Ethical Investment
Nick Wailes
Processes
and Outcomesq
ABSTRACT. There is a growing body of literature on ethical
or socially responsible investment across a range of disciplines.
This paper highlights the key themes in the field and identifies
some of the major theoretical and practical challenges facing
both scholars and practitioners. One of these challenges is un-
derstanding better the complexity of the relationship between
such investment practices and corporate behaviour. Noting that
ethical investment is seldom characterised by agreement about
what it actully constitutes, and that much of the extant research
focuses on a narrow set of issues, the paper argues that there
are benefits associated with examining ethical investment as a
process.
KEY WORDS: ethical investment, socially responsible
investing, screening, funds management, corporate social
responsibility
Grant Michelson is a senior lecturer in Work and Organisational
Studies, School of Business at the University of Sydney. Dr.
Michelson’s teaching and research interests include business
ethics, industrial relations, and organisational behaviour
(especially the moral dimension of rumour and gossip at
work).
Nick Wailes is a lecturer in Work and Organisational Studies,
School of Business at the University of Sydney. He teaches
strategic management and entrepreneurship. Dr. Wailes’s
research interests include the impact of enterprise resource
planning systems on work organisation and the influence of
institutional investors on corporate human resource strategies.
Sandra van der Laan is a lecturer in Accounting and Business
Law, School of Business at the University of Sydney. She is
a member of the Asia Pacific Centre for Environmental
Accountability (APCEA). Her research focuses on social
accounting and she is currently completing a Ph.D. on socially
responsible investment.
Geoff Frost is a senior lecturer in Accounting and Business Law,
School of Business at the University of Sydney. He teaches
management accounting. Dr. Frost’s research interests include
environmental reporting, the role of accountants in the envi-
ronmental management system, and the use of alternate
reporting mediums by reporting entities.
Journal of Business Ethics 52: 1–10, 2004.

2004 Kluwer Academic Publishers. Printed in the Netherlands.
Grant Michelson
Sandra van der Laan
Geoff Frost
Introduction
Ethical investment has emerged in recent years as a
fashionable and increasingly popular topic in the
financial services industry, particularly in the United
States. Estimates in that country are that about one
in every eight investment dollars (13%) are now
committed to ethical investment funds (Social
Investment Forum, 2001). While of less current
significance in other national contexts, including the
United Kingdom and Australia, investment patterns
in both countries also point to an increasing trend of
monies being placed in ethical funds (Williams,
1999). There are a number of possible reasons for
this growth including those on both the supply side
(e.g. legislative imperatives and requirements of
funds, managers of investment funds identifying a
new opportunity in the market to broaden their
investor base) and demand side of financial markets
(e.g. the personal preferences of both individual and
institutional investors revealing unequivocal support
for moral considerations) (Cullis et al., 1992, p. 8).
‘‘Ethical investment’’ (the term favoured in the
United Kingdom) or ‘‘socially responsible invest-
ment’’ (the term commonly used in the United
States) is broadly defined as the integration of per-
sonal values, social considerations and economic
factors into the investment decision. Financial return
remains an important outcome but it is not the sole
criterion driving investments; ethical concerns are
also included. As one equities manager reported
when describing the raison d’être of an ethical fund:
‘‘There’s nothing wrong with making money but it’s
how you make the money that counts’’ (see Murray,
2003).
There is an increasing body of literature which
examines the topic of ethical investment. Until
2 Grant Michelson et al.
very recently, there has been relatively little attempt
to try and synthesise the different threads in
this work (for one exception, this journal produced a
special issue on social investment screens – see
volume 43, number 3, March 2003). The collection
of papers presented here seeks to further advance
our understanding of ethical investment by explor-
ing the issue in its entirety. That is, it examines
the motives and actions of individual and institu-
tional investors, discusses the various processes or
mechanisms associated with ethical investment, as-
sesses the impact of ethical investment on the
behaviour of the organisation, and evaluates the
outcomes of ethical investment for special interest
groups. The purpose of this paper is to highlight
many of the key themes in the research literature as
well as to identify some theoretical and practical
challenges for the field.
