Market sentiment

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Market_sentiment

 

An investor is bullish when they see upward stock trends and bearish when the market is going down. A bull uses its horns in an upward motion to attack and a bear uses its claws in a downward motion to attack.

Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events. If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market participants who maintain a static sentiment, regardless of market conditions, are described as permabulls and permabears respectively. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme. Very bearish sentiment is usually followed by the market going up more than normal, and vice versa. A bull market refers to a sustained period of either realized or expected price rises, whereas a bear market is used to describe when an index or stock has fallen 20% or more from a recent high for a sustained length of time.

Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of the overall movement of an individual stock has been attributed to market sentiment. The stock market's demonstration of the situation is often described as all boats float or sink with the tide, in the popular Wall Street phrase "the trend is your friend". In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors.

Theory of investor attention

A particular thread of scientific literature connects results from behavioural finance, changes of investor attention on financial markets, and fundamental principles of asset pricing: Barberis et al. (1998), Barberis & Thaler (2003), and Baker & Wurgler (2007). The authors argue that behavioural patterns of retail investors have a significant impact on market returns. At least five main approaches to measuring investor attention are known today in scientific literature: financial market-based measures, survey-based sentiment indexes, textual sentiment data from specialized on-line resources, Internet search behavior, and non-economic factors.

First approach

According to the first approach, investor attention can be approximated with particular financial market-based measures. According to Gervais et al. (2001) and Hou et al. (2009), trading volume is a good proxy for investor sentiment. High (low) trading volume on a particular stock leads to appreciating (depreciating) of its price. Extreme one-day returns are also reported to draw investors’ attention (Barber & Odean (2008)). Noise traders tend to buy (sell) stocks with high (low) returns. Whaley (2001) and Baker & Wurgler (2007) suggest Chicago Board Options Exchange (CBOE) Volatility Index (VIX) as an alternative market sentiment measure. Credit Suisse Fear Barometer (CSFB) is based on prices of zero-premium collars that expire in three months. This index is sometimes used as an alternative to VIX index. The Acertus Market Sentiment Indicator (AMSI) incorporates five variables (in descending order of weight in the indicator): Price/Earnings Ratio (a measure of stock market valuations); price momentum (a measure of market psychology); Realized Volatility (a measure of recent historical risk); High Yield Bond Returns (a measure of credit risk); and the TED spread (a measure of systemic financial risk). Each of these factors provides a measure of market sentiment through a unique lens, and together they may offer a more robust indicator of market sentiment. Closed-end fund discount (the case when net asset value of a mutual fund does not equal to its market price) reported to be possible measure of investor attention (Zweig (1973) and Lee et al. (1991)).

The studies suggest that changes in discounts of closed-end funds are highly correlated with fluctuations in investor sentiment. Brown et al. (2003) investigate daily mutual fund flow as possible measure of investor attention. According to Da et al. (2014), "...individual investors switch from equity funds to bond funds when negative sentiment is high." Dividend premium (the difference between the average book-to-market ratios of dividend paying and not paying stocks) potentially can be a good predictor for investor sentiment (Baker & Wurgler (2004) and Vieira (2011)). Retail investor trades data is also reported to be able to represent investor attention (Kumar & Lee (2006)). The study shows that retail investor transactions "...are systematically correlated — that is, individuals buy (or sell) stocks in concert". Initial public offering (IPO) of a company generates a big amount of information that can potentially be used to proxy investor sentiment. Ljungqvist et al. (2006) and Baker & Wurgler (2007) report IPO first-day returns and IPO volume the most promising candidates for predicting investor attention to a particular stock. It is not surprising that high investments in advertisement of a particular company results in a higher investor attention to corresponding stock (Grullon et al. (2004)). The authors in Chemmanur & Yan (2009) provide an evidence that "...a greater amount of advertising is associated with a larger stock return in the advertising year but a smaller stock return in the year subsequent to the advertising year". Equity issues over total new issues ratio, insider trading data, and other financial indicators are reported in Baker & Wurgler (2007) to be useful in investor attention measurement procedure.

The aforementioned market-based measures have one important drawback. In particular, according to Da et al. (2014): "Although market-based measures have the advantage of being readily available at a relatively high frequency, they have the disadvantage of being the equilibrium outcome of many economic forces other than investor sentiment." In other words, one can never be sure that a particular market-based indicator was driven due to investor attention. Moreover, some indicators can work pro-cyclical. For example, a high trading volume can draw an investor attention. As a result, the trading volume grows even higher. This, in turn, leads to even bigger investor attention. Overall, market-based indicators are playing a very important role in measuring investor attention. However, an investor should always try to make sure that no other variables can drive the result.

Second way

The second way to proxy for investor attention can be to use survey-based sentiment indexes. Among most known indexes should be mentioned University of Michigan Consumer Sentiment Index, The Conference Board Consumer Confidence Index, and UBS/Gallup Index of Investor Optimism. The University of Michigan Consumer Sentiment Index is based on at least 500 telephone interviews. The survey contains fifty core questions. The Consumer Confidence Index has ten times more respondents (5000 households). However, the survey consists of only five main questions concerning business, employment, and income conditions. The questions can be answered with only three options: "positive", "negative" or "neutral". A sample of 1000 households with total investments equal or higher than $10,000 are interviewed to construct UBS/Gallup Index of Investor Optimism. Mentioned above survey-based sentiment indexes were reported to be good predictors for financial market indicators (Brown & Cliff (2005)). However, according to Da et al. (2014), using such sentiment indexes can have significant restrictions. First, most of the survey-based data sets are available at weekly or monthly frequency. At the same time, most of the alternative sentiment measures are available at a daily frequency. Second, there is a little incentive for respondents to answer question in such surveys carefully and truthfully (Singer (2002)). To sum up, survey-based sentiment indexes can be helpful in predicting financial indicators. However, the usage of such indexes has specific drawbacks and can be limited in some cases.

Third direction

In the 1920s, the market sentiment of railway companies was bullish as it was a new market, and investors saw long-term prospects.

Under the third direction, researchers propose to use text mining and sentiment analysis algorithms to extract information about investors’ mood from social networks, media platforms, blogs, newspaper articles, and other relevant sources of textual data (sometimes referred as news analytics). A thread of publications (Barber & Odean (2008), Dougal et al. (2012), and Ahern & Sosyura (2015)) report a significant influence of financial articles and sensational news on behavior of stock prices. It is also not surprising, that such popular sources of news as Wall Street Journal, New York Times or Financial Times have a profound influence on the market. The strength of the impact can vary between different columnists even inside a particular journal (Dougal et al. (2012)). Tetlock (2007) suggests a successful measure of investors’ mood by counting the number of "negative" words in a popular Wall Street Journal column "Abreast of the market". Zhang et al. (2011) and Bollen et al. (2011) report Twitter to be an extremely important source of sentiment data, which helps to predict stock prices and volatility. The usual way to analyze the influence of the data from micro-blogging platforms on behavior of stock prices is to construct special mood tracking indexes.

