Table of content:

1.  Introduction  1

2.  Definition and Motivation of SRI Investment  2

2.1.  Definition  2

2.2.  Motivation for SRI investment  3

3.  SRI Market  4

3.1.  History of SRI  4

3.2.  SRI categories  4

3.2.1.  Environmental issues:  4

3.2.2.  Social SRI  5

3.2.3.  Religious or ethical investments  5

3.2.4.  Corporate governance  5

3.3.  Different approaches for an SRI portfolio creation  5

3.3.1.  Screening / Best in class  5

3.3.2.  Shareholder Advocacy / Engagement  6

3.3.3.  Community Investing:  6

3.4.  SRI products  6

3.5.  Product providers  7

3.6.  SRI Indices  7

4.  Development of the SRI market  9

4.1.  Europe:  9

4.2.  USA  10

4.3.  Asia  11

5.  Performance of SRI investments  12

5.1.  Performance of investor activism  12

5.2.  Social Return on SRI-Investment  13

5.3.  Financial Performances and Cost of SRI investments:  13

5.3.1.  SRI Investment performance between 1995 2007  13

5.3.2.  SRI Investment performance between 2008 2010 .  14

5.3.3.  The financial cost of SRI investments  14

6.  Constraints of SRI investment  15

7.  Conclusion  16

I

1. Introduction

In the light of the financial crisis SRI (Socially responsible investment) became popular as never before. SRI has already been around for quite some time before the crisis, but this industry has never seen such a volume increase as in the last 4 years. The EU market for SRI almost doubled since 2007 (Cropper, 2010). This clearly shows that the events forcing the financial crisis motivated investors to rethink their criteria for making their investment decisions. Naturally, such a high growth rate of an industry comes from an increasing demand. In order to satisfy the increasing demand for SRI products the SRI industry is going threw a ‘transformative’ and ‘innovative’ phase exploring new areas for SRI, creating new products and services. However, SRI investment has a very broad definition band and cannot be boxed in. Hence, as good as it might be, SRI investment brings also many challenges with it, because it is such a broad concept.

Therefore, the purpose of this paper is to give an overview about what Socially Responsible Investment is and to find answers to the question of “How sustainable Socially Responsible Investment is?”

In the first chapter the paper will discuss the different definitions and motivations for SRI investments. The second chapter will take a closer look on the historical roots of the SRI market and the different categories and approaches to create an SRI portfolio. Further it will present the available products of the SRI market. The third chapter will present the development of the SRI market in Europe, the US and Asia. In the fourth chapter the performance of socially responsible investment will be analyzed. Finally the fifth chapter will discuss the main constraints of SRI.

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2. Definition and Motivation of SRI Investment

2.1. Definition

There is no universal definition for SRI. Eurosif (European Sustainable Investment Forum) describes this by saying:

“The terms social, ethical, responsible, socially responsible, sustainable, and others are often used in a multitude of overlapping and complementing ways to approach the SRI field. It is this richness of different views that challenges the investor to perfectly define and categories SRI - it is not easily ‘boxed in’.” (Eurosif, 2010)

The USSIF (The Forum for Sustainable and Responsible Investment) describes and defines SRI investment as:

“SRI recognizes that corporate responsibility and societal concerns are valid parts of investment decisions. SRI considers both the investor's financial needs and an investment’s impact on society. SRI investors encourage corporations to improve their practices on environmental, social, and governance issues. You may also hear SRIlike approaches to investing referred to as mission investing, responsible investing, double or triple bottom line investing, ethical investing, sustainable investing, or green investing.” (USSIF)

Broadly seen, SRI stands for investments or investment strategies, which consider social, environmental and governance issues in their decisions. However, some SRIs consider ethical standards, which are derived from either personal values or from religious institutional philosophies. Such ethical standards are subjective and not standardized and therefore much harder defined than the SRI criteria mentioned before. Therefore terms like ‘socially responsible investment’ or ‘ethical investing’ are sometimes used interchangeable, whereas others prefer to use ‘ethical investing’ instead of SRI (Fung/Law/Yau, 2010: 1).

Despite the different appendages and varying ideas, all definitions share the common idea that additionally to the traditional determinants of investment decision also the allocation of funds is an important criterion. This can be reflected by the extension of the magical triangle of the neoclassical finance theory to the magical quad (Pinner, 2003: 28).

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Figure 1: Magical triangle and magical quad

Source: in imitation to Pinner, 2003: 28

In 2006 the United Nations launched the Principles for Responsible Investment (PRI), which are meant to be the first global benchmark for responsible investments. The PRIs serve as a framework for the investment process to integrate ESG (environmental, social and governance) factors. In total there are six PRI principles. By becoming a signatory of the PRIs these guidelines need to get incorporated into the investment process of this companies. In November 2012, according to the Homepage of UNPRI, there are in total 940 signatories of the PRIs (UNPRI, 2011).

2.2. Motivation for SRI investment

Investors have different motives to invest in SRIs. The first and major reason might be the value-based one, where people implement their morals, values and beliefs into their whole life and so also into their investment decisions. The value-based investors can be subdivided into two groups, first the ones who accept a lower return in exchange for the implementation of their values, whereas other value-based investors do not think that their need to be a trade of in return for SRI investments.

The second group are the investors, which use SRI investment as an additional tool of risk management, they are also called the “sustainable” investors. They want to reduce the universal risk by implementing the ESG criteria in their portfolio and the idea behind is that in the long run the risk-adjusted returns will be higher compared to portfolios without ESG criteria.

The last group does not think that excluding some investments from the portfolio, which do not pass the SRI criteria, will have a major impact on the total return, since it is only a minority of assets, which get excluded (Fung/Law/Yau, 2010: 3).

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3. SRI Market

3.1. History of SRI

SRI investment already is around for quite some time, even thought it might not have been called “socially responsible investing”. Historically, different religions around the world have connected economical activities with their beliefs (Redins, 2006). Some first approaches can even be found in the bible, for instance in the book of Exodus 22,24, where it says that it is forbidden to charge poor people high interest rates (Deeken, 2010: 15).

However, nowadays most people associate the rise of SRI investments with the decade of 1920 to 1930. During this period churches motivated people to not invest in the so-called “sin” stocks (gambling, tobacco and alcohol) and in 1928 the first pioneer fund for SRI investment was established. Another important decade for SRI investments were the 1960s. In this decade the Vietnam War, the civil rights movement and ‘green’ issues motivated people to rethink their investment strategies. One of the biggest successes and motivators of SRI investments during the last 30 years might have been the end of the Apartheid in South Africa, where investors rejected to invest in the country, because of the poor social conditions (Redins, 2006).

Recent events like for instance the financial crisis, the nuclear catastrophe in Japan, global warming or the BP oil catastrophe might have been important factors for the large growth within the SRI industry.

3.2. SRI categories

SRI investments can be divided into 4 general categories. An SRI portfolio can be consistent of one category or a combination of different ones.

3.2.1. Environmental issues:

The first category is “environmental issues” and is also known under the terms “green investments” or “clean tech investments”. This category can either exclude companies, which have a bad effect on the environment or include firms, which enhance the environment, like for instance with new technologies like wind. However also companies can be included which have no net effect on nature.

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