Received: 19 December 2018
Revised: 19 August 2019
Accepted: 16 September 2019
DOI: 10.1002/bse.2393
RESEARCH ARTICLE
A systematic literature review of socially responsible
investment and environmental social governance metrics
Luluk Widyawati
UQ Business School, The University of
Queensland, UQ St. Lucia, Queensland,
Australia
Abstract
Socially responsible investment (SRI) encompasses both ethical and financial para-
Correspondence
Luluk Widyawati, UQ Business School, The
University of Queensland, Level 2, Colin Clark
Building (Building 39), UQ St. Lucia,
Queensland 4072, Australia.
Email: luluk.widyawati@uq.net.au
Funding information
Indonesia Endowment Fund for Education
Scholarship
digms. This systematic literature review explores three key research themes within
the SRI literature, identifying a significant disconnect between themes and a fixation
on the financial (as opposed to ethical) paradigm. One of the foundations of SRI is
environmental, social, and governance (ESG) metrics. This review confirms the importance of ESG metrics in the SRI field, as they play two crucial roles, namely, as a proxy
for sustainability performance and an enabler of the SRI market. However, there are
two main issues related to ESG metrics that undermine their reliability: a lack of transparency and a lack of convergence.
K E YW O RD S
ESG, literature review, responsible investment, sustainability, sustainable development
1 | IN T R O DU C T ION
literature is not well mapped, and there is little understanding of the
importance of ESG metrics.
Investors play a vital role in the global effort to achieve sustainable
This review of SRI literature offers two main contributions. First,
development goals by ensuring that capital is appropriately raised
it provides a unique visual tool to analyze the literature in the form
and allocated (Principles for Responsible Investment, 2017). The
of a bibliographic map. The findings reveal continuously dispropor-
practice of integrating sustainability criteria (particularly environmen-
tionate academic attention on the financial paradigm of SRI, particu-
tal, social, and governance [ESG] ratings) in investment analysis is
larly the financial performance of SRI portfolios. This fixation is a
known as responsible investing or socially responsible investment
potential distraction from the ultimate goal of SRI, which is for a
(SRI). SRI has gained increasing attention and popularity over the
company to become more ethical and sustainable. The map also dem-
recent years, and the value of SRI portfolios has grown significantly
onstrates a significant disconnection between different SRI research
(Global Sustainable Investment Alliance, 2018). However, investors
themes.
have raised concerns regarding the lack of a clear definition of
Second, this review identifies new insights into the importance of
when investments can be classified as (socially) responsible, the
ESG metrics. The majority of the SRI literature applies ESG metrics as
absence of standards for SRI investments, and the quality of avail-
a proxy for sustainability performance. In doing so, the literature con-
able data on ESG ratings of companies (Avetisyan & Hockerts,
tinues to exhibit a lack of transparency in addition to convergence
2017; Friede, 2019).
issues, both of which undermine the quality and reliability of ESG
Similarly, the literature reveals considerable diversity in the con-
metrics. This review asserts that ESG metrics play a role as an
ceptual understanding of SRI (Höchstädter & Scheck, 2015) albeit with
enabler of the SRI market, with a range of potential future research
a tendency to focus on financial concepts, particularly the financial
avenues.
performance of SRI portfolios (Capelle‐Blancard & Monjon, 2012).
This paper proceeds as follows. Data collection is described in
The ESG literature has also raised issues regarding the transparency
Section 2, and bibliometric analysis using HistCite™ software is
and reliability of existing metrics (Dorfleitner, Halbritter, & Nguyen,
outlined in Section 3. This is followed by a discussion of the key
2015; Semenova & Hassel, 2015). However, the diversity of SRI
themes in the SRI literature (Section 4) and recent research trends
Bus Strat Env. 2020;29:619–637.
wileyonlinelibrary.com/journal/bse
© 2019 John Wiley & Sons, Ltd and ERP Environment
619
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WIDYAWATI
(Section 5). Section 6 discusses ESG metrics in more detail. Section 7
3 | BIBLIOMETRIC ANALYSIS
provides a discussion of the main findings and concludes the paper
Bibliometric analysis of the collection reveals increasing interest in SRI
with suggestions for future research.
over time. Figure 1 shows a significant increase in SRI studies over the
last decade, with the highest number of publications recorded in 2016.
Ten journals (Table 2) are significant contributors to the field, with the
majority being multidisciplinary business and business ethics publica-
2 | DATA
tions. These journals published 200 articles (46% of the total articles).
Studies analyzed in this review were retrieved from the Social Science
The Journal of Business Ethics was the largest contributor with 112 arti-
Citation Index (SSCI) by Thomson Reuter Web of Sciences (WoS). The
cles. The Journal of Business Ethics is also the most cited, with a total
search was performed on April 6, 2017, using a Boolean search with
Local Citation Score (LCS) of 762. LCS is a score provided by the
keywords “social* responsible mutual fund*” OR “social* responsible
HistCite™ software that shows “the number of times a paper is cited
fund*” OR “ethic* mutual fund*” OR “ethic* fund” OR “ethic* trust”
by other papers in the local collections” (Garfield, 2009). Financial
OR “ESG” OR “social* responsible invest*” OR “sustainab* invest*”
Analysts Journal exhibits the most citations per paper, with 66.5 LCS
OR “sustainab* financ*” OR “ethic* invest*” OR “responsible invest*.”
per article. Table 3 shows the top 10 journals with the highest LCS
The search included all English‐language articles indexed in the SSCI
per paper; the majority of journals are finance related.
from 1900 to 2016. The keywords were adapted from Eccles and
The bibliometric analysis of influential SRI articles is used to pro-
Viviers (2011) and Höchstädter and Scheck (2015) as the most fre-
duce a bibliographic map using HistCite™. There is no exact rule about
quently used terms for SRI. The wildcard character (*) was used to
how to identify influential articles. However, the cut‐off is typically the
obtain results that contain variations of the search keywords. For
citation score where citations begin to level off. With a cut‐off point
example, sustainab* will match both “sustainable” and “sustainability.”
set at LCS ≥15, a total of 63 influential articles were identified. These
The OR term was used to expand the search.
articles represent more than 14% of the original 429 articles. Table 4
The search yielded a total of 634 articles. Information for each arti™
cle was downloaded and imported to the HistCite software for fur-
presents citation data, including citation counts, of these influential
articles.
ther analysis. First, manual data cleaning was performed to ensure
Figure 2 shows the bibliographic map with the 63 articles displayed
™
the relevance of articles. An article was removed from the HistCite
as nodes (circles), with the size of the node representing each article's
collection if it (a) was published in a nonpeer‐reviewed publication,
LCS score. The arrows and lines between nodes represent citation
(b) was published in nonbusiness academic journals, or (c) did not dis-
connections. Clusters of closely connected nodes reveal the existence
cuss any SRI topics. Articles that addressed SRI, but not as the main
of several key research themes.
discussion, were also excluded from the HistCite™ collection to main-
Full‐text analysis is used to identify the research themes, involving
tain the focus of the review. An example of such an article is Maynard
manual comparison of articles to identify similarities and differences.
(2008), which explores the impacts of climate change on insurers. This
This approach is adapted from Ryan and Bernard (2003), who describe
article mentions SRI as an option to help insurers manage climate
different techniques for identifying themes in qualitative research. This
change risk but does not offer more elaborate discussion. The manual
review identifies three main research themes in the SRI literature
data cleaning removed 230 articles from the collection.
