Handbook of Finance: Investment Management and Financial Management

Chapter 14. Socially Responsible Investment

RUSSELL SPARKES

Chief Investment Officer, Central Finance Board of the Methodist Church (UK)

Abstract: Socially responsible investment (SRI), also known as ethical investment, is an investment discipline that adds concerns about social or environmental issues to the normal ones of risk and return as determinants of equity portfolio construction or activity. SRI has three distinctive techniques, which may overlap or follow sequentially: exclusion, activism, and dialogue or engagement. Exclusion avoids investment in certain companies whose operations are judged unacceptable, while activism involves using the rights of share ownership to assert social objectives. SRI may be carried out by individuals, normally through mutual funds, or by institutions such as charitable foundations and pension funds. Barriers to institutional investors adopting SRI strategies include concerns about the impact on investment performance, and perceived legal restrictions.

Keywords: socially responsible investment (SRI), ethical investment, exclusion, activism, dialogue, mutual funds, foundations and pension funds, legal barriers, performance impact

Socially responsible investment (SRI) has developed alongside growing interest in corporate social responsibility (CSR). It is also attracting increasing academic attention with journals devoting issues to the subject. The growth in mainstream institutional investors considering SRI strategies is illustrated by the Principles ...