Equity Markets, Valuation, and Analysis

CHAPTER 19Socially Responsible Investing

Randolph D. Nordby

Professional Lecturer, American University

INTRODUCTION

The importance of socially responsible investing (SRI) has increased substantially in recent years. Top analysts at leading investment firms often grapple with the complicated process of integrating nonstandardized corporate environmental, social, and governance (ESG) data into their investment decision-making process. The recent emphasis on sustainability has brought major obstacles for practitioners, regulators, investors, and corporations regarding reporting and using sustainability data.

Despite the lack of a clear SRI definition, nonstandardized ESG reporting by corporations, and mixed academic results on the potential portfolio benefits from ESG investing, many investors are still interested in sustainable investments. Morgan Stanley (2018) estimates that more than $22.8 trillion is invested globally in sustainable investments, representing more than 24 percent of funds currently under professional management. SRI has been growing as an investment factor over the past few decades and has gone by many names, including SRI, responsible investing (RI), social investing, socially conscious investing, religious investing, green investing, values-based investing, and environmental, social, and governance (ESG) investing. The broadest term is sustainability. To emphasize the integration of sustainability data into the investment decision-making process, rather ...