Who invests in socially responsible investment?
It might be assumed by some that those who invest
in ethical or socially responsible funds do not invest
at all in non-ethical funds. While there will be
individuals for whom this claim is accurate, some
research evidence reveals that it is common for
people to invest both in socially responsible and
more standardised or conventional funds. The
motivations of ethical investors appear to be quite
complicated in reality (Lewis, 2002; Mackenzie and
Lewis, 1999). There is no straightforward trade-off
between a person’s values and their desired and ex-
pected financial return (Lewis and Mackenzie,
2000a). In other words, investors in ethical funds
appear to spread their monies across a range of funds
with different risk-return profiles. Given this find-
ing, it is equally plausible that the better performing
ethical funds attract not just ethical investors but
more general or conventional investors as well. This
is unsurprising as financial return is an important
criterion for investors, regardless of the (ethical)
status of the fund.
Nonetheless, some investors do feel the need to
put their money to work in ways that are consistent
with their personal values, and are generally com-
mitted to their socially responsible investments even
if they perform poorly or are ethically ineffective
(Webley et al., 2001). Part of their motivation might
be to simply ‘‘feel good’’ (psychic income) or to try
and promote social change, even if this means
receiving a slightly lower financial return than
conventional investors. In this sense, an ‘‘ethical
penalty’’ is placed on the action of having invested
according to one’s values (Tippet, 2001, p. 176). It
could be that individuals who invest in ethical causes
are relatively wealthy and therefore able to bear a
financial cost (Tippet and Leung, 2001). Naturally,
this assumes that investors are aware that their
monies might perform better somewhere else.
Gender and education seem to play a part in
explaining the growth of socially responsible
investment, at least in the United States (Schueth,
2003, p. 192). These demographic characteristics
also appear useful in profiling those more likely to
invest in such funds in other countries. For example,
ethical investors in Australia tend to be women, are
relatively young, and highly educated (Tippet and
Leung, 2001).
However, as Dunfee (2003, p. 249) and Lewis
(2002) have recently argued, more needs to be
known about investor psychology in the context of
socially responsible investment. McLachlan and
Gardner in the second paper to this special issue
engage with this need and show that key differences
between ethical and non-ethical (or conventional)
individual investors remain. These writers also cau-
tion against discounting the needs and desires of
socially responsible investors in terms of the mar-
keting of financial services funds. Broadening the
level of analysis to an examination of institutional
investors, Cox and his colleagues in the next con-
tribution provides further evidence for the thesis that
an organisation’s social performance influences long-
term investment by institutions.
The processes of ethical investment
Part of the process of socially responsible investing
includes the development of mechanisms which
inform actual and potential investors about the
involvement of organisations in activities which are
seen either as of concern or are attractive in ethical
terms (Cullis et al., 1992). Integral to this is the
development of social screens. Screening is the
practice of excluding or including companies from
investment portfolios based on a range of social and
 Ethical Investment Processes and Outcomes
environmental criteria. Thus, there are two major
ways of establishing whether an investment is ethi-
cal. The first is to apply a negative screen (a ‘‘never
if ’’ case) whereby certain businesses are avoided,
presumably because they are injurious to human
health. These have generally included the com-
monly listed troika ‘‘sin’’ equities of alcohol, toba-
cco and gambling. The second way is to apply a
positive screen (an ‘‘only if ’’ case) to those firms that
remain possible investment targets; in particular,
those identified as engaging in socially responsible
practices are seen as more attractive investment
options.
Precise data on the proportion of investments that
are ethically screened are difficult to establish, due to
the lack of consensus on how to define ethical
investments (Schlegelmilch, 1997). Exploratory re-
search reveals some variance in the criteria used by
ethical investment fund managers to screen firms.
