The Market for Socially Responsible Investments: A Review and Evaluation

The Market for Socially Responsible Investments: A Review and Evaluation

Mark Anthony Camilleri (University of Malta, Malta)
DOI: 10.4018/978-1-7998-2193-9.ch009

Abstract

This chapter explains how socially responsible investing (SRI) has evolved in the last few decades and sheds light on its latest developments. It describes different forms of SRI in the financial markets and deliberates on the rationale for the utilisation of positive and negative screenings of listed businesses and public organisations. It also presents key theoretical underpinnings on the subject and reports that the market for the responsible investments has recently led to an increase in contractors, non-governmental organisations (NGOs), and research firms who are involved in the scrutinisation of the enterprises' environmental, social, and governance (ESG) credentials. This contribution raises awareness on the screenings of positive impact and sustainable investments. It puts forward future research avenues in this promising field of study.
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Introduction

The investors are attracted to the businesses that yield a return on their investments. Yet, a growing segment of the population, including entrepreneurs, are increasingly integrating their personal values into all aspects of their life, including financial investing (Sparkes, 2017; Schueth, 2003). Many individuals are intrigued to incorporate social and environmental goals into their investment decisions (Epstein, 2018; Humphrey, Warren and Boon, 2016; Sparkes and Cowton, 2004; Schueth, 2003). Therefore, they decide to invest their funds in businesses that promote social responsibility and stakeholder engagement (Majoch, Hoepner, and Hebb, 2017; Mair and Milligan, 2012; Guay, Doh and Sinclair, 2004). The rationale behind socially responsible investing (SRI) is that such investments address societal and community deficits (Camilleri, 2015a; Martí-Ballester, 2015; Nilsson, 2009; Ogrizek, 2002). Therefore, some forms of SRI, including; impact investing, sustainability investing and community investing, among other nomenclatures, support the environmental issues, human rights, fair labour practices, sustainable consumption and community involvement (Ooi and Lajbcygier 2013; Capelle‐Blancard and Monjon, 2012; Sparkes, 2017; Aras and Crowther, 2009; Friedman and Miles, 2001).

Several investors may usually be interested in allocating their financial capital toward laudable projects, as they try to avoid negative externalities, for the benefit of society and the environment (Renneboog, Ter Horst and Zhang, 2008). Hence, SRI portfolios are regularly screened by specialized contractors in order to evaluate their environmental, social, and governance (ESG) credentials (Camilleri, 2015a, 2015b; Renneboog et al., 2008). Many stakeholders, including investors, are well aware that there are numerous instances where big businesses were accused and found guilty of accounting fraud, bribery, money laundering and/or where they were involved in some corporate scandals, like environmental disasters. Therefore, financial investors should be cautious with their portfolios. Notwithstanding, the SRI investors are looking for more than just decent returns on their investments, as they may be genuinely interested in making a positive impact in their society and/or in the natural environment (Nilsson, 2009). They may be concerned about social justice, human rights, anti-corruption, bribery issues, and diversity in the corporations’ boards (Camilleri, 2015a, 2017b).

In this light, this descriptive contribution reviews the foundations of SRI and provides a factual summary of its evolution. It adds value to our academic knowledge as it explains the contemporary developments in the SRI market. Moreover, it reveals how the financial services industry is setting responsible investment screens on all types of businesses hailing from diverse sectors. Afterward, it presents the opportunities and challenges that are affecting the growth or demise of SRI. In conclusion, this contribution suggests future research avenues in this promising field of study.

Key Terms in this Chapter

Community Investing: This category of socially responsible investing (SRI) is related to the provision of investment capital that is intended to add value to the community at large.

Socially Responsible Investing: This is the umbrella term that refers to socially-conscious, sustainable or ethical investing. Such an investment strategy will usually consider both financial return as well as the societal well-being and/or environmental sustainability.

SRI Index: This index is a capitalization-weighted index that provides exposure to those responsible businesses that have demonstrated outstanding environmental, social, and governance (ESG) ratings. It excludes other businesses whose products or services have negative impacts on society and the ecology.

Environmental,: Social, and Governance (ESG): These three non-financial dimensions measure the sustainability and ethical impacts of specific investments in businesses.

Ethical Investment: This category of SRI refers to the individuals’ ethical principles and norms that can possibly influence their selection of securities investing.

Negative Screening: This form of screening involves excluding certain businesses that are not complying with specific, social norms or environmental criteria. Negative screening may exclude businesses that are involved in the production of entertainment drugs, tobacco, or gambling products.

Positive Screening: This form of screening involves selecting responsible and sustainable businesses for investment purposes. Positive screening may include businesses that sell educational material and/or essential requirements like; food, clothing, electricity, water or housing.

Sustainability Investing: This category of SRI refers to investment capital that is directed to sustainable businesses that are protecting the natural environment by reducing and/or offsetting their externalities.

Impact Investing: This category of SRI refers to the provision of investment capital to businesses, non-profit organizations, and funds with the underlying intention to generate a measurable, social or environmental impact alongside a financial return.

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