'Fund' Alcohol Tobacco Gambling Defense/ Weapons Animal Testing Products/ Services Environment Human Rights Labor Relations Employment/ Equality Community Investment Proxy Voting
Parnassus Core Equity Fund XXXXRPPPPPNSV
Parnassus Income Fixed Income XXXXRPXPPPNSV
Parnassus Mid Cap Fund XXXXRPPPPPPV
Parnassus Small Cap FundXXXXRPXPPPPV
Parnassus Endeavor FundXXXXRPXPPPPV
Pax World BalancedRXRRRPPPPPPV
Pax World High YieldRXRRRPPPPPPV
Pax World Value Fund – Individual InvestorNSXRXRPPPPPNSV
Pax World Value Fund – Institutional ClassNSXRXRPPPPPNSV
Pax World Women's Equity Fund – Individual InvestorNSXRXRRRNSRRNSV
Pax World Women's Equity Fund – Institutional ClassNSXRXRRRRRRNSV
Portfolio 21 Institutional NSXRRRPPRRRNSV
Sentinel Sustainable Core Opportunities Fund XXXRRPPPPPNSV
Sentinel Sustainable Emerging Companies FundXXXRRPPPPPNSV
Flex Total Return Utilities Fund XXXXXPPNSPPNSV
Vanguard FTSE Social Index Fund
Walden Social Balanced FundXXRXRPPPPPPV
WVH Ethical Social Equity FundXXRXRPPPRPXV
Winslow Green Growth Fund RRRRRPPNSNSNSNSV

Separately managed accounts

According to the 2014 Report on US Sustainable, Responsible and Impact Investing Trends, among separate account managers, 214 distinctive separate account vehicles or strategies, with $433 billion in assets, incorporated ESG factors into investment analysis. Where a separate account is subject to ERISA, there are legal limitations on the extent to which investment decisions can be based on factors other than maximizing plan participants' economic returns.[22]

Shareholder advocacy

Shareholder resolutions are filed by a wide variety of institutional investors, including public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56 resolutions.[27]

Regulations governing shareholder resolutions vary from country to country. In the United States, they are determined primarily by the Securities and Exchange Commission, which regulates mutual funds and applies the 1940 Act[28] and by the Department of Labor, which regulates certain plans and applies ERISA.[29]

These regulatory regimes require pension plans and mutual funds to disclose how they voted on behalf of their investors.[30] U.S. shareholders have organized various groups to facilitate jointly filing resolutions. These include the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the US SIF.

From 2012 to 2014, more than 200 US institutions and investment management firms filed or co-filed proposals. These institutions and money managers collectively controlled $1.72 trillion in assets at the end of 2013. The top categories of environmental and social issues from 2012 to 2014 were political contributions and climate change and environmental issues.[31]

Community investing

Community investing, a subset of socially responsible investing, allows for investment directly into community-based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the US and UK,[32] or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.[33]

Community investing grew almost 5% from 2012 to 2014. Assets held and invested locally by community development financial institutions (CDFIs) based in the US totaled $64.3 billion at the start of 2014, up from $61.4 billion in 2012.

Investing strategies

Investing in capital markets

Social investors use several strategies to maximize financial return and attempt to maximize social good. These strategies seek to create change by shifting the cost of capital down for sustainable firms and up for the non-sustainable ones. The proponents argue that access to capital is what drives the future direction of development. A growing number of rating agencies collects both raw data the ESG behaviour of firms as well as aggregates this data in indices.[34] After several years of growth the rating agency industry has recently been subject to a consolidation phase that has reduced the number of genesis through mergers and acquisitions.[35]

ESG integration

ESG integration is one of the most common responsible investment strategies and entails the incorporation of environmental, social and governance ("ESG") criteria into the fundamental analysis of equity investments. According to the non-profit Investor Responsibility Research Center institute (IRRCi), approaches to ESG integration vary greatly among asset managers depending on:[36]

  • Management: Who is responsible for ESG integration within the organization?
  • Research: What ESG criteria and factors are being considered in the analysis?
  • Application: How are the ESG criteria being applied in practice?

Negative screening

Negative screening excludes certain securities from investment consideration based on social or environmental criteria. For example, many socially responsible investors screen out tobacco company investments.

