Morals, money, ethical investing and economic psychology

Abstract

This paper reports on a questionnaire survey of 1146 ethical investors in the UK. Ethical investing usually means that certain companies are excluded from one's portfolio on non-economic grounds, e.g. because they manufacture armaments, test chemicals on live animals, or have poor pollution records. Is this an example where moral commitment rather than economics is driving economic decision making? Ethical investors were found to be neither cranks nor saints holding both ethical and not so ethical investments at the same time. A case is made that people are prepared to put their money where their morals are although there is no straightforward trade-off between principles and money. A broader analysis than that based on rational economic man is recommended: an economic psychology.

Which proportion of SR investments is enough? A survey-based approach

“…Nilsson (2008) finds that about 25 % of the 563 respondents perceive a worse performance of SR products compared to conventional investments, whereas more than half of the respondents believe in similar returns and 20 % suppose that sustainable investments outperform their conventional counterparts. However, these results are different from those of Lewis and Mackenzie (2000a) who report a greater percentage of ethical investors assuming that SR investments have a lower return. Thus, investors who do not belief in a superior financial performance of SR investments and regard financial issues to be more important than non-monetary aspects at the same time, are supposed to have a smaller optimal level of SR investments.…”

“…However, several studies suggests that investment decisions appear to be not only determined by these financial considerations, but also by non-financial aims (e.g., Pasewark and Riley 2010;Pérez-Gladish et al 2012). Lewis and Mackenzie (2000a) report that the preferences for ethical investments are price inelastic with respect to losses and elastic with respect to gains. By analyzing the dynamics of cash flows in SR mutual funds, Bollen (2007) finds evidence that cash flows into the funds are more sensitive to lagged positive returns than the cash flows into conventional funds.…”

“…In this context, the question arises whether non-financial utility increases linearly with the amount that is invested in a socially responsible way. As shown by Lewis and Mackenzie (2000a), most SR investors do not have their entire portfolio invested socially responsibly, but only to an average share of 31 %. Hence, we assume that investors consider their non-monetary ambitions to be satisfied if a certain amount is invested socially responsibly.…”

“…This also implies that they are generally committed to their SR investments, even if they perform poorly or are ethically ineffective. However, the questionnaire survey of 1146 SR investors in the UK, conducted by Lewis and Mackenzie (2000a), reveals that these preferences are unrelated to the proportion which is invested socially responsibly. Thus, they suggest that there is no straightforward trade-off between a person's values and their desired expected financial return.…”

“…Furthermore, several studies show that many SR investors mix their portfolio with SR and conventional investments (Mackenzie and Lewis 1999;Lewis and Mackenzie 2000a;Webley et al 2001;Lewis 2001). This result implies that it appears to be sufficient to invest a certain amount to achieve social or ethical objectives which are pursued by implementing SRI.…”