Objectives of socially responsible investment (SRI) are discussed with reference to the two main mechanisms of the SRI ‘movement’: shareholder advocacy and managed investments. We argue that in their current forms, both mechanisms lack the power to create significant corporate change. Shareholder advocacy has been largely unsuccessful to date. Even if resolutions were successful, shareholder advocacy may still be ineffective if underlying economic opportunities remain. Marketing material and investment prospectuses issued by socially responsible mutual funds (SRI funds) commonly contain the (...) claim that, by affecting corporations' access to capital funding, SRI funds can change corporate practices. This paper makes a contribution by presenting the market share of SRI funds in the regions where they are most developed, being Europe, the U.S. and Australia, to show that this claim is unlikely to eventuate. SRI funds also commonly claim that they will outperform conventional active mutual funds. That the economic performances of both are similar might be explained by their similar portfolio compositions. The paper makes an innovation in the SRI literature by adopting a legitimacy framework to explain the continued presence of SRI funds. To achieve desired social and environmental outcomes, SRI funds are urged to address issues at a more systemic level. A suggested mechanism is the collective lobbying of corporations and, especially, governments. (shrink)

This study examines whether differences in financial performance exist for investment trusts which base their portfolio selection primarily on an ethical screen, compared to indexes which incorporate a broader spectrum of investments. Results indicate that on a risk-adjusted basis there is an insignificant difference in the financial performance of these trusts against three common market benchmarks. However as to the extent of the directional effect, there does exist slightly superior financial performance by ethical trusts against their respective industry average indexes, (...) but an underperformance against a smaller company's index and the market as a whole. The lack of a distinct advantage in the short to medium term for applying an ethical screen, may in part be due to the recent development of ethical investments in Australia. Stronger performances by older ethical investment trusts may indicate superior returns are more likely to occur over a longer term. (shrink)