Ethical Investment and Portfolio Theory: Using Factor Analysis to Select a Portfolio
- 1 Accounting, Finance and Economics Department, Manchester Metropolitan University, Manchester, UK
- 2 Accounting, Finance and Economics Department, Manchester Metropolitan University, Manchester, UK
Abstract
Ethical investments are a now a considerable sector in the investment market, with the Financial Times running the headline “Green and ethical investment comes of age” (Shepherd, [1]). Claudia Quiroz (lead fund manager for Cheviot Climate Assets Fund) predicts a strong future for ethical investment, with sustainable investment becoming a growing theme (Hoskin [2]). Much previous research in the “ ethical investment ” field divides investments into two categories: acceptable or unacceptable. This paper builds on the work of Barracchini and Addessi [3], in viewing how “ ethical ” an investment is to be a different dimension — each investment is seen as being on a continuum, from “ least ethical ” to “ most ethical ” . This paper takes the work of Barracchini and Addessi [3] from a theoretical construct to an approach which can be applied by practitioners. In order to make a workable method, this paper uses conventional portfolio analysis (which focus on risk and return), combined with principal components analysis in order to minimize the risk of a portfolio. It adopts a specific functional form for the saver’s utility function, to assess which assets appears most de sirable using that person’s values.
- P. Shepherd, “Green and Ethical Investment Comes of Age,” Financial Times, 2011.
- M. Hoskin, “Interview with Claudia Quiroz from Cheviot,” Worldwise Investor, 2012. www.worldwiseinvestor.com/news/article/281/Interview-with-Claudia-Quiroz-from-Cheviot
- C. Barracchini and M. E. Addessi, “Ethical Portfolio Theory: A New Course,” Journal of Management and Sustainability, Vol. 2, No. 2, 2012, pp. 35-42. doi:10.5539/jms.v2n2p35
- M. Wimmer, “ESG-Persistence in Socially Responsible Mutual Funds”, Journal of Management and Sustainability, Vol. 3, No. 1, 2013, pp. 9-15.
- R. Havemann and P. Webster, “Does Ethical Investment Pay? EIRIS Research and Other Studies of Ethical Investment and Financial Performance,” EIRIS, 1999. www.eiris.org/files/research%20publications/doesethicalinvestmentpay99.pdf
- M. Arosio, “Issues for Responsible Investors: Impact Investing in Emerging Markets,” Responsible research, 2011. www.responsibleresearch.com/Impact_Investing_in_Emerging_Markets-Issues_for_Responsible_Investors.pdf
- BMAC, “The Nestlé Boycott,” Baby Milk Action Coalition, 2013. http://info.babymilkaction.org/nestlefree
- The Mercer Carbon Trust, “A Climate for Change: a Trustee’s Guide to Understanding and Addressing Climate Risk,” The Carbon Trust, London, 2005. www.carbontrust.com/media/84964/ctc509-a-climate-for-change-a-trustees-guide.pdf
- D. Orrell, “Irrational Economic Man,” World Finance, 2013. www.worldfinance.com/home/the-econoclast/irrational-economic-man
- European Commission, “Making a Difference in the World: Europeans and the Future of Development Aid,” 2011.
- European Commission, “Public Awareness and Acceptance of CO2 Capture and Storage,” 2011.
- M. Friedman, “The Social Responsibility of Business is to Increase Its Profits,” The New York Times Magazine, 1970.
- C. Sampford and V. Berry, “Shareholder Values, not Shareholder Value: The Role of ‘Ethical Funds’ and ‘Ethical Entrepreneurs’ in Connecting Shareholders’ Values with Their Investments,” Griffith Law Review, Vol. 13, No. 1, 2004, pp. 115-123.
- B. J. Richardson, “Environmental Regulation through Financial Organisations: Comparative Perspectives on the Industrialised Nations,” Kluwer Law International, The Hague, 2002.
- A. B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, Vol. 34, No. 4, 1991, pp. 39-48. doi:10.1016/0007-6813(91)90005-G