The easiest way would be to count the number of "positive" and "negative" words in each relevant tweet and construct a combined indicator based on this data. Nasseri et al. (2014) reports the predictive power of StockTwits (Twitter-like platform specialized on exchanging trading-related opinions) data with respect to behavior of stock prices. An alternative, but more demanding, way is to engage human experts to annotate a large number of tweets with the expected stock moves, and then construct a machine learning model for prediction. The application of the event study methodology to Twitter mood shows significant correlation to cumulative abnormal returns (Sprenger et al. (2014), Ranco et al. (2015), Gabrovšek et al. (2017)). Karabulut (2013) reports Facebook to be a good source of information about investors’ mood. Overall, most popular social networks, finance-related media platforms, magazines, and journals can be a valuable source of sentiment data, summarized in Peterson (2016). However, important to notice that it is relatively more difficult to collect such type of data (in most cases a researcher needs a special software). In addition, analysis of such data can also require deep machine learning and data mining knowledge (Hotho et al. (2005)).

Fourth road

Islamabad Stock Exchange Bull

The fourth road is an important source of information about investor attention is the Internet search behavior of households. This approach is supported by results from Simon (1955), who concludes that people start their decision making process by gathering relevant information. Publicly available data on search volumes for most Internet search services starts from the year 2004. Since that time many authors showed the usefulness of such data in predicting investor attention and market returns (Da et al. (2014), Preis et al. (2013), and Curme et al. (2014)). Most studies are using Google Trends (GT) service in order to extract search volume data and investigate investor attention. The usefulness of Internet search data was also proved based on Yahoo! Corporation data (Bordino et al. (2012)). The application of Internet search data gives promising results in solving different financial problems. The authors in Kristoufek (2013b) discuss the application of GT data in portfolio diversification problem. Proposed in the paper diversification procedure is based on the assumption that the popularity of a particular stock in Internet queries is correlated with the riskiness of this stock. The author reports that such diversification procedure helps significantly improve portfolio returns. Da et al. (2014) and Dimpfl & Jank (2015) investigate a predictive power of GT data for two most popular volatility measures: realized volatility (RV) and CBOE daily market volatility index (VIX). Both studies report positive and significant dependence between Internet search data and volatility measures. Bordino et al. (2012) and Preis et al. (2010) reveal the ability of Internet search data to predict trading volumes in the US stock markets. According to Bordino et al. (2012), "...query volumes anticipate in many cases peaks of trading by one day or more." Some researchers find the usefulness of GT data in predicting volatility on foreign currency market (Smith (2012)). An increasingly important role of Internet search data is admitted in cryptocurrency (e.g. Bitcoin) prices forecasting (Kristoufek (2013a)). Google Trends data is also reported to be a good predictor for daily mutual fund flows. Da et al. (2014) concludes that such type of sentiment data "...has significant incremental predictive power for future daily fund flow innovations of both equity and bond funds." One more promising source of Internet search data is the number of visits of finance-related Wikipedia pages (Wikipedia page statistics) (Moat et al. (2013) and Kristoufek (2013a)). To sum up, the Internet search behavior of households is relatively new and promising proxy for investor attention. Such type of sentiment data does not require additional information from other sources and can be used in scientific studies independently.

Fifth source

"All boats float or sink with the tide."

Finally the fifth source of investor attention can also depend on some non-economic factors. Every day many non-economic events (e.g. news, weather, health condition, etc.) influence our mood, which, in term, influence the level of our risk aversion and trading behavior. Edmans et al. (2007) discuss the influence of sport events on investors’ trading behavior. The authors report a strong evidence of abnormally negative stock returns after losses in major soccer competitions. The loss effect is also valid after international cricket, rugby, and basketball games. Kaplanski & Levy (2010) investigate the influence of bad news (aviation disasters) on stock prices. The authors conclude that a bad piece of news (e.g. about aviation disaster) can cause significant drop in stock returns (especially for small and risky stocks). The evidence that the number of sunlight minutes in a particular day influence the behavior of a trader is presented in Akhtari (2011) and Hirshleifer & Shumway (2003). The authors conclude that the "sunshine effect" is statistically significant and robust to different model specifications. The influence of temperature on stock returns is discussed in Cao & Wei (2005).

According to the results in the mentioned study, there is a negative dependence between temperature and stock returns on the whole range of temperature (i.e. the returns are higher when the weather is cold). A seasonal affective disorder (SAD) is also known to be a predictor of investors’ mood (Kamstra et al. (2003)). This is an expected result because SAD incorporates the information about weather conditions. Some researchers go even further and reveal the dependence between lunar phases and stock market returns (Yuan et al. (2006)). According to Dichev & Janes (2001): "...returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates". Even geomagnetic activity is reported to have an influence (negatively correlated) on stock returns (C. Robotti (2003). To sum up, non-economic events have a significant influence on trader's behavior. An investor would expect high market returns on a sunny, but cool day, fifteen days around a new moon, with no significant geomagnetic activity, preferably the day after a victory on a significant sport event. In most cases such data should be treated as supplemental in measuring investor attention, but not as totally independent one.

Currency markets

Additional indicators exist to measure the sentiment specifically on Forex markets. Though the Forex market is decentralized (not traded on a central exchange), various retail Forex brokerage firms publish positioning ratios (similar to the Put/Call ratio) and other data regarding their own clients' trading behavior. Since most retail currency traders are unsuccessful, measures of Forex market sentiment are typically used as contrarian indicators. Some researchers report Internet search data (e.g. Google Trends) to be useful in predicting volatility on foreign currency markets. Internet search data and (relevant) Wikipedia page views data are reported to be useful in cryptocurrency (e.g. Bitcoin) prices forecasting.

Investment

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Investment

Investment is traditionally defined as the "commitment of resources to achieve later benefits". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broader viewpoint, an investment can be defined as "to tailor the pattern of expenditure and receipt of resources to optimise the desirable patterns of these flows". When expenditure and receipts are defined in terms of money, then the net monetary receipt in a time period is termed as cash flow, while money received in a series of several time periods is termed as cash flow stream. Investment science is the application of scientific tools (usually mathematical) for investments.

In finance, the purpose of investing is to generate a return from the invested asset. The return may consist of a gain (profit) or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), or investment income such as dividends, interest, or rental income, or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.

Investors generally expect higher returns from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high losses.

Investors, particularly novices, are often advised to diversify their portfolio. Diversification has the statistical effect of reducing overall risk.

Investment and risk

An investor may bear a risk of loss of some or all of their capital invested. Investment differs from arbitrage, in which profit is generated without investing capital or bearing risk.

Savings bear the (normally remote) risk that the financial provider may default.

Foreign currency savings also bear foreign exchange risk: if the currency of a savings account differs from the account holder's home currency, then there is the risk that the exchange rate between the two currencies will move unfavourably so that the value of the savings account decreases, measured in the account holder's home currency.

Even investing in tangible assets like property has its risk. And similar to most risks, property buyers can seek to mitigate any potential risk by taking out mortgage and by borrowing at a lower loan to security ratio.

In contrast with savings, investments tend to carry more risk, in the form of both a wider variety of risk factors and a greater level of uncertainty.

Industry to industry volatility is more or less of a risk depending. In biotechnology, for example, investors look for big profits on companies that have small market capitalizations but can be worth hundreds of millions quite quickly. The risk is high because approximately 90% of biotechnology products researched do not make it to market due to regulations and the complex demands within pharmacology as the average prescription drug takes 10 years and US$2.5 billion worth of capital.

History

The Code of Hammurabi (developed during his reign between 1792-1750 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death.

In the medieval Islamic world, the qirad was a major financial instrument. This was an arrangement between one or more investors and an agent where the investors entrusted capital to an agent who then traded with it in hopes of making a profit. Both parties then received a previously settled portion of the profit, though the agent was not liable for any losses. Many will notice that the qirad is similar to the institution of the commenda later used in western Europe, though whether the qirad transformed into the commenda or the two institutions evolved independently cannot be stated with certainty.