(represented by the shaded areas within the map). These themes are
™
Second, HistCite software (version 12.03.17) was used to conduct
(a) investor behavior (IB), (b) SRI development (DEV), and (c) SRI perfor-
bibliometric analysis and data visualization of articles retrieved from
mance (PERF). These themes are explored in detail in the following
Web of Science (including SSCI). The software facilitated the creation
section.
of a citation index that outlined the chronological network of citations
among the set of documents (Garfield, Pudovkin, & Istomin, 2003). A
cited reference search, to reveal all references cited by articles in the
4 | R E S E A R C H T H E M E S O F S R I LI T E R A T U R E
collection, was carried out to ensure that all important SRI articles
were captured and that none were inadvertently overlooked. The cited
4.1 | Investor behavior studies
reference search identified the most relevant articles within the top
150 cited references. An additional 25 articles were found and manu-
Studies into SRI investor behavior assess motivation, investment pat-
ally added to HistCite™ (Table 1).
tern, and decision making. This theme is founded on the assumption
™
The next step was to manually check all articles in the HistCite
that SRI investors are different from conventional investors, as
database to ensure that there were no duplications or inconsistencies.
explored in 13 of the influential studies published in multidisciplinary
To avoid subjective bias, two other researchers reviewed the manual
journals.
data cleaning and manual addition process and verified the results of
Initial studies on this theme focus on understanding individual
the process. In the case of disagreement, the articles were re‐
investors. An early study by Rosen, Sandler, and Shani (1991) argues
evaluated until consensus was reached. The final collection used in this
that understanding the characteristics of SRI investors, particularly
review comprises 429 articles.
demographics and motivation, is central to understanding their
621
WIDYAWATI
TABLE 1
List of additional articles
Author(s)
Year
Title
LCS
Reason for manual addition
Statman, M.
2000
Socially responsible mutual funds
102
Not available in SSCI
Hamilton, S.; Jo, H.;
Statman, M.
1993
Doing well while doing good? The investment
performance of socially responsible mutual
funds
84
Not available in SSCI
Sparkes, R.; Cowton, C. J.
2004
The maturing of socially responsible
investment: A review of the developing link
with corporate social responsibility
66
Not captured in the initial search
Barnett, M. L.; Salomon,
R. M.
2006
Beyond dichotomy: The curvilinear
relationship between social responsibility
and financial performance
49
Not matching the keywords
Briston, R. J.; Mallin, C. A.;
Saadouni, B.
1995
The financial performance of ethical
investment funds
48
Not available in SSCI
Kreander, N.; Gray, R. H.;
Power, D. M.; Sinclair,
C. D.
2005
Evaluating the performance of ethical and
non‐ethical funds: A matched pair analysis
46
Not captured in the initial search
Gregory A.; Matatko J.;
Luther R.
1997
Ethical unit trust financial performance: Small
company effects and fund size effects
44
Not available in SSCI
Bello, Z. Y.
2005
Socially responsible investing and portfolio
diversification
44
Not available in SSCI
Hong, H.; Kacperczyk, M.
2009
The price of sin: The effects of social norms
on markets
43
Not matching the keywords
Sauer, D. A.
1997
The impact of social‐responsibility screens on
investment performance: Evidence from
the Domini 400 Social Index and Domini
Equity Mutual Fund
43
Not available in SSCI
Bollen, N. P. B.
2007
Mutual fund attributes and investor behavior
38
Not matching the keywords
Luther R. G.; Matatko J.;
Corner D. C.
1992
The investment performance of UK “ethical”
unit trusts
37
Not available in SSCI
Statman, M.
2006
Socially responsible indexes: Composition,
performance, and tracking error
27
Not matching the keywords
Goldreyer, E. F.;
Diltz, J. D.
1999
The performance of socially responsible
mutual funds: Incorporating sociopolitical
information in portfolio selection
26
Not available in SSCI
Sparkes, R.
2001
Ethical investment: Whose ethics, which
investment?
24
Not available in SSCI
Mackenzie, C.; Lewis, A.
1999
Morals and markets: The case of ethical
investing
23
Not available in SSCI
Gregory, A.; Whittaker, J.
2007
Performance and performance persistence of
“ethical” unit trusts in the UK
21
Not matching the keywords
Brammer, S.; Brooks, C.;
Pavelin, S.
2006
Corporate social performance and stock
returns: UK evidence from disaggregate
measures
19
Not matching the keywords
Knoll, M. S.
2002
Ethical screening in modern financial markets:
The conflicting claims underlying socially
responsible investment
17
Not matching the keywords
Irvine, W. B.
1987
The ethics of investing
16
Not matching the keywords
Cowton, C. J.
1999
Playing by the rules: Ethical criteria at an
ethical investment fund
15
Not available in SSCI
Williams, G.
2007
Some determinants of the socially responsible
investment decision: A cross‐country study
15
Not available in SSCI
Beal, D.; Goyen, M.;
Phillips, P.
2005
Why do we invest ethically?
15
Not matching the keywords
(Continues)
622
TABLE 1
WIDYAWATI
(Continued)
Author(s)
Year
Title
LCS
Reason for manual addition
Nilsson, J.
2009
Segmenting socially responsible mutual fund
investor: The influence of financial return
and social responsibility
15
Not matching the keywords
Fowler, S. J.; Hope, C.
2007
A critical review of sustainable business
indices and their impact
14
Not matching the keywords
Note. Sorted by LCS.
Abbreviations: LCS, Local Citation Score; SSCI, Social Science Citation Index.
FIGURE 1 Total publication output of
socially responsible investment studies per
year
TABLE 2
Top 10 publishing journals in the field of SRI
No.
Publication title
Articles published
(1987–1996)
Articles published
(1997–2006)
Articles published
(2007–2016)
Total articles
Total LCS
1
Journal of Business Ethics
2
31
79
112
762
2
Journal of Banking & Finance
1
15
16
290
3
Business Ethics ‐ A European
Review
2
11
13
76
4
Corporate Governance ‐ An
International Review
2
9
11
45
5
Sustainable Development
1
9
10
29
6
Journal of Cleaner Production
1
8
9
5
7
Business & Society
8
8
11
8
Journal of Business Finance &
Accounting
1
5
7
213
9
European Journal of Operational
Research
1
6
7
49
10
Business Strategy and The
Environment
7
7
7
1
Total
200
Abbreviations: LCS, Local Citation Score; SRI, socially responsible investment.
behavior. Similar studies in the United Kingdom (Lewis & Mackenzie,
However, Williams (2007) indicates that the demographic
2000), Australia (McLachlan & Gardner, 2004), and Sweden (Nilsson,
characteristics of SRI investors cannot fully explain their decision
2009) find that SRI investors have specific characteristics in terms of
making; instead, investors' belief systems motivate SRI investment
gender, education, and income.
decisions.
623
WIDYAWATI
TABLE 3
Top 10 publishing journals with highest LCS per article
No.
Publication title
Total LCS
Number of articles
LCS per article
1
Financial Analysts Journal
266
4
66.50
2
Journal of Financial Research
44
1
44.00
3
Review of Financial Economics
43
1
43.00
4
Journal of Financial and Quantitative Analysis
77
2
38.50
5
Journal of Business Finance & Accounting
213
7
30.43
6
Journal of Consumer Affairs
30
1
30.00
7
Managerial Finance
26
1
26.00
8
Strategic Management Journal
51
2
25.50
9
Journal of Financial Economics
76
3
25.33
10
Human Relations
45
2
22.50
Abbreviation: LCS, Local Citation Score.
Studies regarding motivation suggest that both financial and nonfinancial motivations influence the SRI decision (Anand & Cowton,
(largely review and conceptual articles), with the majority appearing
in the Journal of Business Ethics.
