Ethical investment and the incentives for corporate environmental protection and social responsibility

TLDR

The study investigates whether ethical screening incentivizes firms to improve social responsibility, whether screened portfolios are competitive with conventional funds, and how risk‑adjusted returns vary with screening strategy. The incentive strength depends on the share of screened portfolios, which in turn is partly determined by their financial performance. The analysis shows that ethical screening can incentivize firms to alter their behavior, and empirical evidence indicates that screened portfolios are not systematically under‑performing conventional ones. © 2003 John Wiley & Sons, Ltd and ERP Environment.

Abstract

Abstract This paper addresses some interrelated questions regarding ethical investments: does ethical screening provide any incentives for improved social responsibility within firms? Are ethical screened portfolios competitive compared with conventional funds with respect to risk‐adjusted return? Does the risk‐adjusted return of a screened portfolio depend on the screening strategy applied? Considering ethical screening as a kind of segmentation of the equity market, it is shown that screening might create incentives for changes in firms' behaviour. The strength of this incentive depends on the relative share of screened portfolios, which in turn partially depends on the financial performance of the screened portfolios. While some theoretical arguments suggest that screening imposes a handicap compared with conventional portfolios, the empirical evidence does not suggest that screened portfolios systematically under‐perform conventional portfolios. Copyright © 2003 John Wiley & Sons, Ltd and ERP Environment.