The Ethical Investor's Behaviour: Exploring Dimensions on Socially Responsible Investment

Introduction:
The definition of ethical investing depends on personal beliefs. Ethical investing is highly subjective because each individual investor has different ideas about what constitutes ethical behaviour by a company, and different priorities that they want to support with their investment. Broadly speaking, however, ethical investing is a way of earning returns in the financial markets by supporting companies that are creating positive change in the world, or, in some cases, that aren't creating positive change; but aren't making the world worse, either. Ethical investors want to reach their financial goals in ways that coincide with their values. Their investing decisions are usually part of an overall strategy for ethical living that includes making values based decisions about work, housing, transportation and shopping, among other concerns. Ethical investment is even called as socially responsible investments !"#$%, which are often also sustainable investments. &ver the past decade, socially responsible investments have e'perienced an e'plosive growth around the world. (articular to the "#$ funds is that both financial goals and "ocial objectives are pursued. This paper we focus on one fundamental )uestion* +oes ethical investment pay, $n the paper, we define corporate social responsibility as a combination of good corporate governance, sound environmental standards, and care of stakeholder relations. -s well as this paper will focus on the possible ways in which ethical investment criteria can impact the investor.s return. Key ords: "ocially responsible investments !"#$%, corporate governance, investment Behavior.

De!inition o! 'Socially Responsible Investment " SRI':

-n investment that is considered socially responsible because of the nature of the business the company conducts. /ommon themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances !like alcohol,

gambling and tobacco% and seeking out companies engaged in environmental sustainability and alternative energy0clean technology efforts. "ocially responsible investments can be made in individual companies or through a socially conscious mutual fund or e'change traded fund !ET1%.

#istory o! SRI $socially responsible investments%:

Ethical investing has ancient origins and is rooted in 2ewish, /hristian, and $slamic traditions 2udaism has a wealth of teachings on how to use money ethically, and in medieval /hristian Times, there were ethical restrictions on loans and investments which were based on the &ld testamen. The /atholic /hurch imposed a universal prohibition on usury in 3345, which had not been rela'ed until the 35th century. $n England, a law called The -ct against 6sury which (rohibited e'cessive interests on loans was in effect from 3783 to 39:;. $n the 38th century, the <uakers !="ociety of 1riends.% refused to profit from the weapons and slaves trade when they settled in >orth -merica. The founder of ?ethodism, 2ohn @esley !38A4 3853%, stated in his "ermon =The 6se of ?oney. that people should not engage in sinful trade or profit from e'ploiting others. The ?ethodist /hurch in the 6B avoided investing in =sinful. companies, such as companies involved in alcohol, tobacco, weapons and gambling, when they began investing in the stock market in 35:As. Based on the teachings of the Boran and its interpretations, $slamic $nvestors avoid investing in companies involved in pork production, pornography, gambling, and in interest based financial institutions. ?odern "#$ is based on growing social awareness of $nvestors. "ince the 359As, a series of social campaigns, e.g. the anti war and the anti racist ?ovements have made investors concerned about the social conse)uences of their investments. $n the 35CAs, the racist system of the apartheid in "outh -frica became a focal point of protests by social investors. "#$ investors in the 6" pressuriDed companies doing business in "outh -frica to divert those operations to other countries, and urged mutual funds not to include "outh -frican nor western firms with "outh -frican subsidiaries in to their portfolios. These campaigns were relatively successful, for instance, the state legislature of /alifornia passed a law amendment in 35C9 re)uiring the state.s pension funds to divest over E9 billion from companies with activities in "outh -frica !"parkes, :AA:%. &n -pril:7th, 35C9 the /hernobyl nuclear power plant in the former "oviet 6nion !now 6kraine% e'ploded during a test, spreading radioactive material across

Europe and increasing the number of cancer deaths by over :7AA. &n ?arch :4th, 35C5 the worst environmental disaster in the 6" occurred when the oil supertanker E''on FaldeD ran aground near -laska and spilled 33 million gallons of crude oil. The above and other environmental disasters in the late 35CAs made investors aware of the negative environmental conse)uences of industrial development.