1993; Beal, Goyen, & Phillips, 2005; Mackenzie & Lewis, 1999). How-
The rapid development of SRI practices in the world's major econ-
ever, the balance between the two motives varies among SRI investors
omies during the early 2000s instigated studies on the growth and
(Cullis, Lewis, & Winnett, 1992), which affects an investor's tolerance
evolution of SRI. The practice of excluding certain stocks from invest-
toward the risk of lower financial returns of SRI (Webley, Lewis, &
ment portfolios based on nonfinancial criteria began in the United
Mackenzie, 2001).
States and United Kingdom before the 1990s. Some studies (Knoll,
However, few studies have thoroughly investigated the belief sys-
2002; Schueth, 2003) indicate that SRI practices in these two coun-
tems that underpin the behavior of SRI investors. Insight on how the
tries have matured to a stage where SRI investment models are well
belief systems of investors (be that religion, social values, or cultural
developed. Despite this, there is still no consensus on whether SRI is
norms) affect motivation to invest in SRI would enable more effective
accepted as a mainstream practice in financial markets. Sparkes and
and targeted promotion of SRI.
Cowton (2004) argue that SRI adoption by influential and powerful
It is likely that individual SRI investors are also institutional investors (such as pension funds), but it is unclear how institutional behavior
mainstream investors affirms its mainstream status; however, market
participants lack a unified perspective as to what constitutes SRI.
relates to individual behavior regarding SRI. Studies on institutional SRI
Although some commonality exists regarding definitions, the mech-
investors have attempted to provide evidence on this. Cox, Brammer,
anisms of SRI are very heterogeneous. What is considered to be SRI by
and Millington (2004) find that institutional investors have similar
one market participant might not be fully recognized by another
investment patterns to individual investors, especially regarding the
(Sandberg, Juravle, Hedesström, & Hamilton, 2008) Juravle and Lewis
use of negative screening or exclusion strategies to balance financial
(2008) identify impediments at individual and institutional levels, but
and ESG goals. However, Cowton (1999) indicates that the values
Renneboog, Ter Horst, and Zhang (2008b) suggest that SRI is likely
and interests of the board of an ethical investment fund significantly
to grow as investors become increasingly aware of ESG factors and
influence the selection of ethical boundaries and criteria.
more favorable regulatory frameworks emerge.
Existing studies show that there is a potential tension between
Studies into the heterogeneity of SRI mechanisms in local (Schueth,
clients and management in terms of SRI implementation within an
2003) or international (Haigh & Hazelton, 2004; Sandberg et al., 2008;
institutional investment, but more research is needed. Understanding
Sparkes & Cowton, 2004) contexts generally agree that there are three
the extent to which strategy development and the decision‐making
main SRI mechanisms: screening, shareholder activism, and community
process of SRI institutional investors is affected by SRI preferences
investment.
of individual investors is essential to understand the client–agent
relationship.
The screening strategy includes negative screening (the exclusion
of certain investments based on ESG criteria) and positive screening
(which relies on a “best‐in‐class” approach to selecting investments).
Generally, investors are not involved in the operation of investee companies. In comparison, shareholder activism or shareholder advocacy
4.2 | SRI development studies
relies on shareholders influencing companies to adopt more sustainable practices. Community investment requires significant involve-
SRI development studies tend to focus on SRI in specific areas (e.g.,
ment, but investors who use this mechanism are typically interested
countries), theoretical arguments for and against SRI, and participant
in financing sustainability projects or sustainability related companies.
roles in the SRI market. This theme comprises 16 influential studies
Although academics broadly agree on the categorization of SRI
624
WIDYAWATI
TABLE 4
No.
List of highly cited papers in the collection
HistCite ID
Author(s)
Title
Publication
Year
LCS
Theme
1
77
Bauer, R.; Koedijk, K.;
Otten, R.
International evidence on ethical
mutual fund performance and
investment style
Journal of Banking &
Finance
2005
105
SRI performance
2
27
Statman, M.
Socially responsible mutual funds
Financial Analysts Journal
2000
102
SRI performance
3
132
Renneboog, L.; Ter Horst,
J.; Zhang, C. D.
Socially responsible investments:
Institutional aspects,
performance, and investor
behavior
Journal of Banking &
Finance
2008
86
SRI development
4
12
Hamilton, S.; Jo, H.;
Statman, M.
Doing well while doing good? The
investment performance of
socially responsible mutual
funds
Financial Analysts Journal
1993
84
SRI performance
5
59
Sparkes, R.; Cowton, C. J.
The maturing of socially
responsible investment: A
review of the developing link
with corporate social
responsibility
Journal of Business Ethics
2004
66
SRI development
6
71
Derwall, J.; Guenster, N.;
Bauer, R.; Koedijk, K.
The eco‐efficiency premium
puzzle
Financial Analysts Journal
2005
57
SRI performance
7
126
Renneboog, L.; Ter Horst,
J.; Zhang, C.
The price of ethics and
stakeholder governance: The
performance of socially
responsible mutual funds
Journal of Corporate Finance
2008
55
SRI performance
8
91
Barnett, M. L.; Salomon,
R. M.
Beyond dichotomy: The
curvilinear relationship
between social responsibility
and financial performance
Strategic Management
Journal
2006
49
SRI performance
9
16
Briston, R. J.; Mallin, C. A.;
Saadouni, B.
The financial performance of
ethical investment funds
Journal of Business Finance
& Accounting
1995
48
SRI performance
10
80
Kreander, N.; Gray, R. H.;
Power, D. M.; Sinclair,
C. D.
Evaluating the performance of
ethical and non‐ethical funds:
A matched pair analysis
Journal of Business Finance
& Accounting
2005
46
SRI performance
11
18
Gregory A.; Matatko J.;
Luther R.
Ethical unit trust financial
performance: Small company
effects and fund size effects
Journal of Business Finance
& Accounting
1997
44
SRI performance
12
68
Bello, Z. Y.
Socially responsible investing and
portfolio diversification
Journal of Financial
Research
2005
44
SRI performance
13
19
Sauer, D. A.
The impact of social‐
responsibility screens on
investment performance:
Evidence from the Domini 400
social index and Domini equity
mutual fund
Review of Financial
Economics
1997
43
SRI performance
14
45
Schueth, S.
Socially responsible investing in
the United States
Journal of Business Ethics
2003
43
SRI development
15
168
Hong, H.; Kacperczyk, M.
The price of sin: The effects of
social norms on markets
Journal of Financial
Economics
2009
43
SRI performance
16
109
Kempf, A.; Osthoff, P.
2005 report on socially
responsible investing trends in
the United States
European Financial
Management
2007
42
SRI performance
17
96
Bauer, R.; Derwall, J.;
Otten, R.
The ethical mutual fund
performance debate: New
evidence from Canada
Journal of Business Ethics
2007
41
SRI performance
18
40
2001
39
SRI performance
(Continues)
625
WIDYAWATI
TABLE 4
No.
(Continued)
HistCite ID
Author(s)
Title
Publication
Year
LCS
Heinkel, R.; Kraus, A.;
Zechner, J.
The effect of green investment
on corporate behavior
Journal of Financial and
Quantitative Analysis
Bollen, N. P. B.
Mutual fund attributes and
investor behavior
Theme
Journal of Financial and
Quantitative Analysis
2007
38
SRI performance
19
107
20
9
Luther R. G.; Matatko J.;
Corner D. C.
The investment performance of
UK “ethical” unit trusts
Accounting Auditing &
Accountability Journal
1992
37
SRI performance
21
28
Lewis, A.; Mackenzie, C.
Morals, money, ethical investing
and economic psychology
Human Relations
2000
31
SRI performance
22
144
Galema, R.; Plantinga, A.;
Scholtens, B.
