Using Socially Responsible Investing When Deciding on an Investment

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I. Introduction
Socially responsible investing (SRI) is an investment strategy that incorporates social, environmental, and ethical considerations into the investment decision-making process. According to Renneboog et al. (2008a), “Investors in SRI funds explicitly pursue two types of goals: the economic rational goal of wealth-maximization and social responsibility.” That is, investors pursuing a SRI strategy attempt to “do well while doing good”. The introduction of non-financial screening criteria into the investment decision-making process raises the question of whether investors must forgo financial performance in order to invest according to social values. Answering this question is the key contribution of this study.
The concept of ethical investing has been practiced since 17th century when the Quakers refused to profit from the weapons and slaves trade in North America (Renneboog et al., 2008b). However, recent trends suggest SRI is increasingly moving towards the mainstream of the investment universe as a result of the rise in ethical consumerism and an increased focus on corporate social responsibility (CSR). According to the Social Investment Forum, at year-end 2011 an estimated $3.74 trillion in U.S.-domiciled assets was invested in mutual funds that are practicing SRI strategies, representing 11.3% of total assets under management. This figure represents a 22% increase since year-end 2009 and a 486% increase since 1995 when the size of the U.S. SRI market was first measured (SIF, 2012).
The screen criteria used in SRI has evolved as investors’ social concerns have broadened. Early SRI strategies focused on negative screening – the exclusion of specific companies or industries from the SRI portfolio based on social...

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...RI, whereas funds run by companies not specialized in SRI underperformed conventional mutual funds. This suggests that investors need to account for management company characteristics when evaluating SRI investment opportunities. Alternatively, Rennboog et al. (2008) found that SRI mutual funds in many European, North American and Asia-Pacific countries strongly underperformed domestic benchmark portfolios (from -2.2% to -6.5% per annum) when using the four-factor model to measure risk-adjusted returns; however, when the alphas of the SRI mutual funds were compared with those of matched conventional funds there was no statistically significant evidence that the SRI mutual funds underperformed in most countries. Exceptions were the SRI mutual funds in France, Ireland, Sweden, and Japan, which showed statistically negative alphas compared to conventional mutual funds.

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