Some lessons from basic finance for effective socially responsible investing

Given the vast sums of money that mutual and pension fund managers invest, an important question is how they should go about deciding which assets, especially which stocks, they should purchase. One school of thought argues that investment policies should reflect some set of social values. This study examines three questions about the financial implications of effective socially responsible investing in common stocks--that is, socially responsible investment intended to change firms' behavior. ; The first question concerns what socially responsible investors can do to effectively influence firms' investment policies. The second question is, under what conditions, if any, will the securities markets permit effective socially responsible investment? Third, what impact will socially responsible investment have on the performance of portfolios that follow it? ; The analysis has two implications for fund managers and investors who want to change firms' behavior. The first is that the investment strategy should focus on buying shares of small socially responsive firms. The second is that investors who owned targeted socially responsible stocks before socially responsible investment began will realize above-market rates of return in the short run; however, once socially responsible investors stop bidding up the price, investors will receive reduced returns.