The stocks at stake: Return and
risk in socially responsible
investment
Journal of Banking &
Finance
2008
31
Investor behavior
23
7
Rosen, B. N.; Sandler,
D. M.; Shani, D.
Social‐issues and socially
responsible investment
behaviour—A preliminary
empirical‐investigation
Journal of Consumer Affairs
1991
30
Investor behavior
24
30
Cummings, L. S.
The financial performance of
ethical investment trusts: An
Australian perspective
Journal of Business Ethics
2000
27
SRI performance
25
85
Statman, M.
Socially responsible indexes—
Composition, performance, and
tracking error.
Journal of Portfolio
Management
2006
27
SRI performance
26
26
Goldreyer, E. F.; Diltz, J. D.
The performance of socially
responsible mutual funds:
Incorporating sociopolitical
information in portfolio
selection
Managerial Finance
1999
26
SRI performance
27
60
Haigh, M.; Hazelton, J.
Financial markets: A tool for
social responsibility?
Journal of Business Ethics
2004
25
SRI development
28
36
Sparkes, R.
Ethical investment: Whose ethics,
which investment?
Business Ethics‐A European
Review
2001
24
SRI development
29
98
Schroder, M.
Is there a difference? The
performance characteristics of
SRI equity indices
Journal of Business Finance
& Accounting
2007
24
SRI performance
30
133
Benson, K.; Humphrey, J. E.
Socially responsible investment
funds: Investor reaction to
current and past returns
Journal of Banking &
Finance
2008
24
SRI performance
31
165
Sandberg, J.; Juravle, C.;
Hedesstrom, T. M.;
Hamilton, I.
The heterogeneity of socially
responsible investment
Journal of Business Ethics
2009
24
SRI development
32
224
Edmans, A.
Does the stock market fully value
intangibles? Employee
satisfaction and equity prices
Journal of Financial
Economics
2011
24
SRI performance
33
24
Mackenzie, C.; Lewis, A.
Morals and markets: The case of
ethical investing
Business Ethics Quarterly
1999
23
SRI development
34
37
Webley, P.; Lewis, A.;
Mackenzie, C.
Commitment among ethical
investors: An experimental
approach
Journal of Economic
Psychology
2001
23
SRI development
35
53
Hallerbach, W.; Ning, H.;
Soppe, A.; Spronk, J.
A framework for managing a
portfolio of socially responsible
investments
European Journal of
Operational Research
2004
23
SRI performance
36
57
Mclachlan, J.; Gardner, J.
A comparison of socially
responsible and conventional
investors
Journal of Business Ethics
2004
23
SRI performance
(Continues)
626
WIDYAWATI
TABLE 4
No.
(Continued)
HistCite ID
Author(s)
Title
Publication
Year
LCS
Theme
37
63
Guay, T.; Doh, J. P.;
Sinclair, G.
Non‐governmental organizations,
shareholder activism, and
socially responsible
investments: Ethical, strategic,
and governance implications
Journal of Business Ethics
2004
23
Investor behavior
38
86
Benson, K.; Brailsford, T. J.;
Humphrey, J. E.
Do socially responsible fund
managers really invest
differently?
Journal of Business Ethics
2006
23
Investor behavior
39
163
Statman, M.; Glushkov, D.
The wages of social responsibility
Financial Analysts Journal
2009
23
Investor behavior
40
29
Lewis, A.; Mackenzie, C.
Support for investor activism
among UK ethical investors
Journal of Business Ethics
2000
22
SRI development
41
56
Michelson, G.; Wailes, N.;
Van Der Laan, S.;
Frost, G.
Ethical investment processes and
outcomes
Journal of Business Ethics
2004
22
SRI performance
42
167
Cortez, M. C.; Silva, F.;
Areal, N.
The performance of European
socially responsible funds
Journal of Business Ethics
2009
22
Investor behavior
43
46
Schwartz, M. S.
The ethics of “ethical investing”
Journal of Business Ethics
2003
21
SRI development
44
106
Gregory, A.; Whittaker, J.
Performance and performance
persistence of “ethical” unit
trusts in the UK
Journal of Business Finance
& Accounting
2007
21
SRI performance
45
221
Derwall, J.; Koedijk, K.; Ter
Horst, J.
A tale of values‐driven and profit‐
seeking social investors
Journal of Banking &
Finance
2011
21
SRI performance
46
14
Anand, P.; Cowton, C. J.
The ethical investor—Exploring
dimensions of investment
behavior
Journal of Economic
Psychology
1993
20
Investor behavior
47
58
Cox, P.; Brammer, S.;
Millington, A.
An empirical examination of
institutional investor
preferences for corporate
social performance
Journal of Business Ethics
2004
19
Investor behavior
48
90
Brammer, S.; Brooks, C.;
Pavelin, S.
Corporate social performance
and stock returns: UK evidence
from disaggregate measures
Financial Management
2006
19
SRI performance
49
228
Renneboog, L.; Ter Horst,
J.; Zhang, C. D.
Is ethical money financially
smart? Nonfinancial attributes
and money flows of socially
responsible investment funds
Journal of Financial
Intermediation
2011
19
SRI performance
50
127
Juravle, C.; Lewis, A.
Identifying impediments to SRI in
Europe: A review of the
practitioner and academic
literature
Business Ethics‐A European
Review
2008
18
SRI development
51
192
Lee, D.; Humphrey, J. E.;
Benson, K.; Ahn, J. Y. K.
Socially responsible investment
fund performance: The impact
of screening intensity
Accounting and Finance
2010
18
SRI performance
52
42
Knoll, M. S.
Ethical screening in modern
financial markets: The
conflicting claims underlying
socially responsible investment
Business Lawyer
2002
17
SRI development
53
50
Rivoli, P.
Making a difference or making a
statement? Finance research
and socially responsible
investment
Business Ethics Quarterly
2003
17
SRI development
54
5
Irvine, W. B.
The ethics of investing
Journal of Business Ethics
1987
16
SRI development
(Continues)
627
WIDYAWATI
TABLE 4
No.
(Continued)
HistCite ID
Author(s)
Title
Publication
Year
LCS
Theme
Sethi, S. P.
Investing in socially responsible
companies is a must for public
pension funds—Because there
is no better alternative
Journal of Business Ethics
2005
16
SRI development
55
70
56
153
Derwall, J.; Koedijk, K.
Socially responsible fixed‐income
funds
Journal of Business Finance
& Accounting
2009
16
SRI performance
57
11
Cullis, J. G.; Lewis, A.;
Winnett, A.
Paying to be good—UK ethical
investments
Kyklos
1992
15
Investor behavior
58
25
Cowton, C. J.
Playing by the rules: Ethical
criteria at an ethical investment
fund
Business Ethics‐A European
Review
1999
15
Investor behavior
59
69
Beal, D.; Goyen, M.;
Phillips, P.
Why do we invest ethically?
Journal of Investing
2005
15
Investor behavior
60
89
Scholtens, B.
Finance as a driver of corporate
social responsibility
Journal of Business Ethics
2006
15
Investor behavior
61
94
Williams, G.
Some determinants of the socially
responsible investment
decision: A cross‐country study
Journal of Behavioral
Finance
2007
15
SRI development
62
147
Nilsson, J.
Segmenting socially responsible
mutual fund investor: The
influence of financial return
and social responsibility
International Journal of Bank
Marketing
2009
15
Investor behavior
63
161
Chatterji, A. K.; Levine,
D. I.; Toffel, M. W.
How well do social ratings
actually measure corporate
social responsibility?
Journal of Economics &
Management Strategy
2009
15
ESG measurement
Note. Sorted by LCS.