The &ar'et o! SRI:

&ver the past decade, socially responsible investments have e'perienced a phenomenal growth -round the world which is evident from the total assets under management !-6?% of "#$ screened portfolios and mutual funds in the 6", Europe, /anada and -ustralia. "ocially #esponsible investing is a booming market in both the 6" and Europe. $n particular, it has Become an important principle guiding the investment strategies of various funds and accounts. -ssets in socially screened portfolios climbed to E4.A8 trillion at the start of :A3A, a 4;G $ncrease since :AA7, according to the 6" "$1's :A3A #eport on "ocially #esponsible $nvesting Trends in the 6nited "tates. 1rom :AA8 to :A3A alone, "#$ assets increased more than 34G, while professionally managed assets overall increased less than 3G. -s of :A3A, nearly one of every eight dollars under professional management in the 6" is involved in socially responsible investingH3:.:G of the E:7.: trillion in total assets under management tracked by Thomson #euters >elson. #esearch estimates by financial consultancy /elent predict that the "#$ market in the 6" will reach E4 trillion by :A33. The European "#$ market grew from I3 trillion in :AA7 to I3.9 trillion in :AA8. $n the 6", the professionally managed assets of socially screened portfolios reached E:.4 trillion in :AA4, growing by 3:AAG from E39: billion in 3557. /urrently, "#$ assets represent about 3AG of total assets under management in the 6" !"$1, :AA7%. -lthough the European "#$ market is still in an early stage of development, it is also growing rapidly. $n :AA4, the assets of "#$ screened portfolios in Europe totaled around I:4A billion, and they account for about 3G of total assets under professional management in Europe. The 6B, the >etherlands and Belgium are the countries with the highest percentage of socially screened assets in Europe. $n -ustralia, "#$ assets have surged, rising 3AAG in a two year period from :AA3 to :AA4. $n the 6", the assets under management of "#$ funds reached E34C billion in :AA4. 1rom 3557 to :AA4, the number of "#$ mutual funds grew from 77 to 38C in the 6" !"$1, :AA4%, from 7; to 434 in Europe !"i#i, :AA4%, and from 3A to 94 in -ustralia !E$-, :AA4%.

Regulatory Bac'ground:
The growth of the "#$ industry can be partly attributed to the changes in regulation regarding the disclosure of social, environmental and ethical !"EE% information by pension funds and listed companies. $n this section, we review the regulatory initiatives taken by national governments regarding "#$. ?ost of the "#$ regulation is passed in Europe.

(nited Kingdom:
The 6B was the first country that regulated the disclosure of "EE investment policies of pensionfunds and charities. This has contributed considerably to the growth of the "#$ industry. $n 2uly:AAA, the -mendment to the 3557 (ensions -ct was approved, re)uiring trustees of occupational pension funds to disclose in the "tatement of $nvestment (rinciples Jthe e'tent !if at all% to which social, environmental and ethical considerations are taken into account in the selection, retention and realiDation of investmentsK. The Trustee -ct :AAA, which came into effect in 1ebruary :AA3, re)uires charity trustees to ensure that investments are suitable to a charity.s stated aims. -ccording to the /harity /ommission guidance, charities should include =any relevant ethical considerations as to the kind of investments that are appropriate for the trust to make.. $n :AA:, The /abinet &ffice in the 6B published the review of /harity Law in :AA:, which proposed that all charities with an annual income of over M3 million reports on the e'tent to which "EE issues are taken into account in their investment policies. The Nome &ffice accepted theses recommendations in :AA4. $n addition, large organiDations of institutional investors also have taken "#$ initiatives. 1or instance, the -ssociation of British $nsurers!-B$%, whose members invest in about E3 trillion assets, published a disclosure guideline in :AA3 suggesting that listed companies report on material "EE risks relevant to their business activities.