In the early 1900s, purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. Since the Wall Street crash of 1929, and particularly by the 1950s, the term investment had come to denote the more conservative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures.

Investment strategies

Value investing

Main article: Value investing

A value investor buys assets that they believe to be undervalued (and sells overvalued ones). To identify undervalued securities, a value investor uses analysis of the financial reports of the issuer to evaluate the security. Value investors employ accounting ratios, such as earnings per share and sales growth, to identify securities trading at prices below their worth.

Warren Buffett and Benjamin Graham are notable examples of value investors. Graham and Dodd's seminal work, Security Analysis, was written in the wake of the Wall Street Crash of 1929.

The price to earnings ratio (P/E), or earnings multiple, is a particularly significant and recognized fundamental ratio, with a function of dividing the share price of the stock, by its earnings per share. This will provide the value representing the sum investors are prepared to expend for each dollar of company earnings. This ratio is an important aspect, due to its capacity as measurement for the comparison of valuations of various companies. A stock with a lower P/E ratio will cost less per share than one with a higher P/E, taking into account the same level of financial performance; therefore, it essentially means a low P/E is the preferred option.

An instance in which the price to earnings ratio has a lesser significance is when companies in different industries are compared. For example, although it is reasonable for a telecommunications stock to show a P/E in the low teens, in the case of hi-tech stock, a P/E in the 40s range is not unusual. When making comparisons, the P/E ratio can give you a refined view of a particular stock valuation.

For investors paying for each dollar of a company's earnings, the P/E ratio is a significant indicator, but the price-to-book ratio (P/B) is also a reliable indication of how much investors are willing to spend on each dollar of company assets. In the process of the P/B ratio, the share price of a stock is divided by its net assets; any intangibles, such as goodwill, are not taken into account. It is a crucial factor of the price-to-book ratio, due to it indicating the actual payment for tangible assets and not the more difficult valuation of intangibles. Accordingly, the P/B could be considered a comparatively conservative metric.

Growth investing

Growth investors seek investments they believe are likely to have higher earnings or greater value in the future. To identify such stocks, growth investors often evaluate measures of current stock value as well as predictions of future financial performance. Growth investors seek profits through capital appreciation – the gains earned when a stock is sold at a higher price than what it was purchased for. The price-to-earnings (P/E) multiple is also used for this type of investment; growth stock are likely to have a P/E higher than others in its industry. According to Investopedia author Troy Segal and U.S. Department of State Fulbright fintech research awardee Julius Mansa, growth investing is best suited for investors who prefer relatively shorter investment horizons, higher risks, and are not seeking immediate cash flow through dividends.

Some investors attribute the introduction of the growth investing strategy to investment banker Thomas Rowe Price Jr., who tested and popularized the method in 1950 by introducing his mutual fund, the T. Rowe Price Growth Stock Fund. Price asserted that investors could reap high returns by "investing in companies that are well-managed in fertile fields."

A new form of investing that seems to have caught the attention of investors is Venture Capital. Venture Capital is independently managed dedicated pools of capital that focus on equity or equity-linked investments in privately held, high growth companies.

Momentum investing

Momentum investors generally seek to buy stocks that are currently experiencing a short-term uptrend, and they usually sell them once this momentum starts to decrease. Stocks or securities purchased for momentum investing are often characterized by demonstrating consistently high returns for the past three to twelve months. However, in a bear market, momentum investing also involves short-selling securities of stocks that are experiencing a downward trend, because it is believed that these stocks will continue to decrease in value. Essentially, momentum investing generally relies on the principle that a consistently up-trending stock will continue to grow, while a consistently down-trending stock will continue to fall.

Economists and financial analysts have not reached a consensus on the effectiveness of using the momentum investing strategy. Rather than evaluating a company's operational performance, momentum investors instead utilize trend lines, moving averages, and the Average Directional Index (ADX) to determine the existence and strength of trends.

Dollar cost averaging

Dollar cost averaging: If an individual invested $500 per month into the stock market for 40 years at a 10% annual return rate, they would have an ending balance of over $2.5 million.

Dollar cost averaging (DCA), also known in the UK as pound-cost averaging, is the process of consistently investing a certain amount of money across regular increments of time, and the method can be used in conjunction with value investing, growth investing, momentum investing, or other strategies. For example, an investor who practices dollar-cost averaging could choose to invest $200 a month for the next 3 years, regardless of the share price of their preferred stock(s), mutual funds, or exchange-traded funds.

Many investors believe that dollar-cost averaging helps minimize short-term volatility by spreading risk out across time intervals and avoiding market timing. Research also shows that DCA can help reduce the total average cost per share in an investment because the method enables the purchase of more shares when their price is lower, and less shares when the price is higher. However, dollar-cost averaging is also generally characterized by more brokerage fees, which could decrease an investor's overall returns.

The term "dollar-cost averaging" is believed to have first been coined in 1949 by economist and author Benjamin Graham in his book, The Intelligent Investor. Graham asserted that investors that use DCA are "likely to end up with a satisfactory overall price for all [their] holdings."

Micro-Investing

Micro-investing is a type of investment strategy that is designed to make investing regular, accessible and affordable, especially for those who may not have a lot of money to invest or who are new to investing.

Intermediaries and collective investments

Investments are often made indirectly through intermediary financial institutions. These intermediaries include pension funds, banks, and insurance companies. They may pool money received from a number of individual end investors into funds such as investment trusts, unit trusts, and SICAVs to make large-scale investments. Each individual investor holds an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied.

Approaches to investment sometimes referred to in marketing of collective investments include dollar cost averaging and market timing.

Famous investors

Investors famous for their success include Warren Buffett, who ranked second in the Forbes 400 list of the March 2013 edition of Forbes magazine. Buffett has advised in numerous articles and interviews that a good investment strategy is long-term and due diligence is the key to investing in the right assets.

Edward O. Thorp was a highly successful hedge fund manager in the 1970s and 1980s who spoke of a similar approach.

The investment principles of both of these investors have points in common with the Kelly criterion for money management. Numerous interactive calculators which use the Kelly criterion can be found online.

Investment valuation

Free cash flow measures the cash a company generates which is available to its debt and equity investors, after allowing for reinvestment in working capital and capital expenditure. High and rising free cash flow, therefore, tend to make a company more attractive to investors.

The debt-to-equity ratio is an indicator of capital structure. A high proportion of debt, reflected in a high debt-to-equity ratio, tends to make a company's earnings, free cash flow, and ultimately the returns to its investors, riskier or volatile. Investors compare a company's debt-to-equity ratio with those of other companies in the same industry, and examine trends in debt-to-equity ratios and free cashflow.

Activist shareholder

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Activist_shareholder 

An activist shareholder is a shareholder who uses an equity stake in a corporation to put pressure on its management. A fairly small stake (less than 10% of outstanding shares) may be enough to launch a successful campaign. In comparison, a full takeover bid is a much more costly and difficult undertaking. The goals of activist shareholders range from financial (increase of shareholder value through changes in corporate policy, cost cutting, etc.) to non-financial (disinvestment from particular countries, etc.). Shareholder activists can address self-dealing by corporate insiders, although large stockholders can also engage in self-dealing to themselves at the expense of smaller minority shareholders.

According to research firm Insightia, a total of 967 listed companies globally were publicly subjected to activist demands in 2022, up from 913 in 2021. Shareholder activism can take any of several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Daniel Loeb, head of Third Point Management, is notable for his use of sharply written letters directed towards the CEOs of his target companies.