For some of these managers, the behaviour of firms
is more important than the product or service pro-
vided (Stone, 2001). A best-in-class or best-in-
industry approach is favoured by some funds
whereby membership of an ostensibly ‘‘bad’’
industry does not automatically disqualify a company
from investment by the fund. Companies within the
same industry sector are compared and ranked
against each other, not against those outside the
industry. The best-in-industry approach clearly
confirms the importance of seeking good financial
returns as ‘‘sinful’’ industries often provide above-
average returns on investment (Tippet, 2001, p.
172). It also highlights a more proactive desire to
work to improve the overall social performance of
firms, rather than investing in companies that, on the
surface, appear to be moral entities simply because
they are located in more ‘‘ethically acceptable’’ parts
of the economy. For example, a firm that recycles
waste and paper products may rate highly on envi-
ronmental performance, but might adopt poor
practices in other areas such as supplier, customer
and employee relations. The best-in-industry ap-
proach would therefore allow investment in mining
companies provided that they seek to be socially
responsible in terms of cleaning up after themselves
and adopting safe operating practices.
An ongoing challenge for those who employ
various screens using a best-in-industry approach is
how to judge a firm’s performance. Company an-
3
nual reports emphasising a selective range of prac-
tices appear self-serving. Perhaps the best way
forward is to establish uniform accounting principles
for social reporting, including the auditing of any
such reports produced (see Dunfee, 2003).
Other studies which have sought the views of
fund managers (as opposed to individual investors)
reveal that the availability and accuracy of company
information is a crucial mechanism in the ethical
investment process. A survey of 172 investment
professionals in the U.K. found that company
information was rated ahead of other commonly
used screening criteria including product safety,
environmental record and employment practices
(Schlegelmilch, 1997). Coupled with their expressed
desire to capture a good rate of return, this finding
suggests that investment professionals could be
receptive to more information being provided about
a firm’s social activities. Whether companies are
prepared to provide more information to such
investors is debateable.
In the paper by Hummels and Timmer, the au-
thors raise some doubts about the provision of rel-
evant social, ethical and environmental (SEE)
information by three well-known multinationals
(Nike, BP and Monsanto). However, there are signs
that the nature of shareholder engagement might be
changing in contemporary organisations. Hockerts
and Moir claim in their paper that the investor
relations function within a sample of predominantly
European multinational firms are becoming more
sophisticated. Investor relations managers are
increasingly aware of corporate social responsibility
issues and the need to communicate more effectively
with actual and potential investors. The companies
surveyed acknowledged the need for improved dis-
closure and reporting on social and environmental
performance.
We maintain that the inter-related issues of
transparency and disclosure are clearly important
considerations at the company or firm level. This is
no less relevant for the funds themselves. Investors
need to carefully examine the prospectus to see if
the fund performance and ethical guidelines meet
their needs (Hollingworth, 1998). However, this
information might not be provided or, if it is, might
be unreliable (Hoggett and Nahan, 2002). Ethical or
socially responsible funds are not always forthcom-
ing about which companies (and why) are included
4 Grant Michelson et al.
in their portfolios (Tippet, 2001). As part of a
commissioned report on the ethical investment
industry in Australia, how fund managers actually
manage the money as opposed to what they report
to their investors was examined. The processes
used by fund managers to determine which busi-
nesses to invest in varied significantly. Of the 16
ethical funds surveyed, only four funds were re-
garded as having a high level of transparency (TEC,
2003). Given the plausibility that each investor’s
idea of ethical or socially responsible investment is
different, the need for clear reporting procedures
about how the funds actually invest is crucial. More
transparency in the practices adopted by fund
managers will provide investors with more confi-
dence in terms of ensuring their monies are invested
in industries and companies consistent with their
own social priorities.