Abbreviations: LCS, Local Citation Score; SRI, socially responsible investment.
mechanisms, there is no consensus on how or whether these mecha-
critical role not only as an investor but also as an SRI advocate,
nisms impact corporate practices.
because their actions could encourage other investors, including credit
Meanwhile, there are two main arguments concerning SRI's sus-
investors (e.g., banks, private equity, and project financing providers;
tainability impact. Rivoli (2003) applies financial market theory and
Scholtens, 2006). Nongovernmental organizations also have important
concludes that SRI portfolios that apply a screening strategy have a
roles as investors and advocates by engaging in shareholder activism,
better chance of achieving impact, provided that unrealistic assump-
creating SRI funds, campaigning for SRI, or consulting with SRI funds
tions regarding the SRI financial model (such as the perfect market
(Guay, Doh, & Sinclair, 2004). These studies indicate the unique fea-
assumption) are relaxed. Rivoli's argument is rooted in the belief that
ture of the SRI market in which each participant can have more than
financial markets influence the company's policy and behavior (Irvine,
one role. Considering the interconnectedness among market partici-
1987). In contrast, Sparkes and Cowton (2004) argue that shareholder
pants, the field is likely to benefit from further study into the relation-
activism is likely to be the most potent method for influencing corpo-
ship dynamics between different participants in different SRI markets.
rate policies.
This would help identify the optimum mechanism for coordination and
Despite a lack of empirical evidence (Renneboog et al., 2008b), it is
collaboration.
generally agreed (theoretically at least) that SRI is capable of affecting
corporate behavior. It is also crucial that SRI fund managers are trans-
4.3 | SRI performance studies
parent about their products so that investors are informed about the
expected impacts of their investments (Michelson, Wailes, Van Der
SRI performance is the most dominant research theme in the SRI liter-
Laan, & Frost, 2004).
ature, with 34 studies examining the financial impact of SRI practices
It can be concluded that, conceptually, SRI facilitates sustainable
(including mutual funds, trusts, and portfolios). The majority of studies
development, even if there is disagreement about how to achieve
in this stream are published by mainstream financial journals, represen-
significant impact. However, empirical studies are needed to provide
tative of the growing acceptance of SRI as an important topic in
evidence to resolve the current debate on this topic.
finance research.
Every SRI market participant plays an important role. Sethi (2005)
The assumed trade‐off between return and responsibility, due to
argues that institutional investors of pension funds play a potentially
restriction of the pool of assets that can be included in the investment
628
FIGURE 2
com]
WIDYAWATI
Bibliographic map of influential articles in the socially responsible investment field [Colour figure can be viewed at wileyonlinelibrary.
portfolio, is a major concern for SRI. However, it is theoretically possi-
Some studies demonstrate that integrating sustainability criteria
ble for investors to create SRI portfolios that fulfill their required
has no significant impact on portfolio return, meaning that the return
return criteria. One method is the multiattribute portfolio approach
of SRI portfolios is not statistically different from returns of conven-
with predetermined restrictions (Hallerbach, Ning, Soppe, & Spronk,
tional portfolios. This result is consistent for trusts (Cummings,
2004). Empirical studies into SRI performance investigate the return
2000), mutual funds (Bauer, Derwall, & Otten, 2007; Bauer, Koedijk,
of such portfolios with mixed findings.
& Otten, 2005; Cortez, Silva, & Areal, 2009; Derwall & Koedijk,
629
WIDYAWATI
2009), stock indices (Schröder, 2007; Statman, 2006), and hypothetical
result is more common in one setting. Table 5 shows examples of dif-
portfolios (Sauer, 1997). A probable explanation is that SRI portfolios,
ferent results for studies conducted in similar contexts, which reflect
especially mutual funds, are generally managed similarly to conven-
both a convergence and a divergence of SRI performance studies.
tional funds (Benson, Brailsford, & Humphrey, 2006).
Namely, the studies tend to converge on the mutual fund setting but
Alternatively, some studies present evidence that indicates that SRI
produce divergent results even in the same setting. This fragmentation
does have a positive effect on returns by comparing equity portfolios
that exists within the SRI performance literature provides opportuni-
with high and low ESG scores. These studies show that a positive
ties for future research.
screening strategy is generally advantageous for investors (Statman
& Glushkov, 2009) as it provides a positive abnormal return, even after
taking into account additional transaction costs for SRI portfolios
5 | RECENT RESEARCH TRENDS
(Kempf & Osthoff, 2007). Similar positive results are presented by
studies that investigate the return of portfolios created on specific
In addition to bibliometric mapping, a second content analysis was
ESG criteria such as eco‐efficiency (Derwall, Guenster, Bauer, &
performed on more recent articles to counter the inherent shortcom-
Koedijk, 2005) and employee satisfaction (Edmans, 2011). These stud-
ing whereby mapping tends to discredit newly published articles
ies show that SRI investors who remain loyal and hold SRI portfolios
without many citations. The bibliographic map demonstrates that
over the long term are likely to be rewarded with incremental returns.
the most influential articles were published between 1991 and
Further, SRI portfolios including SRI mutual funds are generally less
2011; however, Figure 1 shows that published SRI studies peaked
volatile (Bollen, 2007).
from 2014 to 2016. Additional content analysis reveals continued
In contrast, empirical studies find evidence that portfolios based on
development in the three key research themes described in the pre-
ESG criteria have a negative effect on financial returns. They reveal
vious section. Although studies on SRI performance continue to
that returns for companies with a high ESG score are lower than mar-
dominate, several significant emerging trends are also evident in
ket return (Brammer, Brooks, & Pavelin, 2006) and ESG‐based stock
each research theme.
selection lowers the stock's book‐to‐market ratio (Galema, Plantinga,
SRI studies on investor behavior continue to focus on individual
& Scholtens, 2008). Studies in 18 countries on SRI mutual funds
and institutional investors. Noticeable trends include increasing atten-
also reach similar conclusions (Gregory, Matatko, & Luther, 1997;
tion on individual values and beliefs as drivers of SRI investor behavior
Renneboog, Ter Horst, & Zhang, 2008a). The negative impact can be
(Bauer & Smeets, 2015; Diouf, Hebb, & Touré, 2016; Dumas &
exacerbated by screening intensity (Lee, Humphrey, Benson, & Ahn,
Louche, 2016; Durand, Koh, & Tan, 2013; Glac, 2012; Sandbu,
2010). Although empirical evidence on this negative impact supports
2012). Studies on the return sensitivity of SRI investors reveal that
the theory of a trade‐off between social responsibility and financial
they are less concerned about negative performance (Martí‐Ballester,
return, this does not mean that investors should avoid investing in
2015; Peifer, 2014), even if they expect a certain level of financial
SRI; however, they must be aware of the trade‐off and potentially
return (Paetzold & Busch, 2014; Pérez‐Gladish, Benson, & Faff,
lower returns.