The longest-running SRI index, the Domini 400—now the MSCI KLD 400—was started in May 1990. It has continued to perform competitively —with average annualized total returns of 9.51% through December 2009 compared with 8.66% for the S&P 500.[37]

Despite this impressive growth, it has long been commonly perceived that SRI brings smaller returns than unrestricted investing. So-called "sin stocks", including purveyors of tobacco, alcohol, gambling and defense contractors, were banned from portfolios on moral or ethical grounds. And shutting out entire industries hurts performance, the critics said.[38] However, in a comprehensive study, financial economists Lobe, Roithmeier, and Walkshäusl taking the position of the advocatus diaboli, answer the question whether to invest in a socially responsible way – or not? They create a set of global and domestic sin indexes consisting of 755 publicly traded socially irresponsible stocks around the world belonging to the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. They compare their stock market performance directly with a set of virtue comparables consisting of the most important international socially responsible investment indexes. They find no compelling evidence that ethical and unethical screens lead to a significant difference in their financial performance, which is in contrast with the results of prior studies on sinful investing.[39]


Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations.

Shareholder activism

Shareholder activism efforts attempt to positively influence corporate behavior.[40] These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities. Recent movements have also been reported of "investor relations activism", in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation; this is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole.[41] Hedge funds are also major activist investors; while some pursue socially responsible investing goals, many simply are seeking to maximize fund returns.[42] Pension plans subject to ERISA are somewhat more constrained in their ability to engage in shareholder activism or the use of plan assets to promote public policy positions; any expenditure of plan assets must be aimed at enhancing participants' retirement income.[43]

Shareholder engagement

A less vocal subtype of shareholder activism, shareholder engagement requires extensive monitoring of the non-financial performance of all portfolio companies. In shareholder engagement dialogues, investees receive constructive feedback on how to improve ESG issues within their sphere of influence.[44]

Positive investing

Positive investing is the new generation of socially responsible investing.[38] It involves making investments in activities and companies believed to have a positive social impact. Positive investing suggested a broad revamping of the industry's methodology for driving change through investments.[45] This investment approach allows investors to positively express their values on corporate behavior issues such as social justice and the environment through stock selection  without sacrificing portfolio diversification or long-term performance.[46] Positive screening pushes the idea of sustainability, not just in the narrow environmental or humanitarian sense, but also in the sense of a company's long-term potential to compete and succeed.[38] In 2015, Morgan Stanley conducted a review of 10,000 funds and concluded "strong sustainability" investments outperformed weak sustainability investments,[47] tackling the idea of a trade-off between positive impact and financial return.[48] while the Global Impact Investing Network's 2015 report on benchmarks and returns in impact investing in private equity and venture capital found market-rate or market-beating returns were common in impact investments.[49]

Impact investing

Impact Investing is the alternative investment (i.e. private equity) approach to Positive investing. In 2014, the UK's presidency of the G8 created a Social Impact Investment Task Force which produced a series of reports that defined impact investing as "those that intentionally target specific social objectives along with a financial return and measure the achievement of both".[50] Impact investing, capitalizes businesses that potentially provide social or environmental impact at a scale that purely philanthropic interventions usually cannot reach.[51] This capital may be in a range of forms including private equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Impacting investing has its roots in the venture capital community, and an investor will often take active role mentoring or leading the growth of the company or start-up.

Community investment

By investing directly in an institution, rather than purchasing stock, an investor is able to create a greater social impact: money spent purchasing stock in the secondary market accrues to the stock's previous owner and may not generate social good, while money invested in a community institution is put to work. For example, money invested in a Community Development Financial Institution may be used by that institution to alleviate poverty or inequality, spread access to capital to under-served communities, support economic development or green business, or create other social good. In 1984, Trillium Asset Management's founder, Joan Bavaria, invited Chuck Matthei of the Institute for Community Economics (ICE), an organization that helps communities create and sustain land trusts, to a meeting of US SIF. It is likely that this was the first time a nonprofit organization with a loan fund would meet directly with SRI managers. Trillium clients began investing in ICE later that year.