Of course, there are other problematics with the
screening process. For example, there is no single
definition of ‘‘social responsibility’’ (and therefore
no consensus as to an appropriate standard) for the
purposes of establishing investment screens. One
consequence of this is that the screening criteria
employed are quite subjective (Hollingworth, 1998).
Not surprisingly, both similarities and differences in
ethical concerns exist in different national settings,
including the United Kingdom and the United
States (Williams, 1999). Even within the so-called
‘‘sin’’ industries there is no general consensus. While
tobacco might be seen as morally objectionable
(Schwartz, 2003; Yach et al., 2001), in some coun-
tries gambling is not (Schwartz, 2003). The criteria
for defining negative screens seem simplistic
whereby the product or service, rather than its im-
pact, is addressed. For instance, the case of screening
against military contracting could be rebutted where
peacekeeping roles are increasingly being served by
military forces. Here, more social good than social
harm might result (Schepers and Sethi, 2003, p. 19).
This is not to suggest that the field is incoherent;
some argue there is a need to accept different ap-
proaches to social screening (e.g. Dunfee, 2003).
Consequently, it is claimed that investors indeed
know the ‘‘perfect company’’ is a fiction and that the
screening or evaluation process is simply about
identifying better-managed businesses (Schueth,
2003, p. 190). No more and no less. Thus, the
imposition by investors of a zero tolerance level of
‘‘unethical’’ practice by organisations on any
dimension could be unworkable and potentially
exclude all firms from consideration. With the
breadth of their reach and activities, this argument is
particularly relevant in the case of multinational
firms. Such organisations are often involved with
many products across many countries.
Another issue to consider around negative screens
is the question of primary and secondary involve-
ment. While potential investors may baulk at the
defence industry (armaments companies per se), they
might be less concerned with investing in steel
companies or electronics firms even though such
firms are involved in the supply chain of weapons
production through military hardware and missile
guidance systems. To address such possibilities, some
funds establish a maximum threshold figure whereby
certain companies are excluded only when the
proportion of sales of, say, steel or electronics to the
more explicitly offensive defence industry becomes
too high. But what is considered too high? Schepers
and Sethi (2003, p. 17) contend that the cut-off
figure is subjective and is not uniformly applied
across different funds. Despite the practical difficul-
ties of acquiring accurate information about the level
of involvement, indirect or secondary contribution
should still be part of the screening process. This
will ensure ethical consistency (Schwartz, 2003, p.
209).
Positive screens are also not without their prob-
lems. Some contend that the process of attributing
socially desirable and responsible practices to firms –
thereby increasing their attraction as investment
targets – is subject to a wide degree of variability.
The example of ‘‘diversity’’ is given whereby dif-
ferent behaviours (e.g. equal opportunity programs,
active recruitment of minorities, and discrimination
policies) are usually identified as representing
diversity within an organisation. But are these
behaviours fully representative of notions of diver-
sity? How should diversity be operationalised?
(Schepers and Sethi, 2003, p. 22).
Perhaps for all of these reasons, ethical investment
needs to be considered as much a process as a set of
specific aims. The identity of specific criteria might
become less important than ‘‘… the way in which
issues are identified and considered, the degree of
information obtained, (and) the action that is taken
in response’’ (Taylor, 2001, p. 59).
 Ethical Investment Processes and Outcomes
Does ethical investment pay?
How ethically screened investments perform in
relation to unscreened or more conventional funds is
one of the most contentious and debated issues in the
field. There is some evidence that it does pay, while
other evidence suggests that it does not. This section
will address the logic underlying both arguments.
Many commentators claim that ethical or socially
responsible investing provides returns at least no
worse than standard or conventional investing (e.g.
Cummings, 2000). After all, socially responsible
investors are clearly not interested in considering
unprofitable investment options or paying a signifi-
cant penalty for their ethical choices, since financial
return remains an important consideration. A review
of the evidence suggests that there is merit to such
claims (see Rivoli, 2003, p. 272). In fact, it might be
the case that ethical investments do financially better
than more conventional forms of investment. This is
an essentially ‘‘doing well by doing good’’ argument.
