Social Responsible Investment

What are SRI funds?

SRI funds invest selectively in companies deemed socially responsible. Some avoid certain companies (a negative screen) and others actively seek out companies that meet their ethical standards (positive screen). With the rise of the fossil fuel divestment movement, fossil-free funds and indices (stocks from many companies bundled together) have become popular.

Does SRI work?

Like divestment, SRI funds do not affect share prices or cost of capital for companies, ethical or not - they have no positive financial effect on good companies, and no negative financial effect on bad companies. SRI funds are very unlikely to de-legitimise sectors in the way that headline-grabbing divestment acts do, so some people view SRI as greenwashing: cosmetic and ineffective. However, SRI may pressure companies to raise standards.

Does SRI reduce investors’ financial returns?

There is conflicting evidence on this question, but most studies on the returns of SRI funds find neutral or positive effects, especially in the long term.1 There is general agreement that exclusion of fossil fuel investment from a portfolio would not substantially increase risk.

 

References

1. Eccles, Robert G, Ioannis Ioannou, and George Serafeim. 2013. “The Impact of Corporate Sustainability on Organizational Processes and Performance.” Harvard Business School Working Paper 12 (035): 1–47; Geddes, Patrick. 2013. “Do the Investment Math: Building a Carbon-Free Portfolio.”; Fulton, Mark, and Reid Capalino. 2014. “Investing in the Clean Trillion: ClosIng The Clean Energy Investment Gap.