The purpose of this paper is first to give an in-depth discussion of the criticism of socially responsible investment's (SRI) alleged incompatibility with the concept of rational investment constituting an inferiority to conventional investment so as to disprove unwarranted arguments and identify potential for improvement of SRI. The second objective is to propose a framework that places SRI and conventional investment on the same level of rationality.
The discussion is based on a literature study. The framework uses a previously published multidimensional optimization approach and embeds it into a new, integrated methodology for investment decisions in the presence of SRI objectives. The framework is empirically evaluated using historic stock market data.
The main findings show that SRI is not necessarily less rational than conventional investment; it can be implemented in an equally stringent and clearly defined methodology. The empirical results prove that investors can pursue SRI objectives without sacrificing performance.
Focus is on the German stock market; in the future, research will be expanded to cover international markets.
The results may contribute to enhance the SRI methodology.
Investors may be encouraged to consider SRI, strengthening the concept of sustainability.
In the literature, the question of SRI’s compatibility with rational investment has often been cited but seldom scrutinized. An in-depth analysis combined with a framework to exploit of the learnings has yet been missing.
Preliminary versions of this paper have been accepted for presentation at PRI-CBERN Academic Network Conference 2012 (October 1-3, 2012, York University, Toronto, Canada) and at ABIS 12th Annual Colloquium (October 15-17, 2013, Nyenrode Business Universiteit, Breukelen, The Netherlands). The author wishes to express his sincere gratitude to the organizers and participants of these conferences. Their valuable feedback and suggestions have greatly helped to improve this paper.
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