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…show more content…
Positive screening is often combined with a “best in class” approach, whereby firms in each industry are ranked according to CSR criteria, and only those meeting a minimum threshold are selected for investment. According to Bauer et al. (2007), the application of a “best in class” approach address the lack of sector diversification and extreme sector tilts that may result from the use of negative and positive screening criteria alone. There exist two opposing views regarding the economic practicality of SRI. Opponents of SRI argue that the inclusion of non-financial criteria in the investment process must result in lower economic returns relative to conventional investment alternatives because the number of investment opportunities is reduced through the application of SRI screening criteria. According to Cortez et al. (2009): Theoretically, portfolio theory arguments suggest that the imposition of additional constraints will inhibit the construction of the optimal portfolio. As the universe of investment is reduced, investors will benefit less from the potential for diversification than in an unconstrained portfolio which will result in lower risk-adjusted returns. Furthermore, the additional costs of monitoring social performance might also cause socially responsible funds to underperform. While proponents of SRI agree that the application of SRI screening criteria results in a reduction of investment opportunities, they argue that the loss of portfolio
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