Socially Responsible Investment: A multicriteria approach to portfolio selection combining ethical and financial objectives

• Published in: European journal of operational research 2012-01, Vol.216 (2), p.487-494
• Main Authors: Ballestero, Enrique, Bravo, Mila, Pérez-Gladish, Blanca, Arenas-Parra, Mar, Plà-Santamaria, David
• Format: Article
• Language: English
• Subjects: Applied sciences; Business ethics; Decision theory. Utility theory; Ethical investment; Ethics; Exact sciences and technology; Investment analysis; Mutual funds; Operational research and scientific management; Operational research. Management science; Operations research; OR in finance; Portfolio theory; Risk theory. Actuarial science; Social investing; Stock portfolio selection; Studies; Utility functions
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2011.07.011

► A purely ethical (Quaker-like) investment is unsuitable for most investors. ► Mutual funds prefer a mix of purely ethical and financial goals. ► We achieve a stochastic model to optimize a mix of financial/purely ethical goals. ► An actual case is developed from a large scale problem of green/financial portfolios. In a context of Socially Responsible Investment (SRI), this paper deals with portfolio selection for investors interested in ethical policies. In the opportunity set there are ethical assets and other assets which are not characterized as ethical. Two goals are considered, the traditional financial goal in the classical utility theory under uncertainty and an ethical goal in the same utility framework. A new financial-ethical bi-criteria model is proposed with absolute risk aversion coefficients and targets depending on the investor’s ethical profile. This approach is relevant as an increasing number of mutual funds are becoming interested in SRI strategies. From the proposed model, an actual case on green investment is developed. Concerning this case (without generalizing to other contexts), an analysis of the numerical results shows that efficient portfolios obtained by the traditional E-V model outperform the strong green portfolios in terms of expected return and risk, but this does not significantly occur with weak green investment.