2012), and different groups of investors expect different returns (Berry
Mutual funds managers also need to consider funds flow as it rep-
& Junkus, 2013).
resents investors' sentiment and future cash flow of the funds. In this
Researchers have also begun to pay more attention to the motiva-
regard, SRI funds are found to be less sensitive to past returns than
tions of institutional investors. External drivers, such as regulatory
conventional funds (Benson & Humphrey, 2008; Renneboog, Ter
environment (Sievänen, Rita, & Scholtens, 2013), and internal drivers,
Horst, & Zhang, 2011). In other words, investors are unlikely to
such as product development and risk management (Crifo, Forget, &
withdraw their investments from SRI funds because of past negative
Teyssier, 2015), have been the subject of investigation. However,
returns.
researchers still have not fully explored in‐depth cross‐analysis of the
Meanwhile, some studies identify a mixed effect of SRI. The mul-
behavior of individual and institutional SRI investors.
tidimensional and contextual nature of SRI means that SRI portfolios
Recent studies present important insights into two issues regarding
can perform differently in different contexts. Derwall, Koedijk, and
SRI development: SRI mainstreaming and the heterogeneity of SRI
Ter Horst (2011) and Barnett and Salomon (2006) present evidence
mechanisms. Viviers and Eccles (2012) argue that SRI practices are
that different screening mechanisms may affect financial perfor-
increasingly concentrated on screening (both positive and negative)
mance. Negative screening might lead to a low ESG scored firm
and shareholder activism. SRI institutional investors are becoming
being undervalued due to lack of demand. Positive screening might
more interested in shareholder activism, even though there is incon-
mean the real value from ESG is not yet recognized for high scored
clusive empirical support for the approach. Kolstad (2016) suggests
firms, resulting in their stock being undervalued; returns could be
that this may be due to shareholder activism triggered by political
earned as the stocks move toward their true values. Therefore, argu-
and bureaucratic motives to appease stakeholder pressure, rather than
ments both for and against SRI can be justified depending on the
by effectiveness and efficiency motives.
context.
Recent research presents two conceptual differences regarding
This review finds no indication that specific characteristics of influ-
the effect of the heterogeneity of SRI mechanisms on the SRI
ential SRI performance studies influence the results. That said, one
mainstreaming effort, namely, that it facilitates or impedes the process.
630
WIDYAWATI
TABLE 5
Examples of different results for SRI performance studies in similar contexts
Context
No. significant
difference
SRI positive
impact
SRI negative
impact
Multi‐
impacts
Study object
Mutual funds
Trust
Equity portfolio
Individual firm stocks
13
1
1
0
1
2
4
0
2
1
1
2
2
0
0
0
Approach
Comparing SRI portfolio
versus conventional
benchmark
Comparing high ESG
versus low ESG scored
portfolio
17
3
3
2
0
4
3
0
CAPMa
CAPMa and multifactor model
Multifactor model
Regression
10
1
3
2
2
2
3
0
0
2
3
0
1
0
1
0
Main quantitative
model used
Abbreviations: CAPM, capital asset pricing model; SRI, socially responsible investment.
a
Including Sharpe's ratio and Jensen's alpha.
The facilitation argument suggests that heterogeneity makes SRI more
Plà‐Santamaria (2012) show that a portfolio with a “green” reputation
appealing to a broad range of investors who have different interests
can earn lower returns than traditional portfolios.
and concerns (Child, 2015; Crifo & Mottis, 2016). The impediment
Second, SRI performance in emerging economies has gained
argument suggests that the idiosyncrasies of SRI undermine collective
increasing attention. In their Brazilian study, Ortas, Moneva, and
beliefs, leading to confusion and reluctance to implement SRI (Dumas
Salvador (2012) indicate that SRI performs as well as the market in
& Louche, 2016). Despite these differences in opinion, the consensus
bullish periods. Cunha and Samanez (2013) find that it suffers from
is that more effort is required to bring SRI to the forefront of main-
losses in periods of crisis due to constraints that lead to higher risks.
stream financial markets.
South African SRI research reveals no significant impact of ESG on
Recent studies present more evidence on the importance of the
context of SRI and insights into the unresolved debate on SRI's impact
financial performance (Chipeta & Gladysek, 2012; Demetriades &
Auret, 2014).
on financial performance. Different SRI settings, such as screening
Third, recent papers have contributed to understanding SRI perfor-
mechanisms and screening intensity, can have different impacts on
mance in a specific market situation. These include studies on market
the financial performance of SRI portfolios. For example, Capelle‐
disturbance due to an increase in competition (In, Kim, Park, Kim, &
Blancard and Monjon (2014) find that negative screening leads to
Kim, 2014) and studies pertaining to SRI during the global financial cri-
underperformance, whereas positive screening has no impact on the
sis (Nofsinger & Varma, 2014).
financial performance of French SRI funds. In contrast, Auer (2016)
Some recent studies adopt the unique approach of analyzing the
argues that negative screening has no impact, whereas positive
performance of sin portfolios as the antithesis of SRI portfolios. Sin
screening negatively impacts the financial performance of European
stocks are perceived to be morally or socially unacceptable, such as
stock portfolios.
tobacco, alcohol, weapons, and gambling companies. Recent studies
New narratives about methodological concerns of SRI performance
present empirical evidence that a portfolio of only sin stocks performs
studies have emerged, including Rathner's (2013) systematic meta‐
better than the market (Soler‐Domínguez & Matallín‐Sáez, 2016);
analysis of 25 SRI performance studies. Rathner (2013) reveals that
however, merely including sin stocks in a regular portfolio does not
results are affected by characteristics such as survivorship bias, focus
affect returns (Borgers, Derwall, Koedijk, & ter Horst, 2015; Lobe &
on the U.S. market, and the study period. As a result, SRI performance
Walkshäusl, 2016). Therefore, excluding sin stocks from a portfolio is
studies should be interpreted with caution. Stellner, Klein, and Zwergel
expected to have no impact on returns.
(2015) note that bias could be reduced if mediating or moderating variables, such as country‐specific variables, are integrated.
Other recent studies concentrate on specific SRI issues in several
6 | DISCUSSION OF ESG METRICS
ways. First, more attention has been given to the impact of a particular
dimension of ESG. For instance, Borgers, Derwall, Koedijk, and ter
In the collection, 28 studies examine ESG measurement, and 238
Horst (2013) provide evidence that stakeholder engagement is posi-
papers incorporate ESG metrics. Further analysis reveals that the roles
tively associated with long‐term, risk‐adjusted returns. Girerd‐Potin,
of ESG metrics are highly related to the type of study. True to the
Jimenez‐Garcès, and Louvet (2014) extend this result for all types
nature of ESG metrics as a measurement unit, quantitative empirical
of stakeholders. Ballestero, Bravo, Pérez‐Gladish, Arenas‐Parra, and
studies mainly apply ESG metrics as a proxy for sustainability
631
WIDYAWATI
performance. Meanwhile, qualitative empirical studies and conceptual
scoring model that distinguishes performance ranges. The result is a
studies suggest that ESG metrics play a more fundamental role as an
rating or ranking form of ESG metrics.
enabling factor of the SRI market.
SRI performance studies have applied both first and second gener-
Analysis also facilitates the identification of ESG metrics providers.
ation ESG metrics as a proxy for sustainability performance, both
KLD is arguably the oldest ESG rating agency and the most popular
directly and indirectly. The direct application involves the use of
source of ESG metrics; KLD scoring is used in 16 SRI performance
“raw” ESG metrics, namely, the aggregated ESG score or scores for
studies. More recently, studies have also applied data from other U.
each ESG dimension. The indirect application involves the use of
S.‐ and European‐based rating agencies such as ASSET4 (Stellner
ESG metrics that have been further processed to form an SRI index
et al., 2015), Bloomberg (Nollet, Filis, & Mitrokostas, 2016),
or used in an investment analysis that results in SRI mutual funds.
