Monday, November 5, 2012

Baker and Nofsinger, Socially Responsible Finance and Investing

The most recent addition to the Robert W. Kolb Series in Finance—Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists, edited by H. Kent Baker and John R. Nofsinger (Wiley, 2012)—follows the series’ familiar format, drawing on the expertise of academics and practitioners from around the world to survey and synthesize vast quantities of research. Its twenty-four chapters, spanning about 500 pages, cover such general topics as finance and society, corporate engagement, and socially responsible investing.

Let’s start with the least socially responsible question: how do socially responsible investing mutual funds stack up against conventional mutual funds? Well, what answer would you like to have? “Several studies report little evidence of a difference in risk-adjusted returns between ethical and conventional funds. However, other studies find that SRI funds can be a valuable source of portfolio risk reduction, even for investors who are not driven by social values. On the other hand, some researchers report a statistically significant cost associated with socially responsible mutual fund investing.” (p. 439) Select your methodology and time period and get your favorite answer.

One of the chapters that particularly appealed to me was “International and Cultural Views” by Astrid Juliane Salzmann (RWTH Aachen University). A couple of takeaways from this study. First, she looks at the law and finance theory, which is based on the differences between British common law and French civil law. “The British common law developed to protect owners of private property against the crown, whereas the French civil law evolved to strengthen state power against a corrupt judiciary. The resultant emphasis of private property rights by the common law tradition supports financial development, and countries that have adopted the common law system generally exhibit better developed financial markets than countries with a civil law tradition.” (pp. 89-90) Common law countries also seem to foster developments in socially responsible finance and investing.

The economic consequences of religion are far from settled. Scholars can’t even document a strong link between religiousness and ethical behavior. For instance, according to studies, atheists are the least likely to engage in insider trading, agnostics the most likely (a rather bizarre finding that almost seems as if it came from a sample of nine traders), and religious commitment appears to be negatively associated with environmentalism. Protestant and Buddhist countries report above-average ethical behavior; Hindu, Orthodox, and Muslim countries exhibit less interest in ethical issues.

Socially Responsible Finance and Investing covers a wide range of topics, from (one of my favorite subheads) “A Palsy in the Invisible Hand: Distorted Consumer Finance Markets” and the use and misuse of financial secrecy in global banking to corporate philanthropy and institutional investor activism, from managerial compensation and social entrepreneurship to green real estate and trust issues in business. It’s not one of those books you read curled up in front of the fire, but it’s a very useful resource for anyone interested in the growing field of socially responsible finance and investing.

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