In the United Kingdom, ethical funds over the
period 1986–1993 outperformed (on a risk-adjusted
basis) non-ethical funds (Mallin et al., 1995).
There are a number of reasons why ethical
investments might do better than more standard or
conventional investment. First, it is thought that
higher financial returns occur because of the adop-
tion of social screening practices. Ethical firms can
act as a positive ‘‘signal’’ to investors since they
communicate to the market the types of factors
including their focus on sustainability and manage-
ment quality that socially responsible firms are ex-
pected to embrace (Cullis et al., 1992, p. 13).
Contained within this logic is a view that ethical
investment operates with longer time horizons than
more conventional investment. If this is correct, the
outlook for ethical investing is bright as some fund
managers in Australia believe that legislative and
customer trends such as recycling initiatives, work-
place smoking bans and higher taxation on gambling
will continue to give emphasis to the ethical
investing ‘‘business model’’ (Drury, 2003). Empirical
research supports this optimism since the longer an
ethical fund has been operating, the more likely it
will outperform more recently established funds
(Cummings, 2000).
In contrast, there are numerous reasons ex-
pounded as to why ethical investment will not re-
5
ward investors. Indeed, it is argued that ethical
investment will attract a financial penalty and lead to
lower returns than other forms of investment. This
perspective might be summarised as a ‘‘doing poorly
by doing good’’ argument. These reasons will now
be discussed.
We are accustomed to the segmentation of mar-
kets when it comes to consumer items. In terms of
marketing strategy, different firms compete for
advantage by attempting to distinguish their prod-
ucts and services across a number of dimensions.
These dimensions might include price, quality,
reputation, packaging, availability and, in some
cases, social responsibility. As some authors note,
‘‘This segmentation strategy, however, is not well
accepted in capital market theory. Neo-classical
economics, for example, assumes that investors care
about only two characteristics as they make their
investment choices: an investment’s expected risk
and expected return’’ (Hickman et al., 1999, p. 72).
Conventional portfolio theory recognises that an
investor’s exposure to risk can be reduced – without
any reduction in return – by diversification. An
investment portfolio that is highly diversified is only
exposed to unavoidable economy-wide or market
risk. Because ethical or socially responsible invest-
ment portfolios based on negative screens exclude
certain investments, they are less diversified.
Therefore, it is assumed that the exposure to risk for
ethical investment is higher than for non-ethical or
traditional investment (Carswell, 2002). However,
traditional investors can still benefit from diversifi-
cation by including ethical funds as part of their
portfolio strategy. Similarly, benefits accrue to ethi-
cal investors who include more traditional funds as
part of their portfolios (Hickman et al., 1999). As
noted earlier, empirical research suggests that the
latter best characterises the behaviour of ethical
investors (Lewis and Mackenzie, 2000a; Mackenzie
and Lewis, 1999).
It might well be argued too, that ethical funds
attract higher transaction costs and management fees
due to the relatively small size of the funds, and the
need to collect specialised information data con-
cerning the ethical practices of firms. On this last
point, managers responsible for implementing social
screens do indeed consult a wide range of sources of
information, and do this on a regular basis (Stone,
2001). This finding is not surprising given the lack of
6 Grant Michelson et al.
standardised social data on corporate behaviour.
Consequently, it appears that ethical fund managers
invest considerable time and effort assessing and re-
assessing a firm’s social performance. This will
invariably add to operating costs as some contend:
‘‘Small size may mean that the ratio of management
fees and expenses to total income of the funds is
high’’ (Tippet, 2001, p. 174).
Some also believe that the recent good perfor-
mance of ethical funds is merely an artefact of the
types of companies invested in to date. Because they
could have more technology companies in their
portfolios (due in part to the exclusion of other
companies such as those operating in the resources
sector such as mining), their performance has re-
flected short-term sectoral growth in ‘‘fashionable’’
industries (Hoggett and Nahan, 2002). According to
such critics, the bursting of the information tech-
nology and dot.com bubbles is likely to impact
negatively on the future performance of ethical
funds.
