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Some lessons from basic finance for effective socially responsible investing

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  • Larry D. Wall

Abstract

Given the vast sums of money that mutual and pension fund managers invest, an important question is how they should go about deciding which assets, especially which stocks, they should purchase. One school of thought argues that investment policies should reflect some set of social values. This study examines three questions about the financial implications of effective socially responsible investing in common stocks--that is, socially responsible investment intended to change firms' behavior. ; The first question concerns what socially responsible investors can do to effectively influence firms' investment policies. The second question is, under what conditions, if any, will the securities markets permit effective socially responsible investment? Third, what impact will socially responsible investment have on the performance of portfolios that follow it? ; The analysis has two implications for fund managers and investors who want to change firms' behavior. The first is that the investment strategy should focus on buying shares of small socially responsive firms. The second is that investors who owned targeted socially responsible stocks before socially responsible investment began will realize above-market rates of return in the short run; however, once socially responsible investors stop bidding up the price, investors will receive reduced returns.

Suggested Citation

  • Larry D. Wall, 1995. "Some lessons from basic finance for effective socially responsible investing," Economic Review, Federal Reserve Bank of Atlanta, vol. 80(Jan), pages 1-12.
  • Handle: RePEc:fip:fedaer:y:1995:i:jan:p:1-12:n:v.80no.1
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    Cited by:

    1. Mollet, Janick Christian & Ziegler, Andreas, 2014. "Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets," Review of Financial Economics, Elsevier, vol. 23(4), pages 208-216.
    2. Crifo, Patricia & Forget, Vanina D. & Teyssier, Sabrina, 2015. "The price of environmental, social and governance practice disclosure: An experiment with professional private equity investors," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 168-194.
    3. Cristiana MĒŽnescu, 2011. "Stock returns in relation to environmental, social and governance performance: Mispricing or compensation for risk?," Sustainable Development, John Wiley & Sons, Ltd., vol. 19(2), pages 95-118, March/Apr.
    4. Iulie Aslaksen & Terje Synnestvedt, 2003. "Ethical investment and the incentives for corporate environmental protection and social responsibility," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 10(4), pages 212-223, December.
    5. Urs von Arx, 2007. "Principle Guided Investing: The Use of Exclusionary Screens and Its Implications for Green Investors," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(I), pages 3-30, March.
    6. Joakim Sandberg, 2011. "Socially Responsible Investment and Fiduciary Duty: Putting the Freshfields Report into Perspective," Journal of Business Ethics, Springer, vol. 101(1), pages 143-162, June.
    7. Francesco Gangi & Carmen Trotta, 2015. "The ethical finance as a response to the financial crises: an empirical survey of European SRFs performance," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(2), pages 371-394, May.

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    Keywords

    Investments;

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