Socially Responsible Investors and Their Advisors
Santa Clara University - Department of Finance
Journal of Investment Consulting, Vol. 9, No. 1, pp. 15-26, Fall 2008
Clients want more than advisors who allocate assets in their portfolios. They want advisors who empathize with their goals, whether a secure retirement, a vacation home, or social responsibility. Socially responsible investors want to integrate their personal values into their investment decisions and they look for advisors who do not lecture them about the folly of such integration. Advisors should be flexible enough to adopt clients' goals, even if they do not share them, as long as the pursuit of these goals does not violate the fiduciary duties they owe to their clients.
In Statman (2007), I answered questions about such investments. What distinguishes socially responsible companies from conventional companies? What has been the performance of socially responsible portfolios relative to conventional portfolios? What are the tracking errors of socially responsible portfolios and what can investors do to reduce them? I noted that no company has a perfect score on social responsibility. Some companies are strong on employee relations, some on human rights, and others on concern for the environment. Moreover, some companies that are strong on some social responsibility criteria are weak on others.
Nevertheless, the average social responsibility rating of companies in socially responsible portfolios, such as the Domini Social 400 Index, is higher than the average rating of companies in conventional portfolios, such as the S&P 500 Index. I also noted that financial advisors can construct for their clients socially responsible portfolios that perform as well as conventional portfolios, or even better, whether through mutual funds or separate accounts. Moreover, advisors can control tracking errors of socially responsible portfolios relative to conventional portfolios.
In this article I answer questions about socially responsible investors and their advisors. Do socially responsible investors care about protecting the environment, preventing child labor, or promoting good corporate governance? Do they want consistency between their personal values and their investments or do they hope to improve the world? Do they care only about social responsibility or do they also care about the expected returns and risks of their portfolios? I interviewed investors who have adopted socially responsible investing and investors who have not. I also interviewed advisors who serve socially responsible investors. They include advisors affiliated with Trillium Asset Management, Boston Common Asset Management, First Affirmative Financial Network, and UBS Financial Services.
Number of Pages in PDF File: 12
Keywords: Socially Responsible Investing, Behavioral Finance, Investor Behavior, Asset Pricing Model, Market Efficiency, Portfolios
JEL Classification: G11, G12, G14, G23, G24
Date posted: January 24, 2009 ; Last revised: November 16, 2015