The True Colors of Ethical Funds

Danışoğlu S., Güner Z. N., Ayaydın Hacıömeroğlu H.

International Social Innovation Research Conference, Glasgow, United Kingdom, 2 - 04 September 2019

  • Publication Type: Conference Paper / Unpublished
  • City: Glasgow
  • Country: United Kingdom
  • Middle East Technical University Affiliated: Yes


In their 2009 book “Investing for Change”, Landier and Nair identify three types of investors in the market: (i) investors with a pure profit objective who might be willing to invest in socially responsible investments (SRI) only if such investments would increase their returns (RED investors), (ii) investors with a pure social impact objective who invest in only SRI and cannot be persuaded otherwise (YELLOW investors), and (iii) investors with a blended objective who would like to contribute to the solution of society’s problems but are not willing to pay a high cost for doing so if investing in SRI means sacrificing financial returns (BLUE investors).

Such a classification bears the hopeful message that there are investors who believe that they may create societal change through their investment decisions. Mutual funds provide a wide range of alternatives that would match the investment styles of red, yellow or blue investors. In fact, many funds position themselves on the yellow end of the investment spectrum and invest under a mandate of social responsibility while others position themselves on the red end of the spectrum and invest in only “sin” securities where unexploited profit opportunities are believed to exist. This paper proposes a methodology for monitoring the fund ownership of securities and fund performance over time. Securities are categorized into sin and ethical groups based on either their industry classification or their ESG scores. The change in the fund ownership of securities may reflect either a shift in the fund’s investment style or the company’s social responsibility engagement. Coupled with a performance indicator, change in fund ownership may shed light on whether SRI is a sustainable investment style since its long-term viability depends on a continued demand by all styles of investors who may have different motivations for investing in social impact.