— Ca’ Foscari Dorsoduro 3246 30123 Venezia
Master’s Degree programme — Second Cycle
in Business Administration
Socially Responsible Investment:
integrating financial and non-financial
criteria into a portfolio selection model
Ch. Prof. Diana Barro
Candidate Beatrice Marigo
Matriculation number 833554
Academic Year 2015/2016
Over the last few years the importance of sustainability and social responsibility has grown rapidly. Many events, including natural disaster, climate change, the high population growth, have drown attention of investors. Therefore, there is a growing awareness among investors which address their investments according not only to their ethical personal values, but also to-ward investment processes that integrates social, environmental and ethical considerations. The object of this thesis is Socially Responsible Investment (SRI) that is the discipline that aims at combining profitability and social commitment. First, we carry out an analysis of the structural components (Environmental, Social and Governance factors, SRI strategies, SRI indexes) and of the historical development of Socially Responsible Investments. Second, we provide an overview of the dimension and of the characteristics of the SRI market in Europe and in the World. In the last part of the thesis, moving from recent contributions in the literature, we consider a portfo-lio model that integrates ethical and financial characteristics of assets in the portfoportfo-lio selection procedure.
I would like to sincerely thank my supervisor, Prof. Diana Barro, for her guidance and support, and for the entusiasm she conveys to me in these months of work.
To all my university friends, in particular Diletta and Arianna for sharing with me moments of study and fun during these two years. A heartful thanks goes to my closest friends, Arianna and Gloria for the sincere friendship that binds us for years, for the good times spent together, and for giving me support in difficult times.
A very special gratitude goes out to Francesco for providing me unfailing support and continu-ous encouragement, and that never ceases to surprise me and to demonstrate affection toward me.
Finally, I must express my very profound gratitude to my oldest sibling Alessia, her husband Cristian and my parents, who have provided me through moral and emotional support in my life. This accomplishment would not have been possible without them. I am also grateful to my other family members, in particular Gilda and Cristiano who have supported me along the way. A special mention goes to my niece Adele who always brings me a smile on my face.
1. Socially Responsible Investment 3
1.1. Socially Responsible Investment . . . 3
1.2. Historical evolution of Socially Responsible Investment . . . 4
1.3. Corporate Social Responsibility . . . 5
1.4. Environmental, Social and Governance (ESG) Factors . . . 6
1.5. Socially Responsible Investment Strategies . . . 8
1.5.1. Active Strategy . . . 8
1.5.2. Passive Strategy . . . 9
1.6. SRI Indexes . . . 12
1.6.1. Dow Jones Sustainability Index - DJSI . . . 12
1.6.2. Domini 400 Social Index . . . 13
1.6.3. Ftse4Good . . . 14
1.6.4. Ethibel Sustainability Index (ESI) . . . 15
1.7. SRI and performance . . . 16
1.8. SRI in Europe and in the World . . . 18
1.8.1. Investors . . . 18
1.8.2. SRI strategies . . . 20
1.8.3. SRI asset allocation . . . 24
2. Selection of Socially Responsible Portfolios: a Literature Review 29 2.1. Introduction . . . 29
2.2. Portfolio selection involving "ethical" and "financial" criteria . . . 30
2.2.1. Multi-criteria decision approaches . . . 31
2.2.2. Performance: Conventional Investments versus Socially Responsible In-vestments . . . 33
2.2.3. Performance of SRI funds: screening intensity . . . 37
2.2.4. Corporate Social Responsibility . . . 40
3. Portfolio selection model: integration of financial and non-financial criteria 43 3.1. The Markowitz Portfolio Theory . . . 43
3.1.1. The expected return and risk of a portfolio of assets . . . 44
3.1.2. Problem formulation . . . 46
3.2. SRI portfolio selection as optimization problem . . . 47
3.3. Empirical analysis . . . 48
3.3.2. ESG data . . . 54
3.3.3. Mean-variance efficient frontier without ESG . . . 56
3.3.4. Mean-variance efficient frontier with ESG . . . 59
3.3.5. Efficient frontier Risk-ESG . . . 60
3.3.6. SRI optimization problem with a "pre-screening" on ESG . . . 64
A. Appendix 71
List of Figures
1.1. Triple Bottom Line. . . 6
1.2. Socially Responsible Investment (SRI) Screens . . . 10
1.3. Total Return - DJSI World . . . 13
1.4. Gross returns (USD) - Cumulative Indexes Performance . . . 14
1.5. Total return (USD) - Tradable Indexes Performance . . . 15
1.6. Ethibel Sustainability Index . . . 16
1.7. ESG-CFP relation in various region . . . 17
1.8. Global SRI Assets by region . . . 19
1.9. Retail/institutional investors in Europe. . . 19
1.10. SRI strategies growth in the world . . . 20
1.11. SRI strategies in Europe . . . 20
1.12. Growth of Impact investing by Country . . . 23
1.13. SRI asset allocation by country in 2013 and 2015 . . . 25
1.15. European SRI bonds in 2013 and 2015 . . . 25
1.17. Top 10 countries for Climate-Aligned Bonds . . . 27
2.1. Studies whose results show the performance of SR funds to be equal to conven-tional funds . . . 35
2.2. Studies whose results show that SR funds outperform conventional funds . . . . 36
2.3. Studies whose results show that SR funds underperform conventional funds . . 37
2.4. Impact of screening intensity on performance . . . 39
2.5. Non-monotonic effects of screening . . . 40
3.1. Average returns for each year in the sample period considered, stocks are repre-sented for each sector. . . 51
3.2. Average returns for each year n the sample period considered, stocks are repre-sented for each sector. . . 52
3.3. Mean ESG Disclosure Score for the considered assets in the Eurostoxx50 for the period 2006-2015. . . 56
3.4. ESG disclosure score trend . . . 57
3.5. ESG disclosure score trend . . . 58
3.6. Efficient frontier Risk-Return . . . 59
3.7. Efficient frontier withESGtarget . . . 60
3.8. Comparison efficient frontier with ESG and without ESG . . . 64
3.9. Efficient frontier Risk-ESG . . . 65
List of Tables
1.1. Growth of SRI Assets in the World . . . 18
1.2. Definitions and Key Characteristics of Impact Investing . . . 21
3.1. Financial data set . . . 50
3.2. Final selection of companies from the Eurostoxx 50 . . . 52
3.3. ESG Disclosure Score . . . 55
3.4. Portfolios risk-return (no ESG constraint) . . . 61
3.5. Portfolios Risk-Return withESGtarget≥ 30 . . . 61
3.6. Portfolios Risk-Return withESGtarget≥ 50 . . . 62
3.7. Portfolios Risk-Return withESGtarget≥ 55 . . . 63
3.8. Portfolios Risk-Return withESGtarget≥ 60 . . . 63
3.9. Optimal portfolios with different ESG target levels . . . 65
3.10. SRI optimization problem with a "pre-screening" on ESG . . . 67
A.1. Social Disclosure Score . . . 72
A.2. Environmental Disclosure Score . . . 73
A.3. Governance Disclosure Score . . . 74
A.5. Greenhouse Gases . . . 77
A.6. CDP Score . . . 79
Over the last few years the importance of sustainability and social responsibility has grown rapidly. Many events, including the financial crisis, natural disaster, climate change, the high population growth, have drown attention of investors. The trust on the functioning of the fi-nancial market has been compromized. Moreover, the sole maximization of the profits without taking care of man’s real needs has given rise to doubts. Before the crisis finance and ethics were two uncorrelated terms, instead today their connection is becoming more relevant and there is al-most a need for sustainabilty in finance. Therefore, there is a growing awareness among investors which address their investments according to their ethical personal values. Financial return is always an important outcome but other criteria are used to judge investments. In particular, in-vestment processes that integrate social, environmental and ethical criteria attract considerable interest. For these reasons, we speak about Socially Responsible Investment (SRI), a discipline that provide profitability and social commitment together.