)ontinental Europe:
&ver the past decade, some national governments in continental Europe passed a series of

regulations regarding social and environmental investments and savings. "ince 3553, the #enewable Energy -ct in Oermany gives a ta' advantage for closed end funds to invest in wind energy !Eurosif, :AA4%. $n 3557, +utch Ta' &ffice introduces JOreen "avings and $nvestment (lanK, which grants a ta' deduction to investments in specific =green. projects, such as wind and "olar energy, and organic farming. 1ollowing the British -mendment to 3557 (ensions -ct of :AAA, four countries in continental Europe !namely Belgium, Oermany, $taly and "weden% have passed similar regulations re)uiring pension funds to disclose "EE related information. $n :AA3, Belgium passed the =Fandebroucke. law, which re)uires pension funds to report the degree to which their investments take into account social, ethical and environmental aspects. $n 2anuary :AA:, Oermany adopted a regulation re)uiring that certified private pension schemes and occupational pension schemes Jmust inform the members in writing, whether and in what form ethical, social, or ecological aspects are taken into consideration when investing the paid in contributionsK !Eurosif, :AA4%. "weden passed a regulation !effective since 2anuary :AA:%, re)uiring "wedish national pension funds to incorporate environmental and ethical aspects in their investment policies. $n $taly, legislation was adopted in "eptember :AA; re)uiring pension funds to disclose the effect of non financial factors !including social, environmental and ethical factors% that influence their investment decisions. -ll these initiatives have clearly had a positive impact on the growth of the "#$ fund industry in Europe. 1rance is the first and so far the only country making "EE reporting mandatory for all listed companies. $n ?ay :AA3, the legislation J>ew Economic #egulationsK came into force* listed companies are to publish social and environmental information on the companies in their annual report. ?eanwhile, since 1ebruary :AA3, the managers of Employee "avings (lans are re)uired to consider social, environmental or ethical issues when buying and selling shares

*utside Europe:
$n the 6", section ;A9 of the "arbanes &'ley -ct !2uly :AA:%, re)uires companies to disclose a written code of ethics signed by their chief e'ecutive, chief financial officer and chief accountant. -ustralia is the only country outside Europe that has adopted a regulation regarding "#$. $n :AA3, the -ustralian government passed a bill re)uiring that all investment firms. product disclosure statements include descriptions of Jthe e'tent to which labor standards or environmental, social or ethical considerations are taken into account. K "ince :AA3, all listed

companies on the -ustralian "tock E'change are obliged to make an annual social responsibility report.

India:
The concept of /"# is not new to $ndia; historically speaking, social responsibility of companies is a well established phenomenon in $ndia, and the country has one of the world's richest traditions of /"#. $n its oldest forms, /"# in $ndia included the concept of corporate philanthropy and the Oandhian Trusteeship model. But the liberaliDation of the $ndian economy in the 355As led to a fundamental shift from the philanthropy based model to a multistakeholder approach whereby companies are deemed responsible for all stakeholders, including financial stakeholders, employees and the community. The liberaliDation of the economy also led to the increased presence of large global corporations such as ?icrosoft, $B?, and others on $ndian soil, which thereby e'posed $ndia to a highly developed regime of /"# initiatives. -dditionally, a strong desire to compete and succeed in the global economy drove $ndian business enterprises to integrate /"# into a coherent and sustainable business strategy. These enterprises, both public and private, have realiDed that their long term success depends on the satisfaction of their stakeholders, and that ignoring them could jeopardiDe the company's future prospects in the community. This article discusses the concept of /"# as understood by $ndian businesses in the past, and the changing interpretations of the concept in the age of globaliDation and e'panding markets. The article further discusses the efforts toward community and social development made by both state owned enterprises !"oEs% and private sector businesses. -fter a detailed analysis, the article concludes that the future of /"# in $ndia is bright, and that its importance will continue to grow even further given the increasing importance accorded to /"# world wide, and $ndia's own realiDation that it needs /"# to achieve long term sustainability in the world economy.

