Prior literature on socially responsible investment has contended that excluding “sin stocks” from a portfolio will reduce performance and increase risk. Further, incorporating stocks of firms with positive social responsibility scores will improve performance and reduce risk. We simulate portfolios designed to mimic typical equity mutual funds’ holdings and investigate these propositions. We remove the potentially confounding influences of differences in manager skill, transaction costs and fees, and conduct a clean experiment on the effect of positive and negative portfolio screening. (...) We find no difference in the return or risk of screened and unscreened portfolios. We conclude that a typical socially responsible fund will neither gain nor lose from screening its portfolio. (shrink)

In this article, we examine the empirical association between firm value and CSR engagement for firms in sinful industries, such as tobacco, gambling, and alcohol, as well as industries involved with emerging environmental, social, or ethical issues, i.e., weapon, oil, cement, and biotech. We develop and test three hypotheses, the window-dressing hypothesis, the value-enhancement hypothesis, and the value-irrelevance hypothesis. Using an extesive US sample from 1995 to 2009, we find that CSR engagement of firms in controversial industries positively affects firm (...) value after controlling for various firm characteristics. To address the potential endogeneity problem, we further estimate a system of equations and change regression and continue to find a positive relation between CSR engagement and firm value. Our findings support the value-enhancement hypothesis and are consistent with the premise that the top management of US firms in controversial industries, in general, considers social responsibility important even though their products are harmful to human being, society, or environment. (shrink)

There appears to be an implicit assumption by those connected with the ethical investment movement (e.g., ethical investment firms, individual investors, social investment organizations, academia, and the media), that ethical investment is in fact ethical. This paper will attempt to challenge the notion that the ethical mutual fund industry, as currently taking place, is acting in an ethical manner. Ethical issues such as the transparency of the funds and advertising are discussed. Ethical mutual fund screens such as tobacco, alcohol, gambling, (...) and the military are preliminarily examined to better determine whether they can actually be defined as "ethical" screens as opposed to merely social, political, or religious screens. A code of ethics for ethical investment is constructed by which ethical mutual fund firms can be audited for ethical compliance. (shrink)

The purpose of socially responsible investing (SRI) is to: (1) allow investors to reflect their personal values and ethics in their choices, and (2) encourage companies to improve their ethical, social, and environmental performance. In order to achieve these ends, the means SRI fund managers employ include the use of negative screening, or the exclusion of companies involved in "sinful" industries. We argue that there are problems with this methodology, both at a theoretical and at a practical level. As a (...) consequence, current SRI offerings cannot accurately reflect the values and ethical beliefs they propose to represent. Moreover, the use of a priori criteria is potentially misleading, as we show by discussing examples of glue and wine making. Applying this flawed approach SRI funds fail to influence the direction of the firms they deem most in need of redirecting. Rather than engaging in the simple a priori assumption that some industries are "saints" while others are "sinners" (Freeman, 2007) we suggest a new framework upon which the SRI screening methodology could be grounded. Embracing the philosophical tradition of American pragmatism, we suggest that SRI methodology could be improved by engaging in an analysis based on (1) the actual impacts of the company's products and services, (2) the company's relationships with its specific, real stakeholders, and (3) the contingent environment (social, economic, political, legal, and cultural) in which the business operates. (shrink)

This paper reviews the development of socially responsible investment (SRI) over recent years and highlights the prospects for an increasingly strong connection with the practice of corporate social responsibility. The paper argues that not only has SRI grown significantly, it has also matured. In particular, it has become an investment philosophy adopted by a growing proportion of large investment institutions. This shift in SRI from margin to mainstream and the position in which institutional investors find themselves is leading to a (...) new form of SRI shareholder pressure. Although this bears some resemblance to lobbying campaigns which might take advantage of shareholder rights, we seek to distinguish it as an important phenomenon in its own right — one to which corporate executives are likely to be paying increasing attention in the years to come. We further argue that this approach potentially meets some of the earlier ethical criticisms of certain forms of SRI but, ironically, probably owes its existence to those pioneering approaches. We conclude with some suggestions for further research to inform discussion of the issues highlighted in the paper. (shrink)

Many writers have commented on the heterogeneity of the socially responsible investment (SRI) movement. However, few have actually tried to understand and explain it, and even fewer have discussed whether the opposite – standardisation – is possible and desirable. In this article, we take a broader perspective on the issue of the heterogeneity of SRI. We distinguish between four levels on which heterogeneity can be found: the terminological, definitional, strategic and practical. Whilst there is much talk about the definitional ambiguities (...) of SRI, we suggest that there is actually some agreement on the definitional level. There are at least three explanations which we suggest can account for the heterogeneity on the other levels: cultural and ideological differences between different regions, differences in values, norms and ideology between various SRI stakeholders, and the market setting of SRI. Discussing the implications of the three explanations for the SRI market, we suggest that there is reason to be sceptical about the possibilities of standardisation if not standardisation is imposed top-down. Whether this kind of standardisation is desirable or not, we argue, depends on what the motives for it would be. To the extent that standardisation may facilitate the mainstreaming of SRI, it could be a good thing – but we entertain doubts about whether mainstreaming really requires standardisation. (shrink)

In this study, we try to establish what determines the substantial differences in the Nordic countries’ size and composition of socially responsible investing (SRI). We investigate if these differences between Denmark, Finland, Norway, and Sweden can be associated with key characteristics in economics, finance, culture, and institutions. We find that in particular economic openness, the size of the pension industry, and cultural values of masculinity (femininity) and uncertainty avoidance can be associated with the differences in SRI in the four countries. (...) On basis of these findings, we lay foundations for an international theory of SRI. (shrink)