Ethical funds, also known as socially responsible investment (SRI) funds, have experienced rapid growth around the world. Issues such as global warming, corporate governance, and community involvement have gained significant attention from governments and investors.
Maximization of stockholder value often conflicts with the interests of other stakeholders in a firm. Corporate social responsibility (CSR) plays a role in reducing the costs of such conflicts.
Empirical research shows that the following components of CSR are associated with higher stockholder value: good corporate governance, sound environmental standards, and care of stakeholder relations.
Existing studies hint, but do not unequivocally demonstrate, that SRI investors are willing to accept suboptimal financial performance to pursue social or ethical objectives.
Given the growing social awareness of investors and the increasingly positive regulatory environment, we expect SRI to continue its growth and relative importance as an asset class.
The Rise of SRI
Ethical funds, often also called socially responsible investment (SRI) funds, integrate environmental, social, and governance (ESG) considerations, or purely ethical issues, into investment decision-making. SRI has experienced a phenomenal growth around the world. According to the Social Investment Forum, the professionally managed assets of SRI portfolios in the United States, including retail and, more importantly, institutional funds (for example, pension funds, insurance funds, and separate accounts), reached US$2.7 trillion in 2007, or approximately 11% of total assets under management in that country. The European SRI market is also growing rapidly. In 2007, SRI assets in Europe amounted to €2.7 trillion, representing 17% of European funds under management (European Social Investment Forum).
Although ethical investing has ancient origins that were based on religious traditions, modern SRI is based more on the varying personal, ethical, and social convictions of individual investors. Issues such as environmental protection, human rights, and labor relations have become common in the SRI investment screening process. In recent years, a series of corporate scandals has turned corporate governance and responsibility into another focal point of SRI investors. Hence, criteria such as transparency, governance, and sustainability have emerged as essential in SRI screening.
Over the past decade, a number of national governments in Europe have passed a series of regulations on social and environmental investments and savings. For instance, the United Kingdom was the first country to regulate the disclosure of the social, environmental, and ethical investment policies of pension funds and charities. The Amendment to the 1995 Pensions Act requires the trustees of occupational pension funds to disclose in the Statement of Investment Principles “the extent (if at all) to which social, environmental and ethical considerations are taken into account in the selection, retention and realization of investments.” This has contributed considerably to the growth of the SRI industry.
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