Sustainalytics (Auer, 2016), EIRIS (Brammer et al., 2006; Wu & Shen,
Direct application of ESG metrics has reduced some biases
2013), SAM (Bird, Momenté, & Reggiani, 2012; Xiao, Faff, Gharghori,
because it eliminates the effect of transaction costs and managerial
& Lee, 2013), Vigeo (Girerd‐Potin et al., 2014), and Innovest
issues (i.e., investment manager skills or preferences) by creating
(Brzeszczyński & McIntosh, 2014; Derwall et al., 2005). There is little
unique (hypothetical) portfolios. However, direct application means
discourse on ESG metrics provided by local or regional agencies. This
that measurement issues related to ESG metrics might directly affect
section discusses the use of ESG metrics as a proxy for sustainability
study results. Nevertheless, the increasing popularity of this approach
performance (Section 6.1) and an enabling factor for the SRI market
within recently published SRI performance studies indicates that
(Section 6.2).
researchers recognize and value its benefits. There are eight influential
studies (e.g., Brammer et al., 2006; Kempf & Osthoff, 2007; Sauer,
1997) and 47 recent articles (e.g., Auer, 2016; Girerd‐Potin et al.,
6.1 | ESG metrics as a proxy for sustainability
performance
2014; Xiao et al., 2013) that directly apply ESG metrics as a proxy
for sustainability performance.
Researchers have also extensively applied indirect ESG metrics,
Operationalization of sustainability performance is challenging due to
with many analyzing data on SRI mutual funds. Of the SRI performance
the broad and contextual definition of sustainability. The literature
studies, 44 examine the performance of SRI mutual funds, including 12
indicates that such operationalization has developed in line with the
influential studies and 32 recent studies. A major concern is that only
evolution of SRI practices. Early SRI in the 1990s generally applied
some of the studies (e.g., Borgers et al., 2015; Capelle‐Blancard &
negative screening by excluding nonethical or nonsocially responsible
Monjon, 2014; Henke, 2016) provide information about the raw ESG
companies (Haigh & Hazelton, 2004; Schueth, 2003; Sparkes &
metrics used to create the funds. This may simply reflect the extensive
Cowton, 2004). In this case, ESG metrics are mainly applied to filter
effort needed to identify the raw ESG metrics, especially if the studies
out nonethical companies. As a result, most first‐generation ESG met-
examine a vast number of mutual funds. Moreover, not all mutual
rics, such as the original KLD rating, consist of binary codes to indicate
funds provide this information. This lack of transparency and the issues
compliance or noncompliance with selected sustainability criteria (Hart
of transaction costs and managerial influence are shortcomings of
& Sharfman, 2015; Sharfman, 1996). However, the criteria are debat-
mutual funds data. Regardless, studies of SRI mutual funds present a
able because there is no consensus on the definition of social respon-
realistic view of SRI, because mutual funds are arguably one of the
sibility (Michelson et al., 2004). This type of ESG metric is highly
most popular investment vehicles for SRI investors. It is also relatively
subjective and inconsistent, especially when there is a lack of disclo-
easy to identify SRI mutual funds via fund registers compiled by SRI
sure regarding the methodology.
forums, such as the U.S. SIF (Benson et al., 2006; Benson & Humphrey,
The next stage of evolution of ESG metrics is linked to the increasing
2008; Renneboog et al., 2011) and Eurosif (Cortez et al., 2009).
popularity of positive screening or “best‐in‐class” practices. As an exclu-
The type of ESG metrics used as a proxy of sustainability measure-
sionary SRI strategy, negative screening is often regarded as a punish-
ment is related to the scope and model employed by these studies. A
ment for nonethical companies (Heinkel, Kraus, & Zechner, 2001).
total of 15 SRI performance studies use ESG or SRI indices in their
However, for some investors, negative screening no longer reflects
analysis. These studies generally implement a comparison model,
the sustainability values they wish to achieve (de Colle & York, 2009).
namely, comparing the performance of SRI portfolios with either con-
Furthermore, SRI practices have recently shifted toward a balance
ventional portfolios or market benchmarks (Kappou & Oikonomou,
between punishing non‐performing companies and rewarding best
2016; Schröder, 2007; Statman, 2006). The most commonly used SRI
performing companies (Haigh & Hazelton, 2004; Heinkel et al., 2001).
indices are Domini400 (based on KLD data), FTSE4Good (data from
Using binary‐based ESG metrics is a challenge when evaluating and
EIRIS), and Dow Jones Sustainability Index (data from SAM) and pub-
selecting best performing companies. Therefore, ESG metrics have
lished in either the United States or United Kingdom. Other domestic
evolved to more accurately reflect sustainability performance to facil-
stock indices tend to be used in studies that specifically examine SRI
itate a change in SRI practices (Renneboog et al., 2008b). In this sec-
performance in a specific country (Chipeta & Gladysek, 2012; Ortas
ond generation of ESG metrics, an aggregated score is provided,
et al., 2012; Ortas, Moneva, Burritt, & Tingey‐Holyoak, 2014).
more specific criteria for each dimension developed, weights of
Despite the evolution of ESG metrics and their popularity as a
each dimension reassessed, and the binary code expanded, yielding a
proxy for sustainability performance, the metrics remain flawed. The
632
WIDYAWATI
lack of transparency continues to be a key issue (Busch, Bauer, &
one of the main factors enabling the growth of the U.K. SRI market.
Orlitzky, 2016; Delmas & Blass, 2010). Even though several ESG rating
Similarly, the French SRI market grew substantially after an ESG rating
agencies have published more information regarding their methodol-
agency (Arese, subsequently known as Vigeo) was launched in 1997
ogy, much information crucial for meaningful interpretation and accu-
(Arjaliès, 2014; Gond & Boxenbaum, 2013). This acceleration is ampli-
rate comparison has not been fully disclosed. Changes in the ESG
fied when the establishment is accompanied by compatible regulation
information market as new agencies are launched and established data
and adoption of the metrics by influential market players (Kreander,
providers enter the market exacerbates transparency concerns and
McPhail, & Beattie, 2015; Vasudeva, 2013). However, this acceleration
creates additional confusion (Delmas, Etzion, & Nairn‐Birch, 2013).
effect can be dampened by lack of transparency and standardization in
Moreover, there is still no standard for ESG metrics, which means that
the use of ESG metrics by SRI analysts (Juravle and Lewis, 2008).
data are fragmented and inconsistent due to differences in data collec-
ESG metrics are also a useful tool to educate and build awareness
tion, incompatible data formats, and different levels of quality control
about SRI. Studies indicate that investors with limited awareness and
(Sethi, 2005, Juravle & Lewis, 2008). Although the different metrics
understanding of available ESG metrics are hesitant to invest in SRI
consist of some common dimensions, the aggregate measurement
(Escrig‐Olmedo,
does not converge (Semenova & Hassel, 2015). Recent studies have
Giamporcaro & Pretorius, 2012). For SRI investors, there is concern
also uncovered other measurement issues including bias toward larger
about whether their ethical beliefs can be integrated into investment
companies (Jun, 2016) and a lack of predictive power (Chatterji,
analysis. ESG metrics help investors understand the integration pro-
Levine, & Toffel, 2009). Current practices in ESG measurement need
cess by showing the various options, in terms of ESG dimensions
to improve significantly if ESG metrics are to be reliable and valid
and measurements, that they can choose in order to translate their
(Busch et al., 2016).
beliefs into investment criteria (Heinkel et al., 2001). It is thus likely
Some alternative frameworks to help resolve the issues surrounding ESG metrics have been put forward (e.g., Cabello, Ruiz, Pérez‐
Muñoz‐Torres,
&
Fernández‐Izquierdo,
2013;
that a lack of awareness about ESG metrics impedes SRI market
growth.
Gladish, & Méndez‐Rodríguez, 2014; Kocmanova & Simberova,
2012; Kocmanová & Šimberová, 2014). However, the uptake and
impact of these alternatives remain to be seen. The shortcomings of
7 | DISCUSSION AND CONCLUSION
ESG metrics mean that information might not accurately represent a
company's ESG performance, which in turn might mislead investors
SRI is an important vehicle for capital allocation in the effort to achieve
(Cheng et al., 2015). Consequently, investment analysts and academics
sustainable development goals (PRI, 2017). Investors recognize that
should exercise caution when using ESG metrics.