The purpose of this thesis is to present in detail the issue of Socially Responsible Investments and to build up a portfolio that integrates sustainability and financial criteria.
Socially Responsible Investments is an investment process that integrates in the traditional fi-nancial analysis, economic, social and environmental criteria in pursuit of improved long-term returns. The diffusion of SRI has changed over time. In fact the first form of SRI was not as we know today, but it was based on religious belief. This was the starting point for the development of the still used negative screening of the opportunities of investments. In recent years the phe-nomenon is growing larger and larger, new strategies are created and are used across Europe, US and all over the world. Then, the thesis presents an analysis with an overview of the situa-tion in Europe and in the World with references to the 2014 and 2015 data, thanks to the data collected by the European Sustainable Investment Forum (EUROSIF) and the Global Sustainable Investment Alliance (GSIA). Recently, many studies have tried to estimate the social, ethical and environmental (SEE) dimension of investment decisions. In chapter 2, I’ve tried to summariz and classify papers dealing with the issues of social responsible investments. In particular, many studies use multi-critera decision approaches, others analyse the relationship between conven-tional investments and socially responsible investments, others focus on the importance of the screening intensity for the measure of the financial performance of SRI funds and others give importance to transparency and credibility in the ethical investment process.
Moving from recent contribution in the literature, the final part of the thesis is devoted to the analysis of the inclusion of an ESG dimension into the traditional mean-variance approach and the backtest of the model on data from the Eurostoxx50 basket using the ESG disclosure scores provided by Bloomberg.
1. Socially Responsible Investment
1.1. Socially Responsible Investment
The definition of Socially Responsible Investment is given by the European Sustainable Invest-ment Forum (Eurosif )1in its latest 2016 study [24, p. 9]:
Sustainable and Responsible Investment ("SRI") is a long-term oriented investment approach, which integrates ESG factors in the research, analysis and selection pro-cess of securities whithin an investment portfolio. It combines fundamental analysis and engagement with an evaluation of ESG factors in order to better capture long term returns for investors, and to benefit society by influencing the behaviour of companies.
The strategic objective of sustainable development requires a forward-looking perspective and a cultural change. This perspective always leads to question on the medium to long-term effects of investment choices making them compliant with the most immediate needs. The short-term performance of value maximization is no longer the unique investment criterion instead, another dimension is added. This dimension is the integration of environmental, social and governance factors in the process of investment.
Therefore, there are two intrinsic goals in socially responsible investing: financial gain and so-cial/ethical impact. These two are not necessarily closely associated. A socially responsible in-vestment might have or not a good return for investors. Some literature studies prove that firms investing in corporate social responsibility (CSR) "create shareholder value in the long run al-though stock markets undervalue CSR in the short run" and if firms ignore social responsibility, they "may destroy long-run shareholder value due to reputation losses and/or potential litiga-tion costs" [53, p.1724]. An example of positive return for the company could be the employees’ sense of satisfaction. A company working on the reduction of inequality in the workplace and guaranteeing egalitarian lawsuits for all employees, has a focus on the increase of the morale and higher productivity. This in turn might have a positive impact on the financial gain of the company.
The awareness of social responsibility is a very strong issue, especially in investments. It means moving from the approach of exclusion of certain titles, for example weapons producers, to an
Eurosif is a pan-European group. The mission of the forum is to promote and develop socially responsible in-vestment practices. Member SIF Organisations are FIR (Forum pour l’Investissment Responsable), FNG (Forum Nachhaltige Geldanlage), Forum per la Finanza Sostenibile, Spansif (The spanish Sustainable Investment Forum), UKSIF (UK Sustainable Investment and Finance Association). Current members of Eurosif include pension funds, financial institutions, academic institutions, research associations and NGOs. Together, they represent about 1 trillion € assets. The main benefits that members receive through membership in Eurosif are: lobbying, socially responsible investment information and European wide initiatives that promote the development of industries related to the SRI and Corporate Governance.
active engagement on issues such as the environment, society and corporate governance (ESG). These ESG criteria are placed in the portfolio construction process in combination with business practices.
1.2. Historical evolution of Socially Responsible Investment
Responsible Investment has neither recent origins nor a precise date. The notion of social/ethical investing has evolved over time. At first there were mainly religious convictions: people should not make investments that were contrary to their beliefs. It is what we call now negative screen-ing. The first intention of ethical investing can be read in the Bible, whereby "the charging of interest against the poor is forbidden (Exodus 22, 2 and Leviticus 25, 36-37) and the cancelation of such debt is called for (Deuteronomy 15, 1-11)” . There were also evidences both from Judaism teaching how to use money ethically and from Islam prohibited usury. In addition, the theme of usury was forbidden in the catholic church in 1139 while in England the Act Against Usury prohibited excessive interests on loans and took effect from 1571 to 1624.
However, the common belief is that ethical investing started in the 17th century with the Quak-ers2which prohibited investing in slavery and armaments because their principles were mostly based on equality and humankind before God.
If the Quakers are considered as the pioneers of this practice, also other active religious groups in the Anglo-Saxon world adopted a similar attitude in the 19thcentury, through an investment policy consisting in the exclusion of companies producing weapons, tobacco and alcohol from the portfolio as the Methodist Church in the UK in the 1920s did, avoiding investing in that type of comapanies, which they called ‘sinful’ companies. This tendency became more usual and cre-ated a debate that led to the creation of the Pioneer Fund in 1928. It was the first SRI mutual fund which applied negative screening based on religious convictions. Another important considera-tion from the past is the Islamic tradiconsidera-tion. This religion imposes not to eat pork, therefore Islamic investors do not invest in companies dealing in pork production.They therefore didn’t allow in-vestments in gambling, pornography or in financial institutions which base their investment on these issues.
During the period of the two World Wars, the theme of ethical investment was not so important for investors. This is due to the fact that in these periods investments were mainly focused on weapons.
The issue became important in the late 1960s, thanks to movements that avoided war and racism. The awareness of social consequences of investments in weapons brought investors to think more on ethical investment. The Pax World Fund, founded in the U.S. in 1971 as a result of the Vietnam War, is an example. It was set up to prevent investments in weapons during the war.
Another crucial moment in the evolution of sustainable investments was the phenomenon of the Apartheid a racist system in South Africa in the ’70. The United States and Europe made pressure on companies dealing with South Africa companies. For this reason, the Third Century Fund was founded in 1972. This Fund “did not invest in companies doing business with South
Quakers was a Religious movement originated in the 17thcentury in England. It had spread soon in American colonies and it was the first Christian community that fought slavery. Quakers were also known as The Religious Society of Friends
1.3. Corporate Social Responsibility
Africa. The fund did not only apply negative screening, but also positive screening” . It was the first fund considering environmental criteria in the investment decisions.
