Adding an Ethical Dimension to Portfolio Management
University of Grenoble
Université Pierre Mendes France Grenoble II
affiliation not provided to SSRN
EFMA 2003 Helsinki Meetings
Asset management theory and practice is based solely on financial risk and returns. However, over the past few years many investors have started taking into account a new factor, that is, the ethical nature or, more generally, the social responsibility attached t their investments. Socially responsible investment already accounts for one dollar out of eight in the US and it is growing rapidly in France, notably by means of ethical funds. Up to this, financial theory has not shown any preoccupation with ethics in portfolio choice. This is precisely what the authors propose to do covering issues from investor behavior to optimization. Thus, the investor may decide to simply ignore the shares in question and/or apply a social criterion to financial risk and return when optimization was carried out in 173 European firms based on the social scores provided by the French social rating agency "ARESE". Investors should not have any illusions: it is not possible to gain in the long run by being social. Of course, the financial cost the socially responsible investor has to support depends on the relative importance of the social and financial criteria applied but it is possible to obtain improved social performance even at very low financial cost. The financial sacrifice will become all the more real as the investors' ethical appetite grows. But if the majority of investors become responsible, the financial sacrifice will not be in vain: socially aware companies will benefit from a decrease in the cost of their stockholders' equity and an increase in their volume of investment.
Number of Pages in PDF File: 15
Keywords: ethics, socially responsible investor, portfolio choice, financial cost, altruismworking papers series
Date posted: June 9, 2003
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