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Social Impact Ratings:
How To Make Responsible
Investment Appealing
The investment sector plays a
unique role in promoting ethical
practices throughout the economy.
With well over three trillion dol-
lars invested in socially responsible
investments (SRI) worldwide, envi-
ronmental, social, governance and
ethical factors (collectively, ‘social
impact factors’) have a demonstrable
impact on investment practices. SRI
investors utilize various methods of
influencing corporate practice, in-
cluding social screening of invest-
ments, which can ultimately reward
positive social impact with greater
access to financing.
This paper proposes a method
for incorporating social impact fac-
tors as a quantitative parameter in
investment analysis and a means of
facilitating such analysis in practice.
These proposals have the potential
to integrate social impact factors into
quantitative portfolio management
techniques that have traditionally
been based only on risk and return.
Very broadly, SRI is the inclu-
sion of any social or ethical criterion
in the investment decision-making
process. The first instances of so-
cially responsible investing may be
the Quakers’ rules against investing
in arms companies and engaging in
the business of slavery as early as
the mid-eighteenth century (Kinder,
2005; Kinder and Domini, 1998).
Social screening
techniques within SRI
‘Ethical exclusions’ remain com-
mon to this day, as they are applied
by investors seeking to avoid com-
panies that manufacture products
such as weapons, tobacco, alcoholic
beverages, gambling and controver-
sial media. One shortcoming of this
mode of SRI is that it is not often
clear exactly which companies ought
to be excluded from investment. Par-
ticularly as companies become larger,
more global and increasingly diversi-
fied, it is not clear where to draw the
line from an SRI perspective.
For instance, a large printing
company that makes labels for cig-
arette cartons might be excluded
by an absolute screen on tobacco i