The occurrence of many environmental disasters in the 1970s and 1980s, increased awareness among investors of the negative environmental effects of industrial development. One of partic-ular importance is the Chernobyl nuclear explosion3on April 25th, 1986.
In the 1990s, SRI became a phenomenon that was increasingly spreading in Europe, US, and all over the world. People were more conscious of the ethical issues, and therefore preferred to buy products made by companies that respected particular values, such as those that protect envi-ronment, or care about worker’s conditions.
In recent years, the emphasis has increasingly shifted from the exclusion of the ’bad’ to the conscious preference for the ’good’, and moreover to improve financial performance (positive screening). These approaches are often combined to find the better investment based on social and environmental criteria. In particular, the first socially responsible funds were established, while the first sustainability indices were created in the 2000s as the FTSE4GOOD and the Dow Jones Sustainability Indexes.
1.3. Corporate Social Responsibility
In the last years, the concept of Corporate Social Responsibility (CSR) is becoming a dominant issue. The definition of CSR is given by the World Business Council for Sustainbale Development in a publication by Holme and Watts . They define CSR as: "the continuing commitment by business to behave ethically and contrinute to economic development while improving the qual-ity of life of the workforce and their families as well as of the local communqual-ity and society at large" .
CSR pays particular attention on having a good corporate governace with the protection of share-holders’ interests, and the stakeholders interest such as employees and the local community. In some organisations, the concept of corporate social responsibility is supported by the three words social, economic and evironmental, or also called the "triple bottom line" (planet, people, profit). People stands for social as it focus on employess and their situation in the workplace. Planet stands for environmental, as it refers to environmental issues. Profit stands for economic be-cause it focus on the financial side of a company.
The triple bottom line is strictly connected with environmental, social and governance factors as it will be discussed in the next section.
A nuclear reactor in the Soviet Union burst and dispersed radioactive material into the atmosphere. This disaster lead to the death of many people and the increase of cancer deaths in the European zone.
Figure 1.1.: Triple Bottom Line.
1.4. Environmental, Social and Governance (ESG) Factors
The subject of sustainability is becoming in the last years even more predominant. People care more about environmental problems, climate change, the way in which companies treat their employees and a companies’ social responsibility. These topics in the financial world are called Environmental, Social and Governance (ESG factors). More and more investors require their portfolios to take into consideration this issue because they have values they requested to be respected. They want to invest in companies whose activities are compatible with ESG issues. These investors take into account ESG factors in their long-term investment decisions. ESG factors are called also triple bottom line as shown in figure1.1. The theory of the Triple Bottom Line was first introduced in 1994 by John Elkington; he was the founder of the SustainAbility international organisation and he elaborated this theory in his book of 1997, “Cannibals With Forks: the triple bottom line of 21st century business”. Elkington says that the organisations, should set up their own business strategy “mixing” the three variables, the so called 3P: Profit, People and Planet in order to generate results and have a competitive advantage in the medium term. Once entered in the core system of the company, the 3P would be able to generate the success of the organisation.
First, we consider about the environment that in the triple bottom line is connected with the word “Planet”. When an investor considers this issue in his investment evaluation, his aim is to realize sustainable practices and to reduce the environmental impact. “Environmental aspects of development are examined through the transition from traditional economy, centred economic growth and wealth accumulation, to green economy, which is based on responsible development and is interested in the economic growth impacts on society” .
1.4. Environmental, Social and Governance (ESG) Factors
• climate changes: greenhouse gases are considered a cause for the climate changes. This approach is used to evaluate the effect these gases have.
• nuclear energy: emissions of CO2(carbon dioxide) are one of the downsides of industri-alization. In fact, as the industrial production increases, also this emission increases. The aim is to work on the reduction and elimination of these esmissions.
• air and water pollution: water is an essential element for live on the Earth and the water access is consider a human right. However, fresh water is a scarce resource. According to Eurosif , the freshwater makes up only the 3% of the Earth’s water in 2008 and is distributed unequally. In addition, there is an increasing demand for water from industrial companies and agriculture. Moreover, 20% of all surface water is threatened by pollution. There are even more opportunities for sustainable water use to improve the efficiency and quality of infrastructure and technological innovation.
• biodiversity: this term is used to describe the diversity of living species on Earth. The activity of many businesses depends on biodiversity and ecosystem services. The impact on biodiversity has a series of direct and indirect risks such as physical, market, price and legal risks. The agriculture and food sector, extractive industries, real estate and infrastructure, the paper and timber industry, the tourism sector are among the most exposed to such risks.
• deforestation and waste: deforestation is a worrying phonomenon not only for those peo-ple interested in the environment but also for tourism and landscape. Deforestation is a negative phenomenon since it exploits trees and the vegetation.
The social universe is associated with the bottom line word “People”. It cares about the treatment of employees in the workplace. The social universe requires:
• human rights: "all human beings are born free and equal in dignity and rights"4. After this declaration, every government has to protect its country against abuses and companies have to treat every employ in an equal way, to reduce inequality at the workplace, and ensure transparent, honest and egalitarian lawsuits. If a company works in a social sector, it is required that all members, such as workers, managers, suppliers and executives have equal opportunities in the company. An example is the Mars Chocolate North America’s Sustainable Cocoa Initiative that "requires its cocoa farmers to be certified by fair trade organizations to ensure they follow a code of conduct that includes fair treatment of those providing labor. In exchange of certification, Mars provides productivity technology and buys cocoa at premium price" .
• health and safety: these are two other important isssues in companies, as good practices on wealth and safety can help to reduce workplace accidents. Therefore, there is the need of further training courses with the aim of getting a major security in the workplace.
Governance universe corresponds to the word “Profit” of the bottom line. Therefore, it is associ-ated with the financial aspects of a company. This is relassoci-ated to corporate governance practices, including a manager’s compensation policies, the composition of the board, the control proce-dures, the company’s top management and behaviour in terms of compliance with laws and ethics. The risks in the governance universe are:
• remuneration: it is key issue for companies, shareholders and stakeholders. The themed report on remuneration by Eurosif 2010  focused on the transparency of remuneration that includes the disclosure of companies’ remuneration policies, as well as the recognition of the right to vote to shareholders on the remuneration policy. Remuneration matters since "a well-defined remuneration policy will clearly like the terms of performance and behaviour to the company’s strategy, continuity and long-term stable value creation" .
• corruption: is a crucial factor in a company. Corruption involves the location in which operations are made, and the sector in which the company works. Eurosif  in 2010 conducted a study on the best practices to avoid corruption. The most important thing that a company has to implement is transparency on the activities of the company, on the reports, on the information disclosed. It is also important to prevent corruption with a clear commitment from top management and a collaboration with external stakeholders.
• independence: the independence of the board of directors that are not closely related to the company’s employees on the affairs judgment.
ESG data will be discussed with more detail in chapter 3.
1.5. Socially Responsible Investment Strategies
In order to pursue their social and environmental goals, SRI investors can use different invest-ment strategies.