Global context

Socially responsible investing is a global phenomenon. With the international scope of business itself, social investors frequently invest in companies with international operations. As international investment products and opportunities have expanded, so have international SRI products. The ranks of social investors are growing throughout developed and developing countries. In 2006, the United Nations Environment Programme launched its Principles for Responsible Investment which provide a framework for investors to incorporate environmental, social, and governance (ESG) factors into the investment process. PRI has more than 1,500 signatories managing more than US$60 trillion of assets.[52]

Ethical investment in the UK

In 1985, Friends Provident launched the first ethically screened investment fund with criteria which excluded tobacco, arms, alcohol and oppressive regimes.[53] Since 1985, over 90 investment funds have launched offering a wide range of investment criteria; both negatively screened and with positive investment criteria i.e. investing into companies involved in promoting sustainability.

Since 1985, most of the major investment organizations have launched ethical and socially responsible funds, although this has led to a great deal of discussion and debate over the use of the term "ethical" investment.[54] This is because each of the fund management organizations tend to apply a slightly different approach to running their funds.

In recent years there has been growth in the market for high social impact investments; this is a style of investing where the businesses receiving investment have social or environmental goals as a primary purpose.

UK institutions are also getting more involved in social investing through impact investing funds, with those such as Deutsche Bank and NESTA, alongside other institutions such as Big Issue Invest, which is part of The Big Issue group.

As of June 2014, EIRIS estimated that there was over £13.5 billion invested in Britain's green and ethical retail funds. This estimate is based on around 85 UK domiciled green or ethical retail funds and it seeks to not include UK money invested in ethical funds domiciled outside of the UK.[55]

In higher education

In 2007, the Dwight Hall organization at Yale University launched the first undergraduate-run socially responsible investment fund in the United States, known as the Dwight Hall Socially Responsible Investment Fund.[56][57]

Comparison with conventional investing

While conventional investing only focuses on the traditional risk and returns considerations in making investment decisions, socially responsible investing considers other ethical factors as discussed above. Hence, the question often arise as to whether it pays financially to be ethical or not in making investment decisions. The debate as to whether there is anything to gain or lose by deciding to be ethical and socially responsible in making investment decisions is still ongoing. Several studies have found that there is no conclusive evidence as to whether the performances of socially responsible investments outperform those of conventional and vice-versa.

Comparing portfolio and fund performance

Several studies in various places have analysed the performance of socially responsible investing (SRI) and conventional investing (CI) using different models and methodologies for measuring performance. Using the Carhart four-factor model,[58] found that an approach where stocks with high SRI scores are bought while those with low SRI scores are sold off produced a positive abnormal performance of up to 8.7% per annum, suggesting that investors can achieve their ethical goals without hurting their financial performance.[59] also using the Carhart four-factor model, noted an excess return of 7% for environmentally-friendly firms. However,[60] using a similar approach found the performance of SRI stocks to be not statistically different from those of conventional stocks. In contrast,[61] also using the Carhart four-factor model found a portfolio which included “sin stocks” (alcohol, tobacco, gaming) to be significantly outperforming similar comparable stocks, which indicates that investors in SRI stocks might be losing. However, after controlling for managerial skills, transaction costs and fees,[62] found no outperformance between portfolios which include “sin” stocks and comparable SR portfolios. Some other studies have compared the performance of SRI funds with conventional funds. While some studies used only the capital asset pricing model to compare performance[63][64]), others used multifactor models such as the Fama–French three-factor model and Carhart four-factor model.[65][66][67][68][69][70][71] These studies found no statistically significant difference in performance between the SRI and conventional funds.

Comparing stock market index performance

Considering that difference in performance of funds may be due to portfolio selection/construction process and/or the ability of fund managers and not necessarily on the nature of investments themselves, some studies have compared the performance of indices instead. Two of the pioneer studies compared the performance of the Domini 400 Social Index with the S&P 500.[72][73] The Sharpe ratio and the capital asset pricing model were used to estimate Jensen's alpha for the comparison and no significant difference was found in the performance of the two indices. A follow-up study compared the performance of four SRI indices (Domini 400 Social Index, Calvert Social Index, Citizen's Index and Dow Jones Sustainability Indices US Index) with the S&P 500 index between 1990 and 2004 and found that returns on the SRI indices exceeded returns on S&P 500 even though they were not statistically significant.[74] Others focused only on the US[74] and on outside the US by studying the performance of 29 SRI indices globally.[75] Using the capital asset pricing model to estimate Jensen's alpha as the performance indicator, no significant evidence of under/over performance was found. A comparison of the performance of SR indices with conventional indices on a global scale using marginal conditional stochastic dominance found there is "strong evidence that there is a financial price to be paid for socially responsible investing."[76]

See also


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