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Socially responsible investing (SRI) is a general term used to describe investments that reflect good values, morals, and ethics. Environmental, social, and governance (ESG) is a similarly used description that has become more common recently. In addition to earning competitive rates of return on their money, those who invest in a socially responsible manner attempt to improve the world by investing in companies that function in an ethical manner. SRI is sometimes described as the attempt to "do good while doing well."
Forms of socially responsible investing may date back more than several hundred years with many early cases having religious origins. In the 1700s, John Wesley (the founder of Methodism) taught about the importance of money, and the Quakers who settled North America avoided slavery and weapons related investments. More recently, the avoidance of companies dealing in South Africa represented a driving force behind socially responsible investing and many believe it played a significant role in Nelson Mandela's rise to power. Islamic finance also provides guidance regarding preferred investments and practices to be avoided.
SRI criteria can include positive screens (for considering targeted investments in companies that focus on doing good), as well as negative screens (for eliminating companies from an index or broadly diversified portfolio) that are considered harmful. A United Nations Environment Program formalized in 2006 called “Principles for Responsible Investment” provided a framework for investors using environmental, social, and governance factors in the investment process.
Common screens used by socially responsible investors often include the following.
- Alcohol, Tobacco, & Gambling
- Products and Services
- Animal Testing
- Labor or Employment Policies & Practices
- Human Rights Equality
Funds invested according to some kind of socially responsible screen have grown dramatically in the last few decades. There are now hundreds of funds that use some kind of screening. The longest-running SRI index started in 1990 as the Domini 400 index fund, before being renamed the MSCI KLD 400. It has had high correlation, overlap, and similar performance to the S&P 500. Vanguard introduced U.S. and international ESG ETFs in 2018. ESGV and VSGX have expense ratios of 0.12% and 0.15% and both already have hundreds of millions of dollars in assets. Deutsche Bank launched a US ESG ETF (USSG) in March 2019 with an expense ratio of 0.10% (raising over $800 million from a pension-insurance company in Finland).1
The decision to deviate from a default or complete index for moral or socially responsible reasons is a personal decision for individual investors...
Chapter 28 Notes - The Footnotes in the Book are sequential and for this chapter start at #508 and end at #519.
These notes are provided for those that have purchased the book and would like to access the notes and links directly.
2. Sally Hamilton, Hoje Jo, and Meir Statman, “Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds,” Financial Analysts Journal, November-December 1993 https://www.cfapubs.org/doi/abs/10.2469/faj.v49.n6.62
3. Meir Statman and Denys Glushkov, “Classifying and Measuring the Performance of Socially Responsible Mutual Funds,” Journal of Portfolio Management, Winter 2016
4. Gunnar Friede, Timo Busch, and Alexander Bassen “ESG and financial performance: aggregated evidence from more than 2000 empirical studies,” Journal of Sustainable Finance & Investment, 2015 http://www.tandfonline.com/doi/pdf/10.1080/20430795.2015.1118917
7. Marie Brière, Jonathan Peillex, and Loredana Ureche-Rangau, "Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance?" Financial Analysts Journal, Third Quarter 2017 https://www.cfapubs.org/doi/abs/10.2469/faj.v73.n3.2
8. Mozaffar Khan, “Corporate Governance, ESG, and Stock Returns around the World,” Financial Analysts Journal, Fourth Quarter 2019 https://www.cfainstitute.org/en/research/financial-analysts-journal/2019/0015198X-2019-1654299
10. Harrison Hong and Marcin Kacperczyk, “The Price of Sin: The Effects of Social Norms on Markets.” Journal of Financial Economics, 2009 http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/sin.pdf
12. https://www.ussif.org/blog_home.asp?Display=118 https://www.ussif.org/files/US%20SIF%20Trends%20Report%202018%20Release.pdf
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