Optimal Responsible Investment

Abstract:     
Numerous institutions are now engaged in Socially Responsible Investment or have signed the "UN Principles for Responsible Investment". Retail investors, however, are still lacking behind. This is peculiar since the sector constitutes key stakeholders in environmental, social and governmental standards.

This paper considers optimal responsible investment for a small retail investor. It extends conventional portfolio theory by allowing for a personal-value based investment decision. Preferences for responsibility are defined in the framework of mean-variance analysis and an optimal responsible investment model identified. Also, it is considered how structured products may facilitate retail SRI.

Implications of the altered investment problem are investigated when the dynamics between portfolio risk, expected return and responsibility is considered. Relying on the definition of a responsible investor, it is shown how superior investment opportunities can emerge when the new dimension is incorporated into the investment decision.

Keywords: Retail investors, Portfolio allocation, Preferences for responsibility, Socially Responsible Investment

JEL Classifications: G11, D14

Working Paper Series