Academic journal article International Journal of Business

Green Investing: Is It Different from Socially Responsible Investing?

Academic journal article International Journal of Business

Green Investing: Is It Different from Socially Responsible Investing?

Article excerpt

I. INTRODUCTION

One of the growing trends in investing is green or sustainable investing. Many new mutual funds and electronic traded funds have been created to take advantage of investment opportunities in this area. Green investing appeals to investors that desire to invest in areas that reflect their values on the environment, climate change, and a sustainable economy. Additionally, there exist sector green electronic-trade funds (ETFs) that investors may view as an opportunity to invest in alternative energy or in sustaining the economy such as water infrastructure ETFs. In this paper, we look at the similarities and differences between green investing and the more conventional socially responsible investing (SRI). Our goal is to look at the issues that will be raised by investors in terms of performance differences between green and SRI investing.

II. BACKGROUND

Exactly what is green or sustainable investing? Joseph F. Keefe (2007) defined sustainable investing as "... the full integration of environmental, social, and governance (ESG) factors into financial analysis and decision-making." For the purposes of this research, however, it is better to let investment funds that define themselves as green funds, be green funds. We do not include in our discussion specialty areas of sustainable investing such as water infrastructure ETFs. Investors looking for green funds will find that they have a myriad of different investment portfolios just as investors in SRI funds have many investment opportunities.

Many articles have investigated socially responsible investing. As socially responsible investing developed, the general view was that additional constraints on an investor's portfolio would negatively impact the risk/return trade-off with respect to an optimal portfolio (Rudd, 1981 and Grossman and Sharp, 1986). As empirical research was conducted, a general consensus developed in the literature is that there is no significant difference between the performance of conventional equity money managers and socially responsible funds (Bello, 2005; Goldreyer, Ahmed, and Diltz, 1999). Statman (2000) compared the Domini Social Index (DSI) and the S&P index during the 1990-98 periods. His research showed that the DSI index performed better during this period; but that socially responsible funds and conventional funds performed worse than the S&P 500 index.

Early in their development socially responsible mutual funds were concerned with being "environmentally sound, those that are engaged in alternative energy sources..." (Hamilton, Jo, and Statman, 1993). As evidence of global warming has increased and it is likely to be caused by human activity; there has been a large increase in the number of green funds (See Appendix 1). Stocks included in green funds may be excluded from socially responsible funds because of other management practices or products that they may have. Keefe (2007, 2008) has published two articles on sustainable investing and socially responsible investing. Keefe's thesis is that green investing is better defined and is not as restrictive as socially responsible investing.

According to the Social Investment Forum, SRI has grown very quickly to the level of over $2.71 trillion in assets. This level of investment is SRI implies approximately eleven percent of funds are invested in SRI (2007 Report on Socially Responsible Investing Trends in the United States: Executive Summary and Schueth 2003). The investment in green funds is now growing rapidly as well. It would not be surprising in the near future to see more investors and institutions demanding that the companies be environmentally responsible. It is important, therefore, to research the differences between SRI, green investing, and general mutual funds to compare the performance characteristics on these investments.

III. NATURE OF GREEN INVESTING

It is not clear to what degree green investing overlaps SRI. …

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