Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists

CHAPTER 23

Performance Implications of SR Investing: Past versus Future

NADJA GUENSTER

Assistant Professor of Finance, Maastricht University

Visiting Faculty Fellow, University of California at Berkeley

INTRODUCTION

Traditional finance theory assumes that investors only care about the expected payoffs on their assets. Well-known asset pricing models such as the capital asset pricing model (CAPM) and its extensions, rest on this assumption. In contrast to this traditional view, many investors also care about other attributes of their asset holdings (Fama and French 2007). Probably the most prominent example of investor taste affecting portfolio choice is socially responsible or ethical investing. Socially responsible investors not only care about the financial return on their investment, but also are concerned about whether the companies in their portfolio act in line with their religious, ethical, and political values.

Socially responsible investing (SRI) has experienced tremendous growth over the last two decades. In the United States, SRI assets under management are currently $3.07 trillion of $25.2 trillion invested. Major institutional investors worldwide such as pension funds have started incorporating ethical principles in their portfolio selection process. As of April 2011, more than 850 investment institutions with assets under management of about US $25 trillion have signed the United Nations Principles for Responsible Investment (Principles for Responsible Investment ...