The market for socially responsible investing

This is excerpt from one of my latest papers on socially responsible investing (that was accepted for publication in Emerald's Social Responsibility Journal).

How to Cite: Camilleri, M.A. (2020). The market for socially responsible investing: A review of the developments. Social Responsibility Journal. 10.1108/SRJ-06-2019-0194 Download this paper

There are many factors that are contributing to the development of socially responsible investing (SRI): Firstly, today’s investors have more access to information than ever. They are increasingly using technologies, including mobile devices and their related applications to keep them up to date on the most recent developments in business and society. Certain apps inform investors on the latest movements in the financial markets, in real-time.

Notwithstanding, SRI contractors are providing much higher quality data than ever before. As a result, all investors are in a position to take informed decisions that are based on evidence and research. Investors and analysts use “extra-financial information” to help them analyze investment decisions. This “extra-financial information” comprises details on the corporations’ (i.e. the investees’) environmental, social and governance (ESG) performance. These disclosures encourage businesses and enterprises to report on their responsible and sustainable practices. The companies’ integrated thinking could be a precursor for their integrated reporting. Business can use integrated reporting to provide material information on their financial as well as on their non-financial information for the benefit of prospective investors and analysts, among other stakeholders.

Secondly, the gender equality issue has inevitably led to some of the most significant developments in the financial services industry. Nowadays, there are more women who are in employment, who are gainfully occupied as they are actively contributing in the labor market. Many women are completing higher educational programs and attaining relevant qualifications including MBA programs. Very often, these women move their way up the career ladder with large organizations. They may even become members on boards of directors and assume fiduciary duties and responsibilities.

During the last decades, an increased equality in the developed economies has led to SRI’s prolific growth. As a result, women are no longer the only the beneficiaries of social finance, as they are building a complete ecosystem of social investing. “By 2020 women are expected to hold $72trn, 32% of the total. Most of the private wealth that changes hands in the coming decades is likely to go to women . This wave of wealth is set to land in the laps of female investors who have shown positive attitudes toward social investing, when compared to their male counterparts.

Thirdly, today’s investors are increasingly diversifying their portfolio of financial products. The default investment is the market portfolio, which is a value-weighted portfolio of all investable securities. However, a growing body of evidence suggests that many investors do not necessarily have to sacrifice performance if they invest in socially responsible or environmentally sustainable assets. Moreover, relevant academic literature suggest that there are opportunity costs for the negative screenings of investments.

Investors are increasingly realizing that responsible and positive impact investing is congruent with long term prosperity. In fact, today’s major asset classes including global, international, domestic equity, balanced and fixed-income categories also comprise top-performing socially responsible mutual funds. Therefore, some of the latest financial products are reflecting the investors’ values and beliefs.

Consequentially, the broad range of competitive socially responsible investment options have resulted in diverse, well-balanced portfolios. In the U.S. and in other western economies, top-performing SRI funds can be found in all major asset classes. More and more investors are realizing that they can add value to their portfolios whilst supporting social and environmental causes.

Fourthly, there are economic justifications for the existence of mutual funds in diversified portfolios. Although SRI funds are rated well above average performers no matter which ranking process one prefers to use, other literature suggests that there are situations where positive or negative screens were not having an effect on the financial products’ portfolio value. This can result in having mixed investments where SRI products are marketed with other financial portfolios.

At the moment, the financial industry is witnessing a consumer-driven phenomenon as there is a surge in demand for social investments. A number of non-governmental organizations that have developed indices to measure the organizational behaviors and their laudable practices. Very often, their metrics rely on positive or negative screens that are used to define socially responsible and sustainable investments.

Despite these developments, the balanced investors are still diversifying their portfolio in different industry sectors, as they invest in laudable as well as controversial businesses. Perhaps, in the future there could be alternative screening methods in addition to the extant inclusionary and exclusionary approaches. Several corporations are willingly disclosing their integrated reporting of financial and non-financial performance; as stakeholders including investors, demand a higher degree of accountability and transparency from them. Alternatively, they are fostering responsible corporate governance or facilitating shareholder activism and advocacy, among other actions. As a result, a growing number of firms, are recognizing the business case for integrated thinking that incorporates financial and strategic corporate responsible behaviors.

Indeed, businesses and investors can support the community at large, by allocating funds to socially responsible, positive impact investments. Their sustainable investments can help them improve their bottom lines, whilst addressing their societal and community deficits.

Related publications

Camilleri, M. A. (2017). Socially Responsible and Sustainable Investing. In Corporate Sustainability, Social Responsibility and Environmental Management (pp. 61-77). Springer, Cham. https://link.springer.com/book/10.1007%2F978-3-319-46849-5