Abstract
This chapter provides an overview of ethical and socially responsible finance, presented as a new paradigm that transcends the separation model between social concerns and financial returns. In this regard, SRI represents a form of investment capable of meeting the expectations of investors interested in both profit and social responsibility. The chapter goes on to analyse socially responsible funds (SRFs) from different viewpoints. First, it focuses on SRFs’ capital allocation processes through the nexus agency model. Second, it discusses the prior literature on financial performance in relation to social responsibility screens, then, third, the opportunities and risks associated with the transition of SRI from a niche to the mainstream of financial markets. Fourth, the chapter analyses the characteristics of the ESG ratings of investment mutual funds. A comparison between the European and US SRI markets concludes the chapter.
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Notes
- 1.
Rajan and Zingales (2003), following the collapse of Enron, concluded that liquidity in modern financial markets, coupled with leverage and new financial instruments, serves to amplify the scope and the catastrophic effects of managerial misconduct.
- 2.
It is worth remembering here that there is a common thread between Marx, Sombart and Schumpeter linking their different theses of the evolution of capitalism. For Marx (1867), the relentless individualism of the capitalist would lead to the end of capitalism itself as a result of social struggles. For Schumpeter (1934, 1947), the creative destruction brought to bear by the entrepreneurial classes represents the very engine of capitalist development. At the same time, its evolution leads to a progressive separation between property and control. This is not the end of capitalism, but a new evolutionary phase.
- 3.
According to the Kantian definition, ethics is the doctrine of virtues (Lectures on Ethics, 1781).
- 4.
In this chapter, consistent with Renneboog et al. (2008), the terms “ethical investors” and “socially responsible investors” are interchangeable, since they frequently overlap. The same applies for ethical and socially responsible investment funds, usually simply referred to as “SRFs”.
- 5.
The work of Beal et al. (2005) on the psychological benefits of ethical investment is rooted in behavioural finance studies that recognize the possibility of non-rational choices by the investor. In particular, the approach that combines the classical utilitarian perspective with expressive benefits is based on the concepts of anchoring (Tversky and Kahneman 1974), framing (Slovic 1995), cognitive bias and emotion effect investor (Shefrin and Statman 1985).
- 6.
For example, in July 2020, companies who had signed up to the United Nations Global Compact (UNGC) for the dissemination of social communication came from 157 countries and published a total of 72,277 public reports.
- 7.
- 8.
- 9.
Eurosif (2018, p. 12) defines SRI as “a long-term oriented investment approach which integrates ESG factors in the research, analysis and selection process of securities within an investment portfolio. It combines fundamental analysis and engagement with an evaluation of ESG factors in order to better capture long term returns for investors, and to benefit society by influencing the behaviour of companies”.
- 10.
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Gangi, F., Varrone, N., Daniele, L.M. (2021). Socially Responsible Investment (SRI): From Niche to Mainstream. In: The Evolution of Sustainable Investments and Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-70350-9_1
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