Finding the [Financial] Cost of Socially Responsible Investing

Abstract

Socially responsible investing (SRI) is an increasingly important investment issue, gaining popularity among both institutional and individual investors. In the past, SRI research has almost exclusively focused on whether or not there is a financial “cost” in SRI. With rare exception, no material cost has been observed. We find if we examine SRI in terms of total costs and benefits (i.e., financial and social), there may not be a cost, but when considering only financial cost, there must be a cost in SRI. We examine several economic principles that require such cost, and estimate what this cost might be. Finally, we address why we have not “seen” a financial cost in SRI thus far.

TOPICS: ESG investing, equity portfolio management, security analysis and valuation