A Review: The Financial Impact for Socially Responsible Investors

Abstract

The purpose of this document is to provide an overview of the financial impact of socially responsible investing (SRI) practices for investors, in particular, the impact of excluding socially undesirable stocks and putting more weight on socially desirable stocks. The review covers only the financial performance of SRI investing and is agnostic to the morality or externalities of such practices. On the theory side, the review discusses the expected financial trade-offs associated with SRI investing. On the empirical side, the review covers the historical return performance of various SRI investment strategies and discusses the expected returns going forward. The review also considers the management fees associated with delegated SRI investing and the impact on portfolio quality. Finally, the review provides a representative example to quantify the overall net financial impact, which shows that the at-retirement wealth losses are not insignificant.

Keywords: socially responsible investing (SRI), environmental, social, and governance (ESG), impact investing, greenwashing

JEL Classification: G10, G11, G12, G13, G18