May 14, 2007
Socially Responsible Investment--What is the Point?
Posted by Lisa Fairfax

This Sunday’s Washington Post featured a story on the increase in socially responsible investing over the last decade, and particularly the rise in such investing over the last five years. According to the Washington Post, over the past decade the number of socially responsible investment funds has increased by 39% while the amount of assets in such funds has nearly tripled. But the thrust of the Post article seemed to be pondering the point of such investing.

Certainly many advocates of socially responsible investing have attempted to argue that investment in socially responsible funds allows shareholders to “do well and do good.” However, research suggests that socially responsible investing requires some sacrifice in profits. Thus, one study by professors at Wharton revealed that the annual average returns for actively managed socially responsible investment funds lag behind comparable traditional funds by about 3.5 percentage points. While socially responsible index funds apparently perform better, existing research makes it relatively clear that shareholders who want their investments to “do good,” should not count on their investments doing as “well” as more traditional funds.

In addition, it does not appear that socially responsible investing has any significant impact on corporate policy. Thus, aside from a few anecdotes, there is nothing to suggest that the increase in socially responsible investing has pressured corporations to alter their corporate policies. Of course there are many reasons why such investing may not have any appreciable impact on corporate policy. As an initial matter, while such investing may represent a growing market, it may not be big enough for corporations to take notice. The even bigger problem is the lack of agreement on what counts as socially responsible behavior. Indeed, even on issues that seem relatively uncontroversial, there is no agreement on the kinds of policies that would achieve the socially responsible result. In my study on socially responsible investment funds, I found that there were many corporations that were screened out of some funds, but included in others. In this regard, socially responsible investing may not serve as a good signaling device. These kinds of issues help explain why socially responsible investing has not served as a vehicle for altering corporate policies.

So what is the point? The point appears to be the investment itself. More and more people apparently want their investment decisions to better reflect their social values, and are wiling to sacrifice profits (at least within reason). Thus, socially responsible investing appears to be an end in itself. However, the fact that some people find such investing gratifying for its own sake suggest that corporations interested in attracting such investors need not promote the perhaps unrealistic notion that they can do well and do good. Instead, there is a market for corporations that do good while doing well enough.

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