Since the emergence of issues pertaining to ethics in finance and ethical finance much confusion has been made between socially responsible finance, ethics, microfinance, solidarity, benevolence, and philanthropy. Ethical finance is about investing in socially responsible companies, i.e. those taking ethical, social, and environmental values into account when formulation corporate strategy. In fact, the growing number of socially responsible investors has brought a new sector of the financial industry into being, one that not only looks at risk-to-return rations, but also the environmental and social effects of a company.

  The numbers are staggering. In the US, $2 trillion are now invested in socially responsible companies. In Europe, the corresponding figure is €500 billion, of which €3 billion in Italy. There are 450 ethical funds in Europe and the number is continuously growing. Many are the ethical indexes as well (KLD, DJ sustainability indexes, ECPI etc.). While managed investments are on the decline because of the banking crisis, ethical finance is growing at healthy rates (it has grown by a cumulative 42% over the last ten years). Also, over a multi-year horizon, returns are equal or better than those accruing to traditional investments. However, it should be born in mind that long-term data are still missing, since most of ethical finance is less than a decade old. Still, the evidence is that it pays as a strategy to integrate ethics in the core business of firms, also in the case of non-listed firms. And while investments in Corporate Social Responsibility (CSR) are costly, they get usually repaid over the long term.

  Over the last years, faith in the market economy has been shaken by several financial crises. Think about the post-9/11 financial turmoil, the Argentinian default, cases of major corporate fraud (Enron, Parmalat), or the recent, even more disruptive, banking crisis. Ethical finance and CSR find their rationale in the failures of the market economy: the role of finance as intermediary between savings and the real economy has been distorted by massive recourse to securitization and speculative innovations such as credit derivatives. The negative connotation attributed to modern finance derives from the priority it accords to immediate economic return on investment, the so-called problem of short-termism. In order to overcome this bias in contemporary capitalism, it is necessary to dethrone the primacy of shareholders (owners of financial assets) over stakeholders (human capital, social actors, the environment).

  It will take time for the positive potential of ethical finance and CSR to by fully appraised by managers and shareholders alike, so that both can become a common business practices. But that time will come, considering that market signals are rewarding those business actors who have taken this road, and that institutions and policies are increasingly oriented toward supporting such investment and management strategies.

by Francesco Perrini,
Professor of General Management, Università Bocconi