Social Impact Ratings: How To Make Responsible Investment Appealing

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The investment sector plays a unique role in promoting ethical practices throughout the economy. With well over three trillion dollars invested in socially responsible investments (SRI) worldwide, environmental, social, governance and ethical factors (collectively, ‘social impact factors’) have a demonstrable impact on investment practices. SRI investors utilize various methods of influencing corporate practice, including social screening of investments, which can ultimately reward positive social impact with greater access to financing.

This paper proposes a method for incorporating social impact factors as a quantitative parameter in investment analysis and a means of facilitating such analysis in practice. These proposals have the potential to integrate social impact factors into quantitative portfolio management techniques that have traditionally been based only on risk and return.

Very broadly, SRI is the inclusion of any social or ethical criterion in the investment decision-making process. The first instances of socially responsible investing may be the Quakers’ rules against investing in arms companies and engaging in the business of slavery as early as the mid-eighteenth century (Kinder, 2005; Kinder and Domini, 1998).

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