The Recent Development And Performance Of Ethical Investments

Authored by: Philippe Gillet , Julie Salaber-Ayton

Routledge Handbook of Social and Sustainable Finance

Print publication date:  June  2016
Online publication date:  June  2016

Print ISBN: 9781138777545
eBook ISBN: 9781315772578
Adobe ISBN: 9781317678830

10.4324/9781315772578.ch31

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Abstract

The development of faith-based funds and socially responsible funds challenges modern portfolio theory as some investors move away from the risk-return paradigm by constraining their portfolios to “ethical” investments. This type of investment attempts to balance the regard for morality of a firm’s activities and the regard for return on investment. Such ethical investors will shun companies whose behaviors they condemn, or focus on companies that represent values in which they believe. Hence, in addition to maximizing return and/or minimizing risk, they integrate non-pecuniary preferences into their investment decisions (Gillet, 2009). Ethical investments include a wide range of mutual funds, unit trusts, and equity indices that can be classified into Socially Responsible Investment (following so-called Environmental, Social, and Governance criteria) and faith-based investment (following for instance Christian or Islamic principles). Socially responsible and Islamic funds have grown considerably in the last 20 years, both in volume and in value (Hoepner, Rammal, & Rezec, 2011; Renneboog, Ter Horst, & Zhang, 2012). On the one side, the characteristics and performance of socially responsible funds and indices have been subject to many empirical studies which offer conflicting evidence (Leite & Cortez, 2014; Renneboog, Ter Horst, & Zhang, 2008). On the other side, the Islamic financial system survived the 2007–2008 financial crisis, and several reasons might explain the resistance of Islamic funds; for example, the fact that they comply with Islamic moral and ethical standards or that they exclude equities from the traditional financial sector (Jouini & Pastré, 2009).

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