The Definition of Socially Responsible Investing
by: Davor Miskovic

Many authors describe Socially Responsible Investing (SRI) as an investment philosophy that includes non-financial, ethical (e.g., social and environmental) objectives. In the words of Richard Hudson (2005:641), Socially Responsible Investing is a “non-financial normative criteria…in the choice of securities”. Mansley (2000:3) has described it as a process within the context of financial analysis, which takes into account social, environmental and ethical consequences when selecting, retaining, or realizing investments. Notably, Waddock (2003:369) portrays SRI as a community that encompasses a wide range of individuals and groups interested in criteria other than just return on investment.

However, it is hard to construct a proper definition without referring to Cowton’s (1994) precise and comprehensive attempt which may be easily accepted as a standard definition of responsible investing. Taking the terms “ethical” and “socially responsible” to be equivalent, Cowton stated that:

“Ethical investment may be defined as the exercise of ethical and social criteria in the selection and management of investment portfolios, generally consisting of company shares (stocks). This contrasts with standard depictions of investment decision-making in finance textbooks, which concentrate solely on financial return in the form of dividends and capital gains, and risk…” (Cowton 1994:215).

The quality of Cowton’s (1994) definition lies in confronting a conventional investment decision-making process with the one applied in Socially Responsible Investing. Cowton develops his definition even further by including sources of financial returns from investments to be the basis for concerns of ethical investors. Similarly, Social Investment Forum (2003:3) refers to such type of investing as a process that focuses on non-financial consequences of investments. However, by designating sources of financial returns as important factors, Cowton clearly demonstrates that SRI is not only about avoiding certain activities and consequences, but much more. Based on this assertion, Sparkes (2002) suggests that Socially Responsible Investing should be an investment philosophy that combines financial and non-financial criteria.

In order to understand the meaning behind the concept of Socially Responsible Investing more fully, it is very useful to comprehend the goals of SRI itself. This would be our next step.


References:

Cowton, C. J. (1994). ‘The Development of Ethical Investment Products.’ Published in
The ACT Guide to Ethical Conflicts in Finance, p. 213-232. Oxford, UK: Blackwell Publishers.

Hudson, R. (2005). ‘Ethical Investing: Ethical Investors and Managers.’ Business Ethics
Quarterly 15 (4), p. 641-657.

Mansley, M. (2000). Socially Responsible Investment: A Guide for Pension Funds and
Institutional Investors. Sudbury, UK: Monitor Press.

Social Investment Forum (2005). 2005 Report on Socially Responsible Investing Trends in
the United States. [online] Available here.

Sparkes, R. (2002). Socially Responsible Investment – A Global Revolution. Chichester, UK:
John Wiley & Sons Ltd.

Waddock, S. (2003). ‘Myths and Realities of Social Investing.’ Organization and Environment
16 (3), p. 369-380.