Does (ethical) ownership matter?
A wider question to consider is whether ethical or
socially responsible investing changes corporate
behaviour. In general terms, investment decisions
can provide an external influence on organisations in
terms of changing firm practices (see Solomon et al.,
2002). However, more needs to be known about
why such changes might occur. What has been
employed by some scholars in the field including
Pietra Rivoli and Alan Lewis to answer this question
is the work of Hirschman. That is, investors can
respond to ethical lapses in terms of both ‘‘exit’’ and
‘‘voice’’ strategies (Hirschman, 1970).
The sharemarket itself clearly embodies the ‘‘exit’’
strategy in that investor values and convictions are
converted by the market into preference for buying
and selling equities. Investors can simply choose not
to be associated with unethical activities by with-
drawing their monies from various firms. However,
practically all socially responsible funds exclude
gambling. Yet as some observe with a sense of irony,
the foundations of sharemarket investment itself in-
volves a strong gambling element (Cullis et al., 1992,
p. 21). Ethical funds are not immune from this
broader philosophical criticism. It is not clear whe-
ther the ‘‘exit’’ response helps to change firm
behaviour towards it embracing more socially
responsible practices. This will depend on what
impact the boycott has on the firm. Firms whose
share prices are more sensitive to a changing investor
base would be thought more responsive to the
preferences of the ethical investor (Rivoli, 2003, p.
283).
Premised on shareholder or investor activism, the
‘‘voice’’ strategy seeks to change firm behaviour and
might include the lobbying of shareholders and the
process of wording and re-wording motions and
resolutions (Schepers and Sethi, 2003). Investors
who use this approach tend to be institutions rather
than individuals and there is evidence that firms have
been responsive to investor voice on social issues
(Angel and Rivoli, 1997). However, this strategy has
certain ‘‘costs’’, particularly those associated with
time. Much less common among the range of
‘‘voice’’ options is the practice of investing in firms
that err in order to change them (Lewis and Mac-
kenzie, 2000b).
Nonetheless, there are a number of reasons to
question how effective these voice strategies are
likely to be. In some ways ethical investment can be
regarded as a special form of institutional investment,
with ethical investment funds placing pressure on
firms to either avoid certain behaviours (in the case
of a negative screen) or continue certain practices (in
the case of a positive screen). It is therefore worth-
while considering the findings in the broader liter-
ature on institutional investment and firm strategic
direction and its implications for understanding
ethical investment. Much of the literature on ethical
investment has assumed that once ethically invested
funds attain a certain size, they will then be able to
impact firm behaviour. This point of view ignores
two key issues. First, it ignores the possible impact of
the operation of financial markets on the value of
ethically invested funds. In a situation where there is
a class of assets which is more highly valued (like
shares in ethical firms), this is likely to create
incentives for financial market players to get in-
volved in arbitrage and pairs trading. Secondly, it has
been widely suggested that because of the compe-
tition between institutional investors and their need
to show returns in the short run, institutional
investors favour near term earnings and discount
future earnings (Baker and Fung, 2001). While re-
 Ethical Investment Processes and Outcomes
search indicates that this myopia is more prevalent
for some classes of institutions than others (Bushee,
2001; Cready, 2001), we would expect ethical
investment funds to have reasons to focus on long
term earnings. The greater the pressures for consis-
tent returns, the more likely it is that institutions,
including those that manage ethically invested funds,
may encourage corporate strategies that maximise
short run share price at the expense of social, envi-
ronmental and ethical goals. Thus, ethically invested
funds may actually encourage the very corporate
practices, like downsizing and underinvestment in
research and development, that they are seeking to
prevent. The papers by Haigh and Hazelton, and
Sparkes and Cowton provide conflicting views
about the role that financial markets can play in
encouraging corporate social responsibility.