The most widespread form of socially responsible investing is screening followed by shareholder advocacy and community investing. According to Statman 2007 , screening accounted for 68 percent of the money in socially responsible mutual funds in 2005, shareholder advocacy ac-counted for 26 %, and community investing acac-counted for 1 %. The remaining 5 % was acac-counted for a combination of screening and advocacy.
SRI strategies can be distinguished into two main categories: active strategy and passive strategy.
1.5.1. Active Strategy
In the active strategy, investors make decisions on the corporate policies. Shareholder activism, shareholder advocacy and community investing belongs to the active strategy.
Shareholder activism means that shareholders get together to falicitate changes on aspects they consider wrong in a company. They seek to improve corporate behaviour. The cor-porate policies are influenced proactively by SRI investors. Their actions are made to
en-1.5. Socially Responsible Investment Strategies
courage policies that cover social and/or environmental aspects and to have an impact on society.
Shareholder advocacy aims at pressing entities. These investors want to improve practices and policies. In particular, they act as a good corporate citizen. Investors participate and vote on any shareholder filing resolutions supporting it with dialogue, educating the pub-lic, and promoting corporate social responsibility. They also “seek dialogue with the man-agement of a company beyond the annual meetings and try to bring forth a change in corporate policies . Investors put pressure on the society because they stress the fact that companies do socially responsible thing.
Community investing "has become the fastest growing segment within SRI, with some $61.4 billion in managed assets" . These investment are both public and private and are build around low income channels. When we speak about community investing, we know that investors’ capital is directly invested into community-based organisation. This capital is used by community investing institutions to provide services for the community such as housing, healthcare, education and child care.
1.5.2. Passive Strategy
In the passive strategy investors do not influence investment decisions. The passive strategy is composed by three subcategories: negative screening, positive screening and best-in-class.
Negative Screening is the most recognized approach in the field of responsible investments, and is the oldest and basic strategy used by the first ethical funds. It consists in excluding from the investment opportunities companies with weak environmental, social or gover-nance records. It further excludes unethical companies that are engaged with a particular industry sector, e.g. tobacco companies, companies producing alcohol, gambling, pornog-raphy, nuclear power, weapons, abortion, and companies with poor workplace or compa-nies tat violate the human rights.
Positive Screening is adopted by fund managers in addition to negative screening. Positive screening tries to identify and include companies which can contribute to sustainable de-velopment with strong ethical standards and social parameters. The aim is to focus on companies which pay particular attention for example on renewable energy usage, labour relations, community involvement, diversity, the environment and sustainability of invest-ments. It is important for this type of strategy that companies considering these issues have strong and high ethical standards.
Best-in-class is the third strategy. This method focuses on a specific industry sector and eval-uate and classify companies within the same industry sector following a positive screen strategy. That is to say, companies meeting environmental social and governance criteria (ESG) in their work and that achieve the highest rank in their sector will be selected by investors. Investors then form their balanced industry portfolio consisting of investments in these companies.
1.5. Socially Responsible Investment Strategies
Renneborg et al.  considered four generations of SRI screens. The first and oldest genera-tion is negative screening; the second generagenera-tion is positive screening. "The third generagenera-tion of screens refers to an integrated approach of selecting companies based on the economic, envi-ronmental and social criteria comprised by both negative and positive screens. This approach is often called “sustainability” or “triple bottom line” (due to its focus on People, Planet and Profit). The fourth generation of ethical funds combines the sustainable investing approach (third gen-eration) with shareholder activism .
Figure 1.2 presents the categories, the type and the definiton of screens. It was created by Ren-neboog et al.  who have collected data by SRI funds around the world. They classified four broad categories: ’Sin’, ’Ethical’, ’Social’ and ’Environmental’. ’Sin’ encloses funds that do not want to invest in ’sin industries’ whose return is given by the production of tobacco, alcohol, or pornography, gambling and others. In this category the type of screening is only negative, thus avoiding specific firms. The ’Ethical’ category excludes companies that "test their products on animals, produce equipment that facilitates abortion, develop genetically modified products, or violate Islamic or Christian principles". But it includes companies whose work is to improve human health which represents positive screening. ’Social’ involves companies that "check for superior corporate governance, good labor relations, or a good human rights track record (e.g., no child labor)". Finally, ’Environmental’ is related to funds "that avoid utilities that operate nu-clear power plants or that invest in environmentally friendly firms" . These categories of screens are often combined and used together.
In the 2012 European SRI study , Eurosif recognized seven categories of SRI proceses, also called strategies. They are:
• Sustainability themed Investments: investments in assets that are related to the sustain-ability development;
• Best-in-Class Investment Selection: it follows the best-in-class approach described previ-ously;
• Exclusion of Holdings from Investment Universe: is based on negative screening;
• Norm-Based Screening: involves the screening of investments based on international norms and combinations of norms covering EGS factors ;
• Integration of ESG Factors in Financial Analysis: is enclosing ESG risks and opportunities in traditional financial analysis;
• Engagement and Voting on Sustainability Matters: is the active strategy. Shareholders are involved in the decision making investment with ESG factors;
• Impact Investment: investments that have not only a financial return, but that have also an impact regarding environment, society and governance. This includes community in-vesting and microfinance.
All these strategies incorporate sustainability, responsibility and ESG criteria and they are used by investors when they are engaged in their investment decisions. As reported by Eurosif ’s study in 2016 , the strategy that continued to be dominant is exclusion, at over 10 trillion
€ and covering the 48% of the total of European professionally managed assets. The strategy that is growing faster is impact investing with a growth of 385%, because investors consider this strategy as the most dynamic and clearly the most promising approach. Subsequent to impact investing is Sustainability Themed investments, with a significant growth of 146%, specially in France with a growth of 881% (over 2013-2015) and in Spain with a growth of 264%. The top categories of this strategy are Energy Efficency and Renewable Energy. The second big category is Norms-based screening with over 5 trillion € in assets under management and Switzerland that has seen a growth at 618% in the last two years.
1.6. SRI Indexes
The increasing importance of socially responsible investments has brought to the development of SRI stock market indexes. Ethical or socially responsible indexes (SRI indexes) are stock in-dexes that follow the financial performance of companies selected according to ethical, social or environmental criteria. They provide a signal on social responsibility and environmental objec-tive. Ethical indexes are also used as a benchmark in ethical investment funds for the measure-ment of profitability of the financial product. Ethical indexes allow the comparison between the performance of responsible investment (ethical indexes) and traditional investments (traditional indexes). There are many ethical indexes, however the most important ones are the Dow Jones Sustainability Index, the Domini 400 Social Index, and the Ftse4Good. They are described below.