Activism may help to address the principal-agent problem where the management (agents) do not adequately respond to the wishes of the principals (investors) of publicly traded companies. In the 2010s, investments in the activist asset class grew, with activists receiving coverage by the media and positive attention from investors. Activists have typically engaged in adversarial campaigns, but have also in some cases been able to acquire board seats with a formal proxy context.

Shareholder activists are making their mark on mergers and acquisitions as well – a 2015 survey of corporate development leaders found that 60% of respondents saw shareholder activism affecting transaction activity in their industry. Increasingly, however, the non-financial form of shareholder activism is affecting companies in a range of sectors. Shareholders, often with a comparatively small stake in a company, are seeking to influence the company's environmental and social performance.

Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS), Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA), and Relational Investors, LLC.

Due to the Internet, smaller shareholders have also gained an outlet to voice their opinions. In 2005, small MCI Inc. shareholders created an online petition to protest the MCI/Verizon merger.

History

Corporations in 18th-century Europe were privileged and relatively uncommon, but in the United States became much more common, starting with 300 in the 1790s and expanding by around 26,000 between 1790 and the 1860s, resulting in about 15 times the corporations in Great Britain by 1830. These early corporations contained various provisions for corporate governance, including restricted charters, bylaws, prudent-mean voting rules, dividend payments, and press coverage.

From 1900 to 1950, about 1.22 "offensive" activist initiatives occurred per year, with more occurring in the 1940s and 1950s. Notable investors included Cyrus S. Eaton, Phoenix Securities Corporation, Benjamin Graham, J. Paul Getty, and Malcolm Chace. Activism was likely limited by the lack of ownership dispersion, meaning that many corporations had large shareholders with sizable blocks (10 to 20% of total shares) who already exerted significant control over the corporation.

Notable investors

Notable activist investors include: Isaac Le Maire (1558–1624), Carl Icahn, Nelson Peltz (Trian), Bill Ackman (Pershing Square), Daniel Loeb (Third Point), Barry Rosenstein, Larry Robbins (Glenview), David Einhorn, Gregg Hymowitz (EnTrust Global), Christer Gardell (Cevian Capital), and Ryan Cohen.

During the 1980s, activist investors such as Carl Icahn and T. Boone Pickens gained international notoriety and were often perceived as "corporate raiders" for acquiring an equity stake in publicly owned companies, like Icahn's investment in B.F. Goodrich, and then forcing companies to take action to improve value or rid themselves of rebel intruders like Icahn by buying back the raider's investment at a fat premium, often at the expense of the other shareholders. More recently, activist investor Phillip Goldstein suggested that the role of the activist investor has moved from green mail to one of being a catalyst to unlock value in an underlying security, and says that the public perception of activist investors as "corporate raiders" has dissipated.

In 2019, notable activist investors included Starboard Value, Ancora, Icahn, Elliot Management, and Third Point (Loeb). In 2019, mutual funds such as Wellington Management Company had begun to show signs of activism.

Outreach strategies

Activist investors advertise their message out in various ways including postal mail, websites, and social media.

Statistics

As of 2018, there had been an average of 272 activist campaigns per year in the United States, including 47 proxy contests. About 47% of targeted companies were outside of the United States.

Proxy advisory

As of 2020, passive investors such as index funds by Vanguard as well as non-activist but still active management investors such as mutual funds play a significant role in corporate governance. These firms use proxy advisory firms such as Institutional Shareholder Services to receive recommendations on how to vote on shareholder proposals.

Funding

Activist investors are often hedge funds funded by accredited investors and institutions. In 2019, institutions were demanding more upfront explanation of the activist ideas before funding, and in some cases requiring that the funds be placed into special purpose vehicles specifically for the project. Activist hedge funds, which are hedge funds that "take concentrated positions in the equity of public corporations and actively engage with corporate managers" can address the principal-agent problem and limit self-dealing by providing management with high-powered incentives to increase value.

Offensive versus defensive

Shareholder activism can be categorized as "offensive" or "defensive"; in the latter case, an existing shareholder attempts to correct some deficiency, while offensive activists build a position with the intention to agitate for change. Shareholders can also initiative a derivative suit to force action by the corporation. Shareholders can also engage in a securities class action but these are typically not associated with activism.

Laws

In the United States, acquisition of over 5% of beneficial ownership in a company with the intention to influence leadership must be accompanied by a Schedule 13D filing; investors who do not intend to become activists may file a Schedule 13G instead.

Proxy access

Main article: Proxy statement § Proxy access

Historically, investors were required to mail separate ballots when trying to nominate someone of their own to the board, but beginning in 2015, proxy access rules began to spread driven by initiatives from major institutional investors, and as of 2018, 71% of S&P 500 companies had a proxy access rule.

Voting

Votes for the board may be "straight" or "cumulative". In straight voting (aka statutory voting), shareholders get one vote per share on all ballot questions (e.g., candidates for the board of directors or shareholder proposals). In cumulative voting, a shareholder receives a general vote for however many number of ballot questions there are. The votes can then be all cast for (or against) a single ballot question, which makes it easier for minority shareholders to elect candidates. There has also been a movement toward "majority" voting, where a candidate must receive the majority of votes. Most large corporations are incorporated in Delaware due to the well-developed Delaware General Corporation Law; in Delaware, cumulative voting is optional, but exceptions exist; for example, a California-based but Delaware-registered corporation may be "pseudo-foreign" under California law and therefore have to comply with California law.

Performance

Taking an activist approach to public investing may produce returns in excess of those likely to be achieved passively. A 2012 study by Activist Insight showed that the mean annual net return of over 40 activist-focused hedge funds had consistently outperformed the MSCI world index in the years following the global financial crisis in 2008. Activist investing was the top-performing strategy among hedge funds in 2013, with such firms returning, on average, 16.6% while other hedge funds returned 9.5%.

Research

Shareholder activism directed at both European and American companies has been surging. A 1996 study found that larger firms with higher institutional holdings made firms more likely to be targeted by activist investors. Researchers also try to understand what makes company a desirable target for an activist investor. Lately, both scholars and practitioners started using machine learning methodologies to predict both targets and activists.

Retail involvement

Any shareholder, including a non-institutional retail investors, may submit a shareholder proposal in the United States, and between 1934 and the mid-1980s these shareholders typically submitted proposals. One estimate placed institutional owners at 68% of shares and retail at 32% of shares, but 98% of institutional owners vote and only 28% of retail owners vote. Institutional shareholders, however, often vote automatically upon the advice of proxy advisory firms; allowing retail shareholders to vote based upon a guideline ("standing voting instructions") has been proposed to increase their involvement.

Various websites have been created to facilitate retail involvement, including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.

Political and labor involvement

Labor unions, including through pension funds such as CalPERS coalitions such as the Change to Win Federation often engage in shareholder proposals. The Shareholder Rights Group is a coalition of shareholder proposal advocates.

Socially responsible investing

Organizations such as the Interfaith Center on Corporate Responsibility (ICCR), As You Sow and Ceres use shareholder resolutions, and other means of pressure, to address issues such as sustainability and human rights.

For an analysis of the hundreds of annual shareholder resolutions, see Proxy Preview.

