Why Do We Invest Ethically?

Abstract

Analysis of three potential motives for ethical investment—financial returns, non-wealth returns, and social change—indicates that these motives are neither exhaustive nor exclusive; one single motive will not explain the behavior of all ethical investors. There may be a trade-off between financial and psychic returns for some investors. The trade-off for consumption-investors is expected to be close to zero (total utility is maximized at low levels of ethical investment in the fun of participation model) and is expected to vary with the ethical intensity of investment-investors, as shown when ethical intensity is included in the investor's utility function. Psychic return can also be viewed as an increase in happiness, an approach that lends itself to empirical testing to improve our understanding of why we invest ethically.