1.6.1. Dow Jones Sustainability Index - DJSI
Dow Jones Sustainability Indexes (DJSI) was established in 1999. This index is based on SAM Group research using a best-in-class approach. It outlines, organizes and ranks the companies according to sustainability criteria. To become part of the index, companies have to meet mmum sustainability requirements. Moreover, they always have to implement sustainability ini-tiatives for remaining in the Indices or for being included . “The index identifies, classifies and ranks the companies according to sustainability criteria.[...] The criteria are: transparency, distribution of wealth, quality of life, awareness of environmental risk, use of resources, global warming, valuation of natural resources, advancement of technology and innovation, corporate learning” . In particular, the requirements lead to the exclusion of companies that produce alcohol, armaments, cluster bombs, nuclear weapons, tobacco, firearms, companies that sale or publish phornography magazines or produce adult entertainment services and companies work-ing with gamblwork-ing. Figure 1.3 shows the total returns of the DJSI World from 1993 to 2017. Within a given industry, we can create a portfolio through the DJSI that follows specific sus-tainability criteria in a better way than other indexes. The best-in-class approach chooses the best/most sustainable companies "ensuring a high sustainability profile for index constituents"  and can lead to a long-term success in companies.
DJSI is composed by a bunch of indexes. They are splitted in DJSI World, DJSI Regions and DJSI Countries. It is important ot underline that they are not merely sub-index but they have their own percentiles. Each of them is composed respectively by:
1.6. SRI Indexes
Figure 1.3.: Total Return (USD) - DJSI World. (Source: Bloomberg)
0 500 1000 1500 2000 2500 01/ 12/ 93 01/ 07/ 94 01/ 02/ 95 01/ 09/ 95 01/ 04/ 96 01/ 11/ 96 01/ 06/ 97 01/ 01/ 98 01/ 08/ 98 01/ 03/ 99 01/ 10/ 99 01/ 05/ 00 01/ 12/ 00 01/ 07/ 01 01/ 02/ 02 01/ 09/ 02 01/ 04/ 03 01/ 11/ 03 01/ 06/ 04 01/ 01/ 05 01/ 08/ 05 01/ 03/ 06 01/ 10/ 06 01/ 05/ 07 01/ 12/ 07 01/ 07/ 08 01/ 02/ 09 01/ 09/ 09 01/ 04/ 10 01/ 11/ 10 01/ 06/ 11 01/ 01/ 12 01/ 08/ 12 01/ 03/ 13 01/ 10/ 13 01/ 05/ 14 01/ 12/ 14 01/ 07/ 15 01/ 02/ 16 01/ 09/ 16 PX L as t
Dow Jones Sustainability Emerging Markets;
• DJSI Regions: Dow Jones Sustainability Asia/Pacific, Dow Jones Sustainability Europe, Dow Jones Sustainability North America;
• DJSI Countries: Dow Jones Sustainability Australia, Dow Jones Sustainability Canada Se-lect 25, Dow Jones Sustainability Korea, Dow Jones Sustainability Korea Capped 25%, Dow Jones Sustainability Chile.
Every year RobecoSam invites companies to take part of the Corporate Sustainability Assess-ment (CSA) responding to an extensive industry-specific questionair. The Total Sustainability Score (TSS) for each company is calculated. The result produces for every member of the DJSI family an "Assesed Universe" which is determined by six steps. Afterwards, from the Assessed Universe an Eligible Universe is created following three steps.
All companies selected for the DJSI are screened by Sustainalytics, which provide ethical ivest-ment research services for exposure to companies that are excluded from the index. They have to have a 0% exposure except armaments that have a threshold of 5%.
1.6.2. Domini 400 Social Index
Domini 400 Social Index (DS400 Index) is the most known SRI index in the US, it was created in 1990 by research firm KLD Research & Analitics. This index is a “market cap weighted stock index of 400 publicly traded companies that have met certain standards of social and environmental excellence” . DS400 index was created with the aim of combining the negative screening
Figure 1.4.: Gross returns (USD) - Cumulative Indexes Performance. (Source: Figure from )
strategy (exclusion screens) together with social evaluation criteria as environment, employee relations, diversity and risk management procedures.
Companies pursuing issues like product and environmental safety, strong shareholders relations, corporate governance, employees, environmental standards for suppliers can be included in the DS400 index. Therefore, companies not considering these standards are automatically excluded. For examples those committed in the business of weapons and derives from this business, sales starting from the 2 percent, tobacco, nuclear power, alcohol.
Considering that in the last years the theme of socially investment is growing all over the world, the creation of this index was made to help socially investors to scale social and environmental factors in their investment decisions.
The Domini 400 is now the MSCI5KLD 400. Figure 1.4 shows the cumulative index performace from november 2001 to november 2016 of the two parent index, MSCI KLD 400 social index and the MSCI USA IMI index that is "an equity index of large, mid and small cap companies" . The evidence is that in in recent years there has been a growth of these indexes performance although we can see a slight decrease at the end 2015.
Ftse4Good is and index designed for the measurement of the performance of companies that considered ESG standards and take into account ESG risk levels. It was launched in July 2001. According to FTSE Russel, there are 4 principal way to use these indexes. The first is the use of the index as a financial product to create financial instruments or products based on responsi-ble investment; the second is the use of the index to research companies that can be considered sustainable and socially conscious; the third is the use as a reference for companies that are evaluating EGS criteria having a global and transparend ESG standard; and the fourth is the use as a benchmark index to follow the performance of responsible investment portfolios. Fig-ure 1.5 presents the total return of the performance of FTSE4Good Index Series for five years,
Morgan Stanley Capital International (MSCI) is a leading provider of investment decision support tools worldwide which acquired KLD Research and Analytics in June 2010.
1.6. SRI Indexes
Figure 1.5.: Total return (USD) - Tradable Indexes Performance. (Source: Figure from )
from november 2011 to november 2016. These indexes are a benchmark for ESG investors and the series are obtained from the FTSE4Good Global Index Series. They are: FTSE4Good Global 100, FtSE4Good Europe 50, FTSE4Good UK 50, FTSE4Good Australia 30, FTSE4Good US 100 and FTSE4Good Japan Benchamrk. There are many inclusion requirements for companies: they have to meet many ESG criteria that are developed by experts with the help of several stakeholders with the purpose of remaining consistent with market expectations and the progess in ESG stan-dards.
1.6.4. Ethibel Sustainability Index (ESI)
The Ethibel Sustainability Index ESI is a sustainability index. It can be use to compare traditional equity with the performance of sustainable ivestments. Fund mangers consider this index as a feasible instrument for the passive management of sustainable funds . Especially, in the Ethibel Sustainability Index (ESI) Excellence Global are displayed the best performances of cor-porate social responsibility (CSR) of the companies shares included in the Russel Global Index6. Companies from America, Europe and Asia Pacific are gathered. This particular index consist of some thechical-financial conditions of the basket of shares included in the Investment Register. Figure 1.6 depicts the monthly last price of the ESI from 2002 to January 2017. According to the Ethibel Forum , "the major requirements are:
• the shares are included in the Russell Global Index;
• the shares have an A or B rating;
• the (free float) market capitalisation is higher than EUR 10 billion".
The Russel Global Index is a global index leader that work to provide insight for institutional investors. It embodys the 98% of the investable universe, and the global indexes reflect the performance of over 10000 securities in 47 countries (www.ftserussel.com). The essential values are integrity, collaboration and trust.