Community development financial institution

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Community_development_financial_institution 

A community development financial institution (US) or community development finance institution (UK) - abbreviated in both cases to CDFI - is a financial institution that provides credit and financial services to underserved markets and populations, primarily in the USA but also in the UK. A CDFI may be a community development bank, a community development credit union (CDCU), a community development loan fund (CDLF), a community development venture capital fund (CDVC), a microenterprise development loan fund, or a community development corporation.

CDFIs are certified by the Community Development Financial Institutions Fund (CDFI Fund) at the U.S. Department of the Treasury, which provides funds to CDFIs through a variety of programs. The CDFI Fund and the legal concept of CDFIs were established by the Riegle Community Development and Regulatory Improvement Act of 1994. Broadly speaking, a CDFI is defined as a financial institution that: has a primary mission of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a non-governmental entity.

The Housing and Economic Recovery Act of 2008 (HERA) authorized CDFIs certified by the CDFI Fund to become members of the Federal Home Loan Banks. The Final Rule regarding the procedures and standards to be used by the Federal Home Loan Banks to evaluate applications for membership from CDFIs were published in the Federal Register Federal Housing Finance Agency in January 2010. The Final Rule is to be implemented by the 11 Federal Home Loan Banks, each of which will evaluate membership applications independently.

CDFIs are related to, but not identical with, Community Development Entities (CDEs). CDEs are also certified by the CDFI Fund at the U.S. Department of Treasury but have somewhat different qualifications. Many CDFIs have also been certified as CDEs. The primary purpose of CDEs is to utilize the New Markets Tax Credit Program (NMTCs). NMTCs were created to induce equity investments in low-income communities. Traditionally, because of the NMTCs and the structure of the industry, investments in CDFIs were typically limited to larger financial institutions. Investment access to CDFIs appears to be on the rise, as CNote, a company that lets individuals invest their savings in CDFIs, recently received qualification from the Securities and Exchange Commission to offer their CDFI-based product to non-accredited investors.

CDFIs may be subject to oversight by federal financial institution regulators (e.g., banks, credit unions) or may be "unregulated" at the federal level, and subject only to the laws of the states in which they operate. There is no mandatory rating or ranking system imposed on all CDFIs which would allow investors or others to evaluate their performance, safety, or strength. However, since 2004 approximately 100 CDFI loan funds have received voluntary ratings of their financial strength and social impact performance by Aeris, an independent rating and information service. In 2015, Standard & Poor's issued its first ratings assessments of CDFI loan funds.

Scope

In 2006, there were approximately 1,250 CDFIs, consisting of:

• More than 500 community development loan funds;
• More than 350 community development banks;
• More than 290 community development credit unions;
• More than 80 community development venture capital funds.

In May 2010, the CDFI Fund had certified 862 CDFIs, 57 Native CDFIs (serving Native Americans), and 4,230 CDEs, each of which may have multiple subsidiary investment funds.

Nationwide, over 1,000 CDFIs serve economically distressed communities by providing credit, capital, and financial services that are often unavailable from mainstream financial institutions. CDFIs have loaned and invested billions of dollars in the most distressed communities in the United States, leveraging capital from the private sector for development activities in low wealth communities across the nation.

While there are numerous organizations certified as CDFIs by the CDFI Fund, it is believed that there are thousands of financial institutions serving the needs of low-income people or communities in the United States, that either have not applied for CDFI status or have otherwise not been able to fulfill all of the requirements for formal CDFI certification.

In fiscal year 2016, CDFI program awardees originated $3.6 billion in loans and investments to finance more than 13,000 businesses and 33,000 affordable housing units.

Notable depository CDFIs

ShoreBank, headquartered in the South Shore neighborhood of Chicago, was founded in 1973. By 2007, it had over $2 billion in assets. ShoreBank had branches in Chicago’s South and West sides, Cleveland, and Detroit, but in August 2010 the bank was declared insolvent and its branches were taken over by Urban Partnership Bank. Its holding company ShoreBank Corporation, still exists and promotes its community development mission through affiliates in Oregon and Washington state, and in Michigan’s Upper Peninsula. ShoreBank’s international consulting services have offices in Chicago, Washington, D.C., and London, and projects in 30 countries around the world.

OneUnited Bank, headquartered in Boston, Massachusetts, is the largest African-American-owned CDFI in the country, with branches in Boston, Miami, Florida, and Los Angeles, California.

The Center for Community Self-Help, another leading CDFI, was founded in 1980 in Durham, North Carolina. Self-Help's home and business lending has provided low-wealth, minority, rural and female borrowers with over $5.24 billion in financing. Much of this is through Self-Help's national secondary market program, which enables conventional lenders to make more home loans to low-wealth families. Self-Help also develops commercial and residential real estate and operates retail credit unions. In response to predatory lenders increasingly targeting family wealth in poor and minority communities, Self-Help in 1999 worked with the NAACP, AARP, and other North Carolina groups to form the Coalition for Responsible Lending and help enact one of the United States' first laws to curb predatory mortgage lending. In 2002, Self-Help founded the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization that recommends solutions to predatory lending abuses.

Notable non-depository CDFIs

• Capital Impact Partners
• Chicago Community Loan Fund
• Enterprise Community Partners
• Local Initiatives Support Corporation
• ShoreBank
• Southern Bancorp

Other countries

While the CDFI Fund and its certifications are limited to the United States, the UK also has about 70 CDFIs and a trade association, Responsible Finance, formerly known as the Community Development Finance Association (CDFA). The UK government has provided various funding initiatives for CDFIs and credit unions, and Community Investment Tax Relief (somewhat similar to New Markets Tax Credit) is available on investments in accredited CDFIs.

Institutions similar in purpose exist around the world, such as Grameen Bank in Bangladesh and Clann Credo in Ireland, though they are not generally called CDFIs, but are described by other terms such as microfinance institutions or social banks or social investment funds.

Socially responsible investing

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Socially_responsible_investing

 

Sustainable energy is one of many forms of sustainable investing.

Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social change regarded as positive by proponents. Socially responsible investments often constitute a small percentage of total funds invested by corporations and are riddled with obstacles.

Recently, it has also become known as "sustainable investing" or "responsible investing". There is also a subset of SRI known as "impact investing", devoted to the conscious creation of social impact through investment.

In general, socially responsible investors encourage corporate practices that they believe promote environmental stewardship, consumer protection, human rights, and racial or gender diversity. Some SRIs avoid investing in businesses perceived to have negative social effects such as alcohol, tobacco, fast food, gambling, pornography, weapons, fossil fuel production or the military. The areas of concern recognized by the SRI practitioners are sometimes summarized under the heading of ESG issues: environment, social justice, and corporate governance.

Socially responsible investing is one of several related concepts and approaches that influence and, in some cases, govern how asset managers invest portfolios. The term "socially responsible investing" sometimes narrowly refers to practices that seek to avoid harm by screening companies for ESG risks before deciding whether or not they should be included in an investment portfolio. However, the term is also used more broadly to include more proactive practices such as impact investing, shareholder advocacy and community investing. According to investor Amy Domini, shareholder advocacy and community investing are pillars of socially responsible investing, while doing only negative screening is inadequate.

Some rating companies focus specifically on ESG risk ratings as they can be a "valuable tool for asset managers". These ratings firms evaluate companies and projects on several risk factors and typically assign an aggregate score to each company or project being rated. The firms publish reports of their ESG risk findings.

History

The origins of socially responsible investing may date back to the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade – buying or selling humans.

