Socially Responsible Investment in a Global Environment

Socially Responsible Investment in a Global Environment

Hung-Gay Fung, Sheryl A. Law and Jot Lau

Socially responsible investment (SRI) is becoming increasingly popular and can be potentially rewarding to all parties concerned. This book discusses the opportunities, challenges, and practices of SRI in a global financial environment in a consistent and integrated framework of risk management. It also covers a wide variety of environmental, social, and corporate governance (ESG) issues related to various participants, such as values-based retail, institutional investors, corporations, banks, supranational agencies, and non-governmental organizations.

Chapter 3: Incentives, Alternatives, and Financial Performance of SRI

Hung-Gay Fung, Sheryl A. Law and Jot Lau

Subjects: business and management, corporate governance, corporate social responsibility, economics and finance, corporate governance, financial economics and regulation, law - academic, corporate law and governance, international investment law


INTRODUCTION There are different incentives for investors to engage in SRI. They do so not only for financial rewards but also non-financial returns that fulfill their own aspirations, moral obligations and values. The non-financial incentives have been described as the ‘feel good’ or ‘do well while doing good’ motivation of SRI. Although it sounds ideal to garner profits while doing some good in the world, is there a cost to SRI? It seems easier to convince investors who are socially concerned that there is no cost to SRI. Many of them are willing to accept a lower return on investment for ‘feeling good.’ Fiduciaries (for example, financial advisors and pension fund managers) who work for socially responsible investors, however, are not as easily convinced. They are confronted with the dilemma of trying to achieve the best risk–return trade-off and at the same time to honor clients’ requests for incorporating ESG factors. Should they incorporate ESG if there is a cost to SRI? However, from the fiduciaries’ vantage point, they have not necessarily been convinced that it is good for everybody. As part of the fiduciary duty, they look for hard evidence to support a rational economic decision. However, they have found no overwhelming and compelling evidence to invest in SRI. Financial performance results of SRI at best have been mixed. The literature suggests that SRI best-in-class strategies may at times outperform the market but this has not been consistent. Other SRI strategies may not even fare as well as...

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