Figure 1.6.: Ethibel Sustainability Index (EUR) (Source: Bloomberg) 0 200 400 600 800 1000 1200 1400 1600 1800 01/ 12/ 02 01/ 05/ 03 01/ 10/ 03 01/ 03/ 04 01/ 08/ 04 01/ 01/ 05 01/ 06/ 05 01/ 11/ 05 01/ 04/ 06 01/ 09/ 06 01/ 02/ 07 01/ 07/ 07 01/ 12/ 07 01/ 05/ 08 01/ 10/ 08 01/ 03/ 09 01/ 08/ 09 01/ 01/ 10 01/ 06/ 10 01/ 11/ 10 01/ 04/ 11 01/ 09/ 11 01/ 02/ 12 01/ 07/ 12 01/ 12/ 12 01/ 05/ 13 01/ 10/ 13 01/ 03/ 14 01/ 08/ 14 01/ 01/ 15 01/ 06/ 15 01/ 11/ 15 01/ 04/ 16 01/ 09/ 16 PX L as t
There is also the Ethibel Sustainability Index (ESI) Excellence Europe that holds 200 shares of European companies. Moreover, this index selects companies that belong to the Russel Global Index.
1.7. SRI and performance
Usually, when an investor addresses a Socially Responsible Investment the first concern is to measure the financial performance of the investment. In particular, the question is if a successful SRI can reduce risks and join fiancial value.
Socially Responsible Investments are currently evaluated only from a financial perspective. Pictet and Butz  argued that this is a paradox. According to the authors, the financial performance of a SRI is necessary, but it is not a sufficient condition for a convincent strategy. Social investors7 decide for an SRI investment because they are searching for something that goes beyond the fi-nancial performance and the short-term profit-maximisation (maximum fifi-nancial return). Social investors have a long-term investment perspective. However, there are some problems, as the big amount of qualitative nature of the SRI indices, the subjectivity of the analysis process, the fact that there are a lot of new SRI-related criteria and indicators. These indicators lead to unware which are the most relevant ones, and the fact that there are many ways of evaluating sustainabil-ity and there is not a unique global sustainabilsustainabil-ity rating that embody all these indicators create confusion. The utility function of sustainable investors explicitly embraces environmental and
According to Pictet and Butz, social investors are SRI-oriented investors. The nomenclature ’social’ is not a political connotation, but refers to the fact that SRI-oriented investors are considered to be ’social planners’ in resource economics.
1.7. SRI and performance
Figure 1.7.: ESG-CFP relation in various region (vote-count studies sample), n=402 net studies. (Source: Figure 7 from )
social aspects. Therefore, an important issue is the extra-financial performance and in their study on the performance paradox the authors face the question of how to measure the performance. This extra-financial performance is applied at the end in a transparent way so that sustainable oriented investors with their strategy are able to better assess whether they can achieve their investment objectives. The authors demonstrate that the portfolio construction process is in-deed capable of yielding a portfolio that is clearly more sustainable than the broad market . According to their calculations, creating a globally diversified portfolio through sustainable opti-mization can reache an extra-financial outperformance against the benchmark MSCI World8.The measurement and the transparent communication of extra-financial performance is expected to help investors such as pension funds to withstand the growing pressure of short-term financial return expectations. This shows that they can carry out their fiduciary duties with a sustainable investment strategy and in the best interests of the company as well as in their best interest.
Recently, Friede et al.  in 2000 conducted a study to find the relation between environmen-tal, social and governance (ESG) factors and corporate financial performance (CFP). This study extracted all provided primary and secondary data from 2200 previous empirical studies in the literature. The purpose of the authors was to give a more complete overview of previous aca-demic research. They stress the fact that this issue is still fragmented, citing also other authors views. After a two step-research method, the authors conclude that there is a positive ESG-CFP relation. Through this study, the authors were able to reinforce the obtained results splitting-up also the EGS-CFP relation on the basis of regions, portfolio and nonportfolio studies, asset classes (equities, bonds and real estate). Figure 1.7 represents the results across regions. In particular, the figure shows that there is a positive relation between ESG criteria and CFP on a final sample
of 402 studies. When the authors exclude the proportion of portfolio studies, the ratio increases for all countries.
The authors conclude that all rational investors should be oriented toward long-term responsi-ble investing, "in order to fulfill their fiduciary duties and may better align investors’ interests with the broader objectives of society. This requires a detailed and profound understanding of how to integrate ESG criteria into investment processes in order to harvest the full potential of value-enhancing ESG factors" .
1.8. SRI in Europe and in the World
Based on the data collected by the Global Sustainable Investment Alliance (GSIA)9, we can see that in recent years global sustainable investments assets are coninuing to growth. Over the period 2012-2014, the United States registered a fast growing, with 76% of the growth on SRI Assets. The second country in terms of growth was Canada with a growth of 60%, the third was Europe with 55% (see table 1.1).
Table 1.1.: Growth of SRI Assets in the World (Data from ). 2012 2014 Growth Europe $8,758 $13,608 55% United States $3,740 $6,572 76% Canada $589 $945 60% Australia/NZ $134 $180 34% Asia $40 $53 32% Total $13,261 $21,358 61%
The situation of Global SRI assets in 2014 is shown in figure 1.8 which reports the percentage of the Global SRI Assets considering that the United Statets have $21.4 trillion SRI Assets. The Eurosif1 2016 study allows us to infer the status of SRI across Europe. To perform this study, a questionair was submitted to 13 European markets, and the data were collected at the end of 2015. This study is carried out every two years and points out the growth of SRI.
There are two type of investors in the financial market: institutional investors and retail in-vestors. Institutional investors are large institutions, pension funds, banks, and insurer. Instead, retail investors are individual investors which invest in professionally manged funds. There are some differences betwen the two investor types. In the first place, regarding the size of the trades they made: retail investors buy and sell an average of 100 shares, whereas institutional investors
GSIA is a cooperation between international sustainable investment organisations. Alliance members are ASrIA, Eurosif, RIAA, UKSIF, US SIF, BVBDO. The purpose of the alliance is to strengthen the visibiliy of sustainable organisations, to raise the synergies between GSIA members, to improve the effectiveness and the productiveness of the GSIA members, and to provide support for the members.
1.8. SRI in Europe and in the World
Figure 1.8.: Global SRI Assets by region. (Source: Figure 1 from ).
Figure 1.9.: Retail/institutional investors in Europe. (Source: Figure 28 from ).
buy or sell 10000 or more shares at a time. Second, even if they both invest in bonds, options and future contracts, retail investors do not enter in some market such as swaps and forward markets for the nature of the transaction.
Based on the data collected for Europe, Canada and the United States by GSIA in the Global Sus-tainable Investment Review in 2014  from 2012 to 2014, there was a small increase of 2.4% in the retail assets. Therefore, the amount of institutional asset in 2014 was 86.9% while it was 89.3% in 2012. Consequently, retail assets in 2012 and 2014 were 10.7% and 13.1% respectively. Concerning the SRI European market, Eurosif study 2016  shows that institutional assets dominate the market even if retail asset are increasing, from 3.40% in 2013 to 22% at the end of 2015. In particular, figure 1.9 illustrates that there has been an increase in the retail market in Belgium and it is the only european country with the major percentage on retail assets, opposite to Spain which is the country with the majority of institutional assets.
Figure 1.10.: SRI strategies growth in the world. (Source: Figure 3 from ).
Figure 1.11.: SRI strategies in Europe. (Source: Figure 1 from ).