One of the most articulate early adopters of SRI was John Wesley (1703–1791), one of the founders of Methodism. Wesley's sermon "The Use of Money" outlined his basic tenets of social investing – i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production, which can harm the health of workers. Some of the best-known applications of socially responsible investing were religiously motivated. Investors would avoid "sinful" companies, such as those associated with products such as guns, liquor, and tobacco.

The modern era of socially responsible investing evolved during the political climate of the 1960s. During this time, socially concerned investors increasingly sought to address equality for women, civil rights, and labor issues. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery bus boycott and the Operation Breadbasket Project in Chicago, established the beginning model for socially responsible investing efforts. King combined ongoing dialog with boycotts and direct action targeting specific corporations. Concerns about the Vietnam War were incorporated by some social investors. Many people living during the era remember a picture in June 1972 of a naked nine-year-old girl, Phan Thị Kim Phúc, running towards a photographer screaming, her back burning from the napalm dropped on her village. That photograph channeled outrage against Dow Chemical, the manufacturer of napalm, and prompted protests across the country against Dow Chemical and other companies profiting from the Vietnam War.

During the 1950s and 1960s, trade unions deployed multi-employer pension fund monies for targeted investments. For example, the United Mine Workers fund invested in medical facilities, and the International Ladies' Garment Workers' Union (ILGWU) and International Brotherhood of Electrical Workers (IBEW) financed union-built housing projects. Labor unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions. In 1978, SRI efforts by pension funds was spurred by The North will Rise Again: Pensions, Politics, and Power in the 1980s and the subsequent organizing efforts of authors Jeremy Rifkin and Randy Barber. By 1980, presidential candidates Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation for pension investments.

SRI had an important role in ending the apartheid government in South Africa. International opposition to apartheid strengthened after the 1960 Sharpeville massacre. In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the Sullivan Principles. However, reports documenting the application of the Sullivan Principles said that US companies were not trying to lessen discrimination in South Africa. Due to these reports and mounting political pressure, cities, states, colleges, faith-based groups and pension funds throughout the US began divesting from companies operating in South Africa. In 1976, the United Nations imposed a mandatory arms embargo against South Africa. From the 1970s to the early 1990s, large institutions avoided investment in South Africa under apartheid. The subsequent negative flow of investment eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone did not bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

The mid and late 1990s saw the rise of SRI's focus on a diverse range of other issues, including tobacco stocks, mutual fund proxy disclosure, and other diverse focuses.

Since the late 1990s, SRI has become increasingly defined as a means to promote environmentally sustainable development. Many investors consider effects of global climate change a significant business and investment risk. CERES was founded in 1989 by Joan Bavaria and Dennis Hayes, coordinator of the first Earth Day, as a network for investors, environmental organizations, and other public interest groups interested in working with companies to address environmental concerns.

In 1989, representatives from the SRI industry gathered at the first SRI in the Rockies Conference to exchange ideas and gain momentum for new initiatives. The name has since changed to The SRI Conference which meets annually at Green Building certified establishments and has attracted over 550 persons annually since 2006. This conference is produced by First Affirmative Financial Network, an investment advisory firm that works with advisors nationwide providing portfolios specialized in sustainable and responsible investing.

The first sell-side brokerage in the world to offer SRI research was the Brazilian bank Unibanco. The service was launched in January 2001 by Unibanco SRI analyst Christopher Wells from the São Paulo headquarters of the bank. It was targeted at SRI funds in Europe and the US, although it was sent to non-SRI funds both in and out of Brazil. The research was about environmental and social issues (but not governance issues) regarding companies listed in Brazil. It was sent for free to Unibanco's clients. The service lasted until mid-2002.

Drawing on the industry's experience using divestment as a tool against apartheid, the Sudan Divestment Task Force was established in 2006 in response to the genocide occurring in the Darfur region of the Sudan. Support from the US government followed with the Sudan Accountability and Divestment Act of 2007.

More recently, some social investors have sought to address the rights of indigenous peoples around the world who are affected by the business practices of various companies. The 2007, SRI in the Rockies Conference held a special pre-conference specifically to address the concerns of indigenous peoples. Healthy working conditions, fair wages, product safety, and equal opportunity employment also remain headline concerns for many social investors. In the mid-2010s, some funds developed gender lens investing strategies to promote workplace equity and general welfare of women and girls.

Current strategies

Socially responsible investing is a growing market in both the US and Europe. In particular, it has become an important principle guiding the investment strategies of various funds and accounts.

Government-controlled funds

Government-controlled funds such as pension funds are often very large players in the investment field, and are being pressured by the citizenry and by activist groups to adopt investment policies which encourage ethical corporate behavior, respect the rights of workers, consider environmental concerns, and avoid violations of human rights. One outstanding endorsement of such policies is The Government Pension Fund of Norway, which is mandated to avoid "investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages".

In the 2000s and 2010s, pension funds were under pressure to disinvest from the arms company BAE Systems, partially due to a campaign run by the Campaign Against Arms Trade (CAAT). Liverpool City Council has passed a successful resolution to disinvest from the company, but a similar attempt by the Scottish Green Party in Edinburgh City Council was blocked by the Liberal Democrats.

Mutual funds and ETFs

Socially responsible mutual funds counted by the 2014 Trends Report increased in number to 415 in 2014, up from 333 in 2012, 250 in 2010, 173 in 2005 & 2007, 189 in 2003, and 167 in 2001. The overall number of mutual funds incorporating environmental, social and corporate governance (ESG) has increased four-fold since 2012. Additionally, 20 exchange-traded funds (ETFs) that incorporate ESG criteria were identified with $3.5 billion in assets at the end of 2011, an increase from the 8 ETFs with $2.25 billion in net assets identified in its 2007 report—the first Trends report to track ETFs [11]. Unlike the Employee Retirement Income Security Act of 1974 (ERISA), which severely limits the extent to which socially responsible goals can be considered in managing corporate and Taft-Hartley pension assets (due to ERISA's overriding goal of protecting employees' pensions), registered investment companies can take these factors into account so long as the disclosure and other requirements of the Investment Company Act of 1940 are met. US SIF maintains charts describing the socially responsible mutual funds offered by its member firms.

Separately managed accounts

According to the 2014 Report on US Sustainable, Responsible and Impact Investing Trends, among separate account managers, 214 distinctive separate account vehicles or strategies, with $433 billion in assets, incorporated ESG factors into investment analysis. Where a separate account is subject to ERISA, there are legal limitations on the extent to which investment decisions can be based on factors other than maximizing plan participants' economic returns.

Shareholder advocacy

Shareholder resolutions are filed by a wide variety of institutional investors, including public pension funds, faith-based investors, socially responsible mutual funds, and labor unions. In 2004, faith-based organizations filed 129 resolutions, while socially responsible funds filed 56 resolutions.

Regulations governing shareholder resolutions vary from country to country. In the United States, they are determined primarily by the Securities and Exchange Commission, which regulates mutual funds and applies the 1940 Act and by the Department of Labor, which regulates certain plans and applies ERISA.

These regulatory regimes require pension plans and mutual funds to disclose how they voted on behalf of their investors. U.S. shareholders have organized various groups to facilitate jointly filing resolutions. These include the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, and the US SIF.

From 2012 to 2014, more than 200 US institutions and investment management firms filed or co-filed proposals. These institutions and money managers collectively controlled $1.72 trillion in assets at the end of 2013. The top categories of environmental and social issues from 2012 to 2014 were political contributions and climate change and environmental issues.