The literature on institutional investors and firm
strategy also raise further questions about the ability
of ethical investment to affect firm performance.
While on the face of it increased levels of institu-
tional investment in the United States, and else-
where, seems to be associated with a general shift in
strategic orientation of firms towards behaviours that
maximise shortrun share price (Lazonick and
O’Sullivan, 2000), detailed studies of managerial
response indicate that managers have much more
freedom in the face of investor pressure than might
otherwise be expected. Useem (1993), for example,
provides evidence to suggest that managers in Uni-
ted States firms have adopted a number of practices
that blunt the impact of investor pressure. Thus, he
shows that managers have proved relatively suc-
cessful at encouraging investment from different
types of shareholders that can act as a counter to the
interests of institutions (see Useem, 1998). While
Useem’s studies focus on situations in which man-
agers have sought to limit the influence of institu-
tions that demand short term returns, it may be the
case that managers are able to balance the impact of
ethical investors by seeking corporate funding from
non-ethical sources as well. Useem (1993) also ar-
gues that while institutions may have more potential
influence over corporate strategy and firm behav-
iour, in most cases this power is latent and institu-
tions are unlikely to have the resources or the
inclination to intervene directly in the management
of the firm. For ethical investors this situation is even
more problematic given that they tend to be
7
minority shareholders in firms. While corporate
codes have increasingly attempted to give rights to
minority shareholders, they still tend to favour large
shareholders. Furthermore managers have become
increasingly sophisticated in the ways that they
manage shareholder expectations. In this regard
Useem (1996) demonstrates the increasing impor-
tance of the investor relations function in firms. The
papers by Hummels and Timmer, and Hockerts and
Moir in this collection, suggest that these practices
are equally important when it comes to ethical
investment.
The broader literature on institutional investors
and firm behaviour therefore reveals that there is not
a simple relationship between ownership and firm
behaviour. To use the language of agency theory,
while principals, including ethical investors, may
have more power, they are still dependent on
managers to act as their agents. The impact of ethical
investment on firm behaviour is thus indeterminant.
That is, just because a firm takes funds from an
ethical source, this does not ensure that the firm will
consistently adopt an ethical stance in all of its
operations. The paper by Waring and Lewer in this
collection, which focuses on the implications of
ethical investment for the human resource function,
attests to the potentially radical consequences of
ethical investment for key aspects of firm behaviour.
It also suggests that there is need to move beyond
macro level studies to a meso level of analysis which
focuses on factors at the level of the firm that
mediate investor pressure and which may prevent
ethical investment from achieving its aims.
Perhaps the most important contribution of the
articles in this special issue is that they start to look
beyond the debates about the relative financial per-
formance of ethical investment and examine what
many would consider to be the more important
question of the extent to which ethical investment
shapes corporate behaviour. The final two papers
speak directly to this issue from the point of view of
two interest groups that have sought to use capital
markets and shareholder activism to influence firm
behaviour. The paper by Guay et al. seeks to identify
ways in which non governmental organisations can
employ shareholder activism more effectively. The
paper by Marens offers a sobering assessment of a
decade of financial activism on the part of United
States trade unions.
8 Grant Michelson et al.
There are a number of emerging developments
aimed at enhancing the impact of ethical investment
on both corporate and societal behaviour. For cor-
porations, some argue that the concept of Total
Social Impact (TSI) is a credible ratings system
which incorporates better a firm’s impact on all its
stakeholders and not just its shareholders (Dillenburg
et al., 2003). The TSI metric scheme seeks to move
beyond exclusionary or negative screens and actually
modify business behaviour. These authors claim that
corporations will respond to improvements in
measurement techniques; in other words, there is an
assumption that firm behaviour is influenced by the
ability to measure its outcomes. The more com-
prehensive these measures for key stakeholder
groups (e.g. customers, employees, owners, suppli-
ers, competitors, communities, and the environ-
ment), the more effective will be the field of socially
responsible investment. This exercise in bench-
marking and measuring ‘‘best practice’’ ethical per-
formance is supported in other contexts. Spiller, for
example, classifies a similar model of ethical business
in New Zealand including how firms rate according
to an ethical ‘‘scorecard’’ (Spiller, 2000).