Should )ompanies Be Socially Responsible:

1inance te'tbooks tell us that companies should ma'imiDe the value of their shareholders =e)uity. $n other words, companies. only responsibility is a financial one. $n recent years, corporate social responsibility !/"#% has become a focal point of policy makers !and the public%, who demand that corporations assume responsibility towards society, the environment, or the stakeholders in general. "#$ investors thus aim at promoting socially and environmentally sound corporate behavior. They avoid companies producing goods that may cause health haDards !like tobacco% or e'ploiting employees both in developed and developing countries !negative screening%. They select companies with sound social and environmental records and with good corporate governance !positive screening%. $n general, "#$ investors e'pect companies to focus on social welfare in addition to value ma'imiDation. -t the heart of the "#$ movement is a fundamental )uestion* is a firm.s aim to ma'imiDe shareholder value or social value !defined as the sum of the value generated for all stakeholders%, /lassical economics !e.g. -dam "mith.s =invisible hand. and the social welfare heorems% states that there is no conflict between the two goals* in competitive and complete markets, when all firms ma'imiDe their own profits !value%, the resource allocation is (aretooptimal and the social welfare is ma'imiDed. $n practice, the ma'imiDation of shareholder value often conflicts with the social welfare criterion represented by the interests of all stakeholders of a firm, including employees, customers, local communities, environment and so forth. By ma'imiDing shareholder value, firms may not take care of the interests of other stakeholders. $n /ontinental European corporate governance regimes, a stakeholder approach is more common than in the -nglo "a'on countries

+er!ormance e!!ects o! ethical criteria:

There are a number of different ways in which ethics could influence performance. 1irstly, it can impact at the company level and secondly at the ethical portfolio level. The @orld Business /ouncil for "ustainable +evelopment stated Jwe are convinced that investment managers stand a good chance of improving their portfolio performance and reducing their risks if they pay closer attention to the environmental performance of the companies in which they plan to investK. $t found that there were =downside. factors which may serve to depress investment returns and =upside. factors which could benefit companies. The downside factors outlined were* the cost and availability of capital; increased liability claims; e'panded rules on disclosure; greater emphasis on environmental factors in credit risk ratings; the availability and cost of insurance;

the emergence of environmental ta'es; and the increasing use of economic arguments by ecological pressure groups. The upside factors included* increased consumer demand due to increased ecological concern; increases in resource productivity; market share growth and new business development due to companies recogniDing the potential offered by the upside factors.

+ort!olio e!!ects:
The ethical policy of the fund and the fund manager are the key influences on the portfolio performance. The ethical policy and the ethical approach will define the ethical universe from which the fund manager can invest. &f course, for a passively managed fund it is only the ethical criteria and the inde' construction rules that are the key influences, though very few passively managed ethical tracker funds currently e'ist.

The e!!ects o! ethical investment on a port!olio:

The models show that there are both positive and negative influences that can come into play. The combination of all these factors may have the overall effect of broadly similar financial performance. $t is not likely that ethical criteria will always lead to outperformance, nor will it always lead to under performance. Those who do believe in a consistently positive ethical investment effect on performance need to e'plain why a market focused on profit ma'imiDation would overlook a potentially successful strategy for so long.

)onclusions:
-s the business diverges new challenges and threats emerges both internally and e'ternally. The focus of the growth and development of the /ompany depends on how it looked in the eyes of customers, shareholders, society in general. "ocially responsible investment is one emerging areas where the /ompanies are really tested. "o, the survival and growth of /orporate rests on how close they are to the society in addressing the responsibility towards the society. (rofit ma'imiDation of shareholder value often conflicts with the social welfare criterion represented by the interests of all stakeholders of a firm, including employees, customers, local communities, environment and so forth. By ma'imiDing shareholder value, firms may not take care of the

interests of other stakeholders. $t is not likely that ethical criteria will not always lead to outperformance, nor will it always lead to under performance. Those who do believe in a consistently positive ethical investment effect on performance need to e'plain why a market focused on profit ma'imisation would overlook a potentially successful strategy for so long. Re!erences: - paper on J"ocially #esponsible $nvesting vs. Fice $nvestingK byNoje 2o "anta /lara 6niversity , Tamanna "aha >ew Pork 6niversity ,#oopali "harma "anta /lara 6niversity, "ylvie @right "anta /lara 6niversity . The Ethics of $nvesting, ?aking ?oney or ?aking a +ifference, By 2oakim "andberg. http*00www.eiris.org0files0researchG:Apublications0doesethicalinvestmentpay55.pdf. http*00www.investopedia.com0terms0s0sri.asp http*00en.wikipedia.org0wiki0"ociallyQresponsibleQinvesting.