Community investing

Community investing, a subset of socially responsible investing, allows for investment directly into community-based organizations. Community investing institutions use investor capital to finance or guarantee loans to individuals and organizations that have historically been denied access to capital by traditional financial institutions. These loans are used for housing, small business creation, and education or personal development in the US and UK, or are made available to local financial institutions abroad to finance international community development. The community investing institution typically provides training and other types of support and expertise to ensure the success of the loan and its returns for investors.

Community investing grew almost 5% from 2012 to 2014. Assets held and invested locally by community development financial institutions (CDFIs) based in the US totaled $64.3 billion at the start of 2014, up from $61.4 billion in 2012.

Investing strategies

Investing in capital markets

Social investors use several strategies to maximize financial return and attempt to maximize social good. These strategies seek to create change by shifting the cost of capital down for sustainable firms and up for the non-sustainable ones. The proponents argue that access to capital is what drives the future direction of development. A growing number of rating agencies collects both raw data the ESG behaviour of firms as well as aggregates this data in indices. After several years of growth the rating agency industry has recently been subject to a consolidation phase that has reduced the number of genesis through mergers and acquisitions.

ESG integration

ESG integration is one of the most common responsible investment strategies and entails the incorporation of environmental, social and governance ("ESG") criteria into the fundamental analysis of equity investments. According to the non-profit Investor Responsibility Research Center institute (IRRCi), approaches to ESG integration vary greatly among asset managers depending on:

• Management: Who is responsible for ESG integration within the organization?
• Research: What ESG criteria and factors are being considered in the analysis?
• Application: How are the ESG criteria being applied in practice?

Negative screening

Negative screening excludes certain securities from investment consideration based on social or environmental criteria. For example, many socially responsible investors screen out tobacco company investments.

The longest-running SRI index, the Domini 400—now the MSCI KLD 400—was started in May 1990. It has continued to perform competitively —with average annualized total returns of 9.51% through December 2009 compared with 8.66% for the S&P 500.

Despite this impressive growth, it has long been commonly perceived that SRI brings smaller returns than unrestricted investing. So-called "sin stocks", including purveyors of tobacco, alcohol, gambling and defense contractors, were banned from portfolios on moral or ethical grounds. And shutting out entire industries hurts performance, the critics said. However, in a comprehensive study, financial economists Lobe, Roithmeier, and Walkshäusl taking the position of the advocatus diaboli, answer the question whether to invest in a socially responsible way – or not? They create a set of global and domestic sin indexes consisting of 755 publicly traded socially irresponsible stocks around the world belonging to the Sextet of Sin: adult entertainment, alcohol, gambling, nuclear power, tobacco, and weapons. They compare their stock market performance directly with a set of virtue comparables consisting of the most important international socially responsible investment indexes. They find no compelling evidence that ethical and unethical screens lead to a significant difference in their financial performance, which is in contrast with the results of prior studies on sinful investing.

Divestment

Divesting is the act of removing stocks from a portfolio based on mainly ethical, non-financial objections to certain business activities of a corporation. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment portfolio after six months of financial analysis and deliberations.

Shareholder activism

Shareholder activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities. Recent movements have also been reported of "investor relations activism", in which investor relations firms assist groups of shareholder activists in an organized push for change within a corporation. This is done typically by leveraging their enhanced knowledge of the corporation, its management (often via direct relationships), and the securities laws as a whole. Hedge funds are also major activist investors; while some pursue socially responsible investing goals, many simply are seeking to maximize fund returns. Pension plans subject to ERISA are somewhat more constrained in their ability to engage in shareholder activism or the use of plan assets to promote public policy positions; any expenditure of plan assets must be aimed at enhancing participants' retirement income.

Shareholder engagement

A less vocal subtype of shareholder activism, shareholder engagement requires extensive monitoring of the non-financial performance of all portfolio companies. In shareholder engagement dialogues, investees receive constructive feedback on how to improve ESG issues within their sphere of influence.

Positive investing

Positive investing is the new generation of socially responsible investing. It involves making investments in activities and companies believed to have a positive social impact. Positive investing suggested a broad revamping of the industry's methodology for driving change through investments. This investment approach allows investors to positively express their values on corporate behavior issues such as social justice and the environment through stock selection – without sacrificing portfolio diversification or long-term performance. Positive screening pushes the idea of sustainability, not just in the narrow environmental or humanitarian sense, but also in the sense of a company's long-term potential to compete and succeed. In 2015, Morgan Stanley conducted a review of 10,000 funds and concluded "strong sustainability" investments outperformed weak sustainability investments, tackling the idea of a trade-off between positive impact and financial return. while the Global Impact Investing Network's 2015 report on benchmarks and returns in impact investing in private equity and venture capital found market-rate or market-beating returns were common in impact investments.

Impact investing

Impact investing is the alternative investment (i.e. private equity) approach to Positive investing. In 2014, the UK's presidency of the G8 created a Social Impact Investment Task Force which produced a series of reports that defined impact investing as "those that intentionally target specific social objectives along with a financial return and measure the achievement of both". Impact investing, capitalizes businesses that potentially provide social or environmental impact at a scale that purely philanthropic interventions usually cannot reach. This capital may be in a range of forms including private equity, debt, working capital lines of credit, and loan guarantees. Examples in recent decades include many investments in microfinance, community development finance, and clean technology. Impacting investing has its roots in the venture capital community, and an investor will often take active role mentoring or leading the growth of the company or start-up.

Community investment

By investing directly in an institution, rather than purchasing stock, an investor is able to create a greater social impact: money spent purchasing stock in the secondary market accrues to the stock's previous owner and may not generate social good, while money invested in a community institution is put to work. For example, money invested in a Community Development Financial Institution may be used by that institution to alleviate poverty or inequality, spread access to capital to under-served communities, support economic development or green business, or create other social good. In 1984, Trillium Asset Management's founder, Joan Bavaria, invited Chuck Matthei of the Institute for Community Economics (ICE), an organization that helps communities create and sustain land trusts, to a meeting of US SIF. It is likely that this was the first time a nonprofit organization with a loan fund would meet directly with SRI managers. Trillium clients began investing in ICE later that year.

Global context

Socially responsible investing is a global phenomenon. With the international scope of business itself, social investors frequently invest in companies with international operations. As international investment products and opportunities have expanded, so have international SRI products. The ranks of social investors are growing throughout developed and developing countries. In 2006, the United Nations Environment Programme launched its Principles for Responsible Investment which provide a framework for investors to incorporate environmental, social, and governance (ESG) factors into the investment process. PRI has more than 1,500 signatories managing more than US$60 trillion of assets.

The Global Sustainable Investment Alliance (GSIA) is a collaboration of membership-based sustainable investment organisations around the world including the European Sustainable Investment Forum (Eurosif), UK Sustainable Investment and Finance Association (UKSIF), the Responsible Investment Association Australasia (RIAA), Responsible Investment Association (RIA Canada), the Forum for Sustainable and Responsible Investment (US SIF), Dutch Association of Investors for Sustainable Development (VBDO) and Japan Sustainable Investment Forum. The GSIA’s mission is to deepen the impact and visibility of sustainable investment organizations at the global level.

The Global Sustainable Investment Review 2018, the fourth edition of this biennial report, continues to be the only report collating results from the market studies of regional sustainable investment forums from Europe, the United States, Japan, Canada, and Australia and New Zealand. It provides a snapshot of sustainable investing in these markets at the start of 2018 by drawing on the in-depth regional and national reports from GSIA members: Eurosif, Japan Sustainable Investment Forum (JSIF), Responsible Investment Association Australasia, RIA Canada and US SIF. This report also includes data on the African sustainable investing market, from the African Investing for Impact Barometer, and on Latin America from the Principles for Responsible Investment.

