Ethical factors in capital market: Socially responsible versus uncrupulous investment

Abstract

Socially Responsible Investment (SRI) funds have been shown to underperform, primarily due to restricting their investments to a subset of the universe of investable assets. Rapid growth of SRI funds implies that there is a growing segment within the investment community who are willing to accept lower returns than the unrestricted investors. However, it also follows that investors' utility derived from ethical investments perhaps reflects an added dimension, or an ethical premium, that compensates them for this underperformance. This research questions whether investors, on average, would remain committed to ethical investments in the face of decreasing wealth. We attempt to answer this question, by first observing the differences between an ethical portfolio and (un)ethical portfolio, created by using assets that are deemed uninvestable by ethical screens. Using market and style associated risk filtered premiums, we find that (i) increased demand for ethical assets results in a decrease in demand for non-ethical assets, and (ii) poor past market performance, that leads to general wealth decreases, results in increased demand for unethical assets and decreased demand for ethical assets.