Future challenges
Despite the growth in ethical or socially responsible
investment, there are certain aspects about the field
which still need to be addressed. For instance, be-
cause it is still seen as loosely or ambiguously de-
fined, confusion still remains about what exactly
constitutes an ethical investment (Schepers and Se-
thi, 2003; Sparkes, 2001). To date, the area has been
largely self-identified by promoters. Environmental
issues regularly feature on the social investment
‘‘radar screen’’ but there may be other areas such as
the arts and cultural industries which, hitherto, have
not been seen as ‘‘legitimate’’ areas for socially
responsible investment (Williams and Sharamitaro,
2002). This oversight might be due more to its
aesthetic, as opposed to moral (ethical) dimension
(see Irvine, 1987). Nonetheless, the broad definition
of ethical investment in the literature lends itself to
various interpretations, including the lack of con-
sensus about the issues that concern investors. This
state of affairs is not aided by the lack of transparency
and disclosure of information to potential and actual
investors.
Some commentators have posed the question
‘‘what is ethical about ethical investment’’? (see
Schwartz, 2003; Sparkes, 2001). To describe some-
thing as ‘‘ethical’’ conveys the impression that there
is an element of altruism and self-sacrifice involved.
A firm offering an ethical fund to investors suggests
that the firm has chosen to embrace a higher level of
accountability and responsibility. Therefore, it is not
unusual for it to be judged more stringently (Sch-
wartz, 2003). But it has also been argued that socially
responsible funds ‘‘show little explicit ethical
awareness, as their main objective appears to be to
maximise investment returns within the constrained
investment universe available to them’’ (Sparkes,
2001, p. 198). It is not surprising then that more
attention to the issue is needed. As some have
concluded ‘‘Only when the ethical investment
movement is ethically screened can it be deemed
ethical’’ (Schwartz, 2003, p. 212).
Conclusion
This paper has provided an overview of current
debates about ethical investment. It has demon-
strated the complexity of many of the issues raised by
this topic including the motives of socially respon-
sible investors, the different types of screening pro-
cesses involved, the mixed evidence concerning the
financial return of ethical funds, and the links be-
tween ethical investment and corporate behaviour.
Overall, we need to see ethical investment in its
entirety and not disaggregate its central features. We
would argue that for these reasons there is consid-
erable benefit in an approach which treats ethical
investment as a process and examines all the con-
nections and disjunctures that take place within this
process.
Taken together, the papers in this collection
(drawn from a wide variety of disciplines and na-
tional contexts) provide new insights into the pro-
cess and outcomes of ethical investment from the
decision by individuals and institutions to invest
right through to the consequences of ethical
investment for special interest groups. The papers
illustrate the breadth of research taking place in
 Ethical Investment Processes and Outcomes
connection with ethical investment and the variety
of perspectives that can brought to bear on the topic.
Note
q Hirschman, A. O.: 1970, Exit, Voice, and Loyalty (Harvard
This special issue of the Journal of Business Ethics
had its origins in a one day workshop on ethical
investment financially supported by the International
Centre for Research on Organisational Discourse,
Strategy and Change (ICRODSC), the Accounting
Foundation, and the School of Business at the
University of Sydney. The best workshop papers
were submitted for consideration of publication as
well as a general call for papers extended to scholars
outside of Australia.
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Work and Organisational Studies,
School of Business,
Faculty of Economics and Business,
University of Sydney,
Sydney, NSW 2006,
Australia
E-mail: g.michelson@econ.usyd.edu.au