The 2018 report shows that globally, sustainable investing assets in the five major markets stood at US$30.7 trillion at the start of 2018, a 34% increase in two years. From 2016 to 2018, the fastest growing region has been Japan, followed by Australia/New Zealand and Canada. These were also the three fastest growing regions in the previous two-year period. The largest three regions— based on the value of their sustainable investing assets—were Europe, the United States and Japan.

An 2020 global analysis from Morningstar indicates that assets in sustainable funds reached nearly, $1.7 trillion. Net flows into U.S. sustainable funds surpassed $51 billion.

ESG ratings agencies

Asset managers and other financial institutions increasingly rely on ESG ratings agencies to assess, measure and compare companies' ESG performance. Sustainsalytics, RepRisk are two examples of dedicated ESG ratings agencies, while global credit agencies like S&P Global are also seeing the value to adding ESG ratings to their data offerings.

Responsible, ethical and impact investing in Australia

According to the Responsible Investment Association Australasia's annual Responsible Investment Benchmark Report Australia 2020, in 2019 and for a 19th consecutive year, funds managed under responsible investment approaches grew as a proportion of total professionally managed investments in Australia to AU$1,149 billion in assets under management, a rise of 17% from 2018. Ever more investment managers are applying a range of responsible investing approaches – from ESG integration and negative screening to sustainability-themed and impact investing.

The report shows that in Australian and multi-sector responsible investment funds outperformed mainstream funds over 1, 3, 5 and 10 year time horizons.

Australian responsible investment managers still favour ESG integration and corporate engagement and voting above negative and norms-based screening as their primary responsible investment approaches for constructing portfolios, but managers are increasingly driving capital towards sustainability-themed and impact investing allocations with allocations to Green, Social and Sustainability Bonds more than doubling since last year.

Negative screening of fossil fuels by the responsible investment industry is beginning to catch up to consumer interest. In 2018, only 5% of responsible investment AUM for survey respondents who conduct negative screening was screened for fossil fuels. In 2019, 19% of responsible investment AUM has been screened for fossil fuels, growing 14 percentage points from the year before. For consumers using RIAA's Responsible Returns search and compare tool for ethical investments, the most important exclusionary screens are fossil fuels, human rights abuses and armaments.

Responsible, ethical and impact investing in New Zealand

The Responsible Investment Association Australasia's annual Responsible Investment Benchmark Report New Zealand 2020 details the size, growth, depth and performance of the New Zealand responsible investment market over 12 months to 31 December 2019 and compares these results with the broader New Zealand financial market. In 2019, funds managed under responsible investment approaches grew as a proportion of total professionally managed investments in New Zealand to NZ$153.5 billion in 2019. This represents 52% of the estimated NZ$296 billion of total professionally managed assets under management in New Zealand.

Increasingly, responsible investors in New Zealand have shifted their focus from screening out harmful industries such as tobacco and armaments, to considering broader environmental, social and corporate governance (ESG) factors when investing. Impact investing has grown over 13 times from NZ$358 million in 2018 to NZ$4.74 billion in 2019. Green, Social and Sustainability (GSS) Bonds account for 88% of products using this approach.

Ethical investment in the UK

In 1985, Friends Provident launched the first ethically screened investment fund with criteria which excluded tobacco, arms, alcohol and oppressive regimes. Since 1985, over 90 investment funds have launched offering a wide range of investment criteria; both negatively screened and with positive investment criteria i.e. investing into companies involved in promoting sustainability.

Since 1985, most of the major investment organizations have launched ethical and socially responsible funds, although this has led to a great deal of discussion and debate over the use of the term "ethical" investment. This is because each of the fund management organizations tend to apply a slightly different approach to running their funds.

In recent years there has been growth in the market for high social impact investments; this is a style of investing where the businesses receiving investment have social or environmental goals as a primary purpose.

UK institutions are also getting more involved in social investing through impact investing funds, with those such as Deutsche Bank and NESTA, alongside other institutions such as Big Issue Invest, which is part of The Big Issue group.

As of June 2014, EIRIS estimated that there was over £13.5 billion invested in Britain's green and ethical retail funds. This estimate is based on around 85 UK domiciled green or ethical retail funds and it seeks to not include UK money invested in ethical funds domiciled outside of the UK.

In higher education

In 2007, the Dwight Hall organization at Yale University launched the first undergraduate-run socially responsible investment fund in the United States, known as the Dwight Hall Socially Responsible Investment Fund.

Comparison with conventional investing

While conventional investing only focuses on the traditional risk and returns considerations in making investment decisions, socially responsible investing considers other ethical factors as discussed above. Hence, the question often arise as to whether it pays financially to be ethical or not in making investment decisions. The debate as to whether there is anything to gain or lose by deciding to be ethical and socially responsible in making investment decisions is still ongoing. Several studies have found that there is no conclusive evidence as to whether the performances of socially responsible investments outperform those of conventional and vice versa.

Comparing portfolio and fund performance

Several studies in various places have analysed the performance of socially responsible investing (SRI) and conventional investing (CI) using different models and methodologies for measuring performance. Using the Carhart four-factor model, found that an approach where stocks with high SRI scores are bought while those with low SRI scores are sold off produced a positive abnormal performance of up to 8.7% per annum, suggesting that investors can achieve their ethical goals without hurting their financial performance. also using the Carhart four-factor model, noted an excess return of 7% for environmentally-friendly firms. However, using a similar approach found the performance of SRI stocks to be not statistically different from those of conventional stocks. In contrast, also using the Carhart four-factor model found a portfolio which included "sin stocks" (alcohol, tobacco, gaming) to be significantly outperforming similar comparable stocks, which indicates that investors in SRI stocks might be losing. However, after controlling for managerial skills, transaction costs and fees, found no outperformance between portfolios which include "sin" stocks and comparable SR portfolios. Some other studies have compared the performance of SRI funds with conventional funds. While some studies used only the capital asset pricing model to compare performance), others used multifactor models such as the Fama–French three-factor model and Carhart four-factor model. These studies found no statistically significant difference in performance between the SRI and conventional funds.

Comparing stock market index performance

Considering that difference in performance of funds may be due to portfolio selection/construction process and/or the ability of fund managers and not necessarily on the nature of investments themselves, some studies have compared the performance of stock market indices instead. Two of the pioneer studies compared the performance of the Domini 400 Social Index with the S&P 500. The Sharpe ratio and the capital asset pricing model were used to estimate Jensen's alpha for the comparison and no significant difference was found in the performance of the two indices. A follow-up study compared the performance of four SRI indices (Domini 400 Social Index, Calvert Social Index, Citizen's Index and Dow Jones Sustainability Indices US Index) with the S&P 500 index between 1990 and 2004 and found that returns on the SRI indices exceeded returns on S&P 500 even though they were not statistically significant. Others focused only on the US and on outside the US by studying the performance of 29 SRI indices globally. Using the capital asset pricing model to estimate Jensen's alpha as the performance indicator, no significant evidence of under/over performance was found. A comparison of the performance of SR indices with conventional indices on a global scale using marginal conditional stochastic dominance found there is "strong evidence that there is a financial price to be paid for socially responsible investing."

A more recent study showed that "improvements in CSR reputation enhance profits".