1.8.2. SRI strategies
Looking at SRI strategies, figure 1.10 indicates the growth at a global level of the seven strategies defined by Eurosif and addressed in section 1.5. Globally, negative screening is the mostly used strategy with $14.4 trillion of assets invested in 2014. ESG integration is the second mostly used strategy having $12.9 trillion of assets invested in 2014. The figure depicts the fact that Europe and US are the countries using more
Europe reflects the same situation as globally seen. In 2015, exclusion was the main strategy used and with respect to 2013 this strategy is spreading even more, from6.8 millions € to 10 millions € respectively. Figure 1.11 compares the situation of SRI strategies in Europe in 2013 and 2015. Differently from the global situation, the second mostly used strategy in Europe is norm-based screening with5 millions € and the third is engagement and voting.
Impact investing is a strategy that is particularly new and it is one of the most innovative strate-gies. It is the SRI strategy that is growing the most in the last years. The term was coined in 2007 at the Bellagio Summit convened by the Rockfeller Foundation in the U.S.. Impact investing means to invest in assets with the purpose of "solving social and environmental problems"  and also to bring a benefit for companies and at the same time a financial gain. Eurosif 
1.8. SRI in Europe and in the World
2014 puts together some definition given by organisations that have recently worked on impact investing OECD (Organisation for Economic Cooperation and Development), the Global Impact Investing Network (GIIN), World Economic Forum, European Commission and IESE research project. The definitions and key caracteristics are reported in table 1.2.
Table 1.2.: Definitions and Key Characteristics of Impact Investing. (Source: Table from )
Source Definition Key Characteristics
OECD Social investment is the pro-vision of finance to organisa-tions with the explicit expec-tation of a social, as well as financial, return.
• Involves private investment that contributes to the public benefit;
• Explicit social dimension;
• Hybrid funding involving private investment that contributes to the public benefit;
• Financial goals can range from capital preser-vation to a market rate of return.
Global Impact Investing Net-work (GIIN)
Impact investments are in-vestments made into com-panies, organisations, and funds with the intention to generate social and environ-mental impact alongside a fi-nancial return. Impact in-vestments can be made in both emerging and devel-oped markets, and target a range of returns from be-low market to market rate, depending upon the circum-stances.
• Intentionality – The intent of the investor to generate social and/or environmental impact through investments is an essential component of Impact investing;
• Investment with return expectations – Impact investments are expected to generate a financial return on capital and, at a minimum, a return of capital;
• Range of return expectations and asset classes – Impact investments generate returns that range from below market to risk-adjusted mar-ket rate. Impact investments can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital and private equity;
• Impact measurement – A hallmark of Impact investing is the commitment of the investor to measure and report the social and environmen-tal performance and progress of underlying in-vestments.
Source Definition Key Characteristics World Economic
Impact investing is an in-vestment approach that in-tentionally seeks to create both financial return and positive social or environ-mental impact that is ac-tively measured;
• It does intentionally and ex-plicitly set out to deliver the dual objective of social/ envi-ronmental outcomes and fi-nancial returns (which may be below market, at market or above market).
• An investment approach and not an asset class (a criterion by which investments are made across asset classes);
• Intentionality ma ers. Investments that are mo-tivated by the intention to create a social or en-vironmental good are Impact investments. • Outcomes, including both the nancial return and the social and environmental impact, are ac-tively measured;
• Impact investing is unique in that the investor may be willing to accept a lower financial re-turn in exchange for achievement of a social out-come;
• Covers all investments that intentionally seek to create measurable social or environmental value, regardless of the stage of maturity of the enterprise.
European Social Enterprise Funds (EuSEF) are funds (un-dertakings) investing at least 70% of raised capital in social businesses.
• Social businesses are businesses whose pri-mary objective is the achievement of measur-able, positive social impacts (art. 3(d)ii);
• Procedures to measure the social impact in-vestee businesses have commi ed to must be in place together with speci c indicators (art. 10); • Investors must be informed about targeted and actual social impacts and the measurement methodologies used (art. 14d).
IESE research project
Any profit-seeking in-vestment activity that intentionally generates measurable benefits for society.
• Correlation between impact and financial re-turn: the financial return drivers of the funded business model cannot be dissociated from im-pact objectives;
• Social impact must be intentional • Social impact must be measurable;
• It needs to generate positive bene ts for society.
An important characteristic of impact investing is the measurement of the benefits of social impact. It is essential to underline the term impact, because not only impact investment wants to create a social or environmental impact, but also other strategies such as Sustainability themed ones which try to produce impact. Investments made in impact investing are usually made in private markets, and they are focused on solving specific problems. Impact investing
incorpo-1.8. SRI in Europe and in the World
Figure 1.12.: Growth of Impact investing by Country. (Source: Figure 19 from )
rates community investing that directs public and private investments to low income; the aim is improving the community development in terms of quality of life, health, education and so on. As stated before, impact investing is a strategy that is growing faster. According to the last Eu-rosif reports , there has been a growth of 385% in two-year period 2013-2015, from 20 269 million Euro in 2013 to 98 329 million Euro at the end of 2015 considering that in 2011 they were worth only 8 750 million Euro. In particular, figure 1.12 represents the growth of impact invest-ing by Country and we can see that the major growth was in the Netherlands (+115%), followed by Finland, Belgium and Poland (+100%).
There are incentives but also barriers for investors who decide to choose impact investing. The main factors are firstly the contribution to sustainable development, secondly the financial op-portunity, thirdly the look for stable long-term return and lastly fiduciary duty and risk manage-ment. On the contrary, the main impediments are the lack of viable products/options, the risk, the performance, the lack of qualified advice and the mistrust about greenwashing . At a global level, GSIA 2014 review  focused on the type of impact investment by Regions.
Europe In the European market 55% of these investments were in microfinance, and the rest were in thematic investments, community and social business investments.
United States In the North American market, the 52% of institutional investors using impact investing strategies were money managers, 18% were philantropic foundations and the other 30% were healthcare institutions, educational institutions and other non-profit organisations. Actually, 64% of investors in the US SIF Foundation practices impact investing together with other SRI strategies, managing 24.6 billions $. The other 12.2 billion $ are managed by investors engaging only in impact investing.
Canada Canadian impact investments are by 94% directly made into companies. In Canada, the impact investment capital is shared by numerous sector. The 43% of the impact investment assets are from the nonprofit and social enterprise sector. This is the most powerful sector in Canada thanks to the Québec’s "solidarity finance" sector, which includes institutions having socioeconomic investment interests. The second largest sector is the Aboriginal business sector which consist in credit unions, financial institutions (it receives 15% of impact investment as-sets) and the third is community development (12%) which embraces "community-focused debt and equity financiang for local initiatives, small business and traditionally underserved social groups".
Australia and New Zealand In these two countries impact investing is less used even if assets experienced a growth in the two-year period 2012-2014, from $1.1 billion to $2 billion. The growth is due to the fact that impact investing has moved from private wealth markets to institutional markets, that is large and small banks, microfinance, social impact funds and bonds.
