Socially Responsible Investing Essay

3806 Words May 26th, 2011 16 Pages
Socially Responsible Investing in the Financial Market

ABSTRACT
This paper talks about socially responsible investing in the financial marketplace which mutual funds and other individuals should consider while investing for the betterment of the society they live in. It first describes what social responsible investment is, and then provides some challenges faced by this form of investment. Finally the paper also provides some recommendations to address these challenges to create a healthier investment climate.

Contents

INTRODUCTION 3 ETHICAL INVESTMENT 4 FINANCIAL PERFORMANCE OF ETHICAL FUNDS 5 SHAREHOLDER ACTIVISM 7 COMMUNITY INVESTING 7 STAKEHOLDER THEORY AND IT’S RELATIONSHIP WITH ETHICAL INVESTMENT 9 CHALLENGES
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FINANCIAL PERFORMANCE OF ETHICAL FUNDS

Similar funds exist today. But an investor and portfolio manager often needs to be wary of one situation. As much as these stocks provide a protection against the recession, it is not free of risk. These companies producing dangerous products to the society have an increased chance of a litigation risk. For instance, a tobacco company could be sued if one of its consumers died because of a rare disease after consuming its cigarette. The repercussions for the investor could be huge in this case if the stock price tanked and the company was forced to shut down. Thus if a portfolio manager employs a strategy similar to Morgan it could hurt the return of the investors severely if such a situation arises.
A comparative study was performed by Lobe, Roithmeier and Walkshausl (4) to analyze if stocks invested in ethical funds generate a higher return than those invested in stocks of companies which produced products or acted in a manner that were harmful to the society. An index was constructed consisting of socially irresponsible publicly traded companies across the world. They called it “sin” index. This index was compared with the performance of certain virtue comparable consisting of the most important SRI index. They realized that over a long term horizon the SRI index performed better than the “sin” index. The reason that

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