In Markowitz’s (1952) setting, portfolio selection is driven solely by financial parameters and the investor’s risk aversion. This framework may however be viewed as too restrictive since, in the scope of Socially Responsible Investment (SRI)1, investors also consider non-financial criteria. This paper explores the impact of such SRI concerns on mean-variance portfolio selection.
SRI has recently gained momentum. In 2007, its market share reached 11% of assets under management in the United States and 17.6% in Europe.2 Moreover, by May 2009, 538 asset owners and investment managers, representing $18 trillion of assets under management, had signed the Principles for Responsible Investment (PRI)3. Within the SRI industry, initiatives are burgeoning and patterns are evolving rapidly.
In practice, SRI takes various forms. Negative screening consists in excluding assets on ethical grounds (often related to religious beliefs), while positive screening selects the best-SR rated assets (typically, by combining environmental, social, and governance ratings). Renneboog et al. (2008) describe “negative screening” as the first generation of SRI, and “positive screening” as the second generation. The third generation combines both screenings, while the fourth adds shareholder activism.
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