Asia In the Asiatic market, impact investing is seeing a significant growth, although it is a smaller market compared to the United States. This strategy is growing thanks to the fact it is considered a financial opportunity and can contribute to sustainable development. Asia is working for implementing impact investing in particular raising the awareness, transparency and accountability of impact investments. In Asia, the Japan market is the one that is more mature, especially impact investment bonds market and community investing and also crowd-funding are having even more attention.
1.8.3. SRI asset allocation
Regarding the SRI asset allocation, Eurosif created a graph in which we can see the percentage of the assets for each of the 13 countries surveyed and also an European weighted average of the assets as presented in figure 1.13b. We can see that bonds have the higher percentage (64%) of the SRI assets, equities own over 30%. But if we compare these results with those of the 2013 Eurosif , we note that equities decreased by a percentage of 20% (in December 2013 they represent 50% of the asset allocation). This level reflects the situation in the previous years (2009-2011). Instead, bonds have shown an increase by a level 14% from a percentage of 40% in 2013. Figure 1.13a shows the SRI asset allocation for each country under study at the end of 2013, but there is no asset average for the European countries.
The European SRI study considers the bond allocation in detail. By analysing figure 1.15b we can see that corporate bonds have the highest percentage, with 51.17% of the allocation, followed by sovereign bonds with a percentage of 41.26 and local/municipal bonds with a percentage of 7.16. Comparing these results with those from 2013, we see that corporate bonds increased significantly at the end of 2015. We also note an increase in the sovereign bonds, thanks to the increasing use of Green Bonds. According to Eurosif , private sector banks and other corporate issuers "contributed an additional 10 billion € of new Green Bonds issues out of a total market of 39 billion € in 2015" .
1.8. SRI in Europe and in the World
Figure 1.13.: SRI asset allocation by country in 2013 and 2015. (Source: Figures 15 from  and 29 from ).
(a) SRI asset allocation 2013. (b) SRI asset allocation 2015.
Figure 1.15.: European SRI bonds in 2013 and 2015. (Source: Figure 16 from  and 30 from ).
During the last years, the matter of climate changes and its implications lead to the need of in-vestment which takes care of the environmental impact and faces it with tranparency. For this reason, Green Bonds are becoming even more spread. A Green Bond is a bond that is used to "raise funds to finance or re-finance projects with environmentally sustainable benefits" . The ’green’ characteristic is the environmental purpose of the investment. Essentially Green Bonds are used to raise capital and invest in profitable projects from the environmental point of view as wind farms, sustainable use of water, initiatives related to the prevention and control of pollution. Despite the importance of this issue, the clarity and the measurability of the im-pact, Green Bonds are governed by voluntary guidelines, in particular the Green Bond Principles (GBP). GBP collaborates with the International Capital Market Association (ICMA). GBP works is to give a direction for qualified green projects. Another self-regulatory initiative is the Climate Bonds Initiative (CBI).
As the Director of the Green Bond Principles Secretariat the ICMA, Peter Munro stated in his article, "green bonds are a product that is helping markets to adjust to the future that [...] will entail far greater environmental rigour, and more profound investment implications, as the ma-teriality of environmental risk and opportunity crystallises" .
Eurosif ’s study from 2016 focuses on Green Bonds and considers this type of bond as part of the impact investing strategy for the positive impact that have on the climate and environment. Eurosif  reports the most important data about Green Bond volumes, taken by the ’Bonds and Climate Change: the state of the market in 2016’ study10. In particular, Eurosif underlines that the volume of Green Bonds issuance in 2016 has already reached $44 billion. Figure 1.17 shows the 2016 volume of Green Bonds worldwide. Moreover, the pie chart points out the size of China’s Green Bond market. China is seen as a leader in driving growth in this market. In Europe, France is the country with the largest market.
Next to Green Bonds, the market that is emerging even more is that of the the Social Bond. A Social Bond is a traditional bond, part of which is devoted to social activities that are suffering from the financial point of view. The non-profit organisations meet increasingly difficulty in accessing resources to fund social projects for this purpose and therefore private banking initia-tives are helping them. In addition, Social Bonds follow the GBP guidelines.
Moreover, there are also the Social Impact Bonds that are "essentially a public-private partner-ship, funding effective social services through a performance-based contract. The partnership is based on a private investment which is used to develop, coordinate, or expand effective ser-vice programs" . According to ICMA , some social project categories offer and promote food security, access to essential services as education, health, financial services, affordable basic infrastructures such as transport, sanitation, clean drinking water, affordable housing and the generation of employment. Contrary to the normal bond, if the investment does not achieve its purpose, nobody loses because no payments have to be made and there is no return either. Since it is difficult to measure the social impact, these type of investments are very risky and there is
1.8. SRI in Europe and in the World
Figure 1.17.: Top 10 countries for Climate-Aligned Bonds. (Source: Figure 21 from ).
a high possibilty of default.
An additional market, connected with Green Bonds and Social Bonds are the sustainability bonds. Sustainability bonds are bonds that enclose transactions of both social and green bonds combin-ing green and social objectives.
Even if Social and Green Bonds bring a positive impact to the market, they are still treated in a very careful way. They will only be able to establish when aligning investors’, issuers’ and society interests.
2. Selection of Socially Responsible
Portfolios: a Literature Review
An investor seeks to combine different types of assets in order to find the risk profile he prefers. This can be obtained by portfolio selection process. The best portfolio is obtained by estimating and modeling the risk using portfolio selection models.
The most popular portfolio selection model is the one proposed by H. M. Markowitz who won the Nobel Price for the creation of Modern Portfolio Theory (MPT) in 1990 . Markowitz fo-cused on the problem of composing a portfolio choosing from a bunch of possible assets fixing in advance a treshold on expected return and portfolio variance. Hence, Markowitz’s study is based on the process that generates the demand and supply of financial assets based on two character-istics which are risk and return. The basic principle governing the Markowitz theory is that in order to build an efficient portfolio a combination of titles should be identified for minimizing the risk and maximizing the overall performance. To make this happen, the securities held in the portfolio have to be uncorrelated or, rather, not perfectly correlated. The traditional model is also called mean-variance (M-V) model . Following the Markowitz theory, many papers have been published on portfolio selection based this theory.
Instead, in recent years the awareness of social, environmental and economic problems that can arise because of the business has led to the implementation of new techniques in portfolio selec-tion. Investors are more careful in considering investments that comply with their ethical and moral values. Hence, the ethical and social responsibility of investments is becoming even more popular in the academic literature due to the fact that socially responsible investment provides profitability and social commitment together. Therefore, to be in line with these even more actu-alised discipline, many studies have tried to find a way to incorporate these preferences into the portfolio selection model. In particular, many studies have tried to estimate the social, ethical and environmental (SEE) dimension of investment decisions.
The majority of SRI studies are on the fincial performance of the SRI funds. Blancard and Monjon  use a metaphor to describe this problem that is "Looking for the Keys Under the Lamppost". According to the authors, there are so many studies about performance of SRI funds that look only at this theme. Therefore, they affirm that there is the need of more research on conceptual and theoretical ground like the aspirations of SRI investors or/and the relationship between SRI and regulation.
With respect to the data used, Bilbao et al.  state that the majority of these studies, whose aim is to classify investors socially responsible belief, take the measures of responsible and irrespon-sible corporate behaviour from the databases of independent agencies, examples are the Domini