ESG is crucial for the practice of SRI (Avetisyan & Hockerts, 2017;
Friede, 2019). However, there is a lack of understanding of the impor-
6.2 | ESG metrics as an enabling factor for the SRI
market
tance of ESG metrics in the SRI literature. This review demonstrates
that SRI is conceptualized differently across two main paradigms: It
is a financial innovation born from ethical concerns about corporate
ESG metrics also serve as an enabling factor for the SRI market.
behavior. In other words, there are two sides to the SRI coin: ethical
Studies on SRI investor behavior, SRI development, and ESG metrics
and financial.
suggest that ESG metrics provide legitimacy, accelerate growth, and
The ethical paradigm views SRI as an instrument to pressure com-
build awareness for the SRI market. ESG metrics are an essential ele-
panies to change their policies and operate more ethically and sustain-
ment in establishing an SRI market.
ably. SRI advocates generally consider this to be SRI's ultimate goal.
An ESG metric is a tool to adapt and align the cognitive frameworks
A vital feature of this paradigm is the complex and multidisciplinary
of SRI stakeholders with the professional standards of the financial
context of SRI, which arises from the nature of ethics and sustainabil-
sector. ESG metrics render SRI understandable and scalable to the
ity. Investor behavior and SRI development themes mainly represent
broader financial community and help ensure the legitimacy of SRI as
this paradigm. A critical discussion in this paradigm concerns the best
an emerging financial market (Déjean, Gond, & Leca, 2004). As SRI
and most effective ways to achieve desired outcomes, considering
markets develop, legitimacy is maintained by ESG rating agencies col-
the vast heterogeneity of SRI mechanisms and the unique relationship
laboratively and politically engaging with other macro actors in the
among SRI market participants.
financial market (Giamporcaro & Gond, 2016). It is thus important to
The financial paradigm views SRI as new financial services offered
have insights into the role of ESG metrics in establishing SRI markets
to specific groups of investors and consequently assumes that SRI
to promote new markets, especially in emerging economies.
retains characteristics of traditional financial products. This assump-
The introduction of ESG metrics is also vital to accelerate the
tion is inherent in studies that emphasize the financial characteristics
growth of emerging SRI markets. Reviews of SRI market development
of SRI, such as returns, risks, and quantitative financial models. This
in different countries reveal that SRI portfolios have grown signifi-
paradigm is illustrated by extensive empirical studies on SRI perfor-
cantly after ESG metrics were introduced or ESG rating agencies were
mance. These studies have not yet come to a general consensus, and
established. For instance, Cullis et al. (1992) and Solomon, Solomon,
further analysis reveals that they tend to be conducted in similar, if
and Suto (2004) credit the 1983 establishment of the U.K.'s EIRIS as
not the same, contexts. For example, studies often use similar types
633
WIDYAWATI
and sources of data (e.g., mutual funds data from U.S. SIF or Eurosif),
and lack of consistency or convergence. A lack of transparency arises
similar methodologies (e.g., multifactor model), and focus on certain
because ESG data providers and rating agencies do not disclose suffi-
countries or regions (e.g., United States, United Kingdom, and Europe).
cient information about the processes and methodologies they use to
Nevertheless, there is little empirical knowledge about the most effec-
produce the metrics or the quality of the data used in the process.
tive way to apply SRI as a quantitative financial model and how this
Future research on this issue could examine rating agency disclosures,
application affects market equilibrium.
evaluate the level of transparency of different agencies, and subse-
This review identifies three key research themes and contributes
two related findings. First, SRI literature is dominated by studies of
quently investigate the impact of the lack of transparency on companies and investors.
SRI performance. This review indicates that far more SRI performance
Regarding the lack of consistency or convergence, studies reveal
studies have been published compared with other themes, in terms of
that different rating agencies may score the same company differently
both influential and recently published articles. The dominance of SRI
because of differences in data collection and methodologies. However,
performance studies is concerning because it suggests that academic
the lack of transparency means that there is not enough information to
discussion might be excessively fixated on output—that is, financial
thoroughly compare the substance and calculation processes of ESG
performance—and thus overlook SRI's ultimate goal, which is to
metrics from different rating agencies. Studies on this lack of conver-
change corporate behavior. One of the possible reasons for the
gence generally analyze aggregated ESG metrics, demonstrating that
dominance of SRI performance studies is the availability of data
composite ESG scores and specific environmental scores published
(Capelle‐Blancard & Monjon, 2012). Nevertheless, the heterogeneity
by several major rating agencies (KLD, Trucost, Asset4, and GES) do
of SRI practices is still not fully explored by SRI performance studies.
not converge. More studies are required to investigate whether this
For example, little work has been done on the financial impact of
lack of convergence exists in other settings. Future studies could also
shareholder activism. Another possible reason for the dominance of
investigate whether there is a lack of convergence in the social and
SRI performance studies is that academics are under increasing pres-
governance dimensions of ESG. Studies on different or larger sample
sure from financial markets to provide evidence on the financial impact
sets would also improve understanding of convergence issues. Future
of SRI practices. Studies on SRI development identify this as a short‐
studies could also capture the vast diversity of ESG metrics available
term paradigm problem; that is, a mismatch between the relatively
by including metrics from the relatively less studied rating agencies
short‐term views of financial markets and the supposedly long‐term
such as EIRIS, Vigeo, SAM, Innovest, and Sustainalytics. In addition,
view of ESG. ESG is viewed as a long‐term issue because changes in
more research on improving transparency and convergence while
a company's behavior take longer to manifest than changes in the per-
protecting the intellectual propriety of rating agencies are needed.
formance of its stocks.
The last finding regards the lack of understanding about the role of
Second, the dominance of SRI performance studies is exacerbated
ESG metrics as an enabling factor of SRI. The emergence of ESG met-
by the lack of integration between different research themes. SRI
rics is credited as one of the main factors that provide legitimacy for
studies tend to refer to other studies within the same research theme.
SRI markets, especially in their early stages of development. Subse-
This tendency is illustrated in the bibliographic map, which shows very
quently, as SRI markets develop, the establishment of ESG metrics is
few connections between studies in different research themes. One
often followed by accelerated growth in the number of transactions
possible reason for this is that the two different paradigms stem from
and investors. However, there is a lack of understanding about why
different fields and thus have different conversation circles including
and how this happens. Such an understanding is vital if a similar effect
different publication avenues. A researcher from one field might not
is to be achieved in emerging SRI markets in Asia and Africa. There is
be aware of the studies performed in another. Therefore, it is impor-
little research on this issue and what exists has been conducted in a
tant to have more avenues for researchers from different fields to
narrow context, such as a single country. Future studies that examine
meet and discuss their research to build holistic awareness and under-
how ESG metrics affect the dynamics of SRI markets are needed, as
standing of SRI.
are those that examine market players' perceptions. Insights into
Future studies on SRI should also attempt to connect the different
how the behavior and perception of investors and companies might
paradigms of SRI. Such studies should explore more questions about
change as a result of the emergence or modification of ESG metrics
the conceptual, theoretical, and behavioral issues of SRI, which are
would also be worth exploring.
more related to SRI's ultimate goal. Possible topics for future studies
The findings of this review contribute to the literature by present-
include the relationship between financial performance of SRI portfo-
ing a novel visualization tool to analyze the development of SRI
lios and changes in ESG practices of companies included in the portfo-
literature. This paper extends the findings of previous work by
lio, the assessment of SRI financial performance from the company
Capelle‐Blancard and Monjon (2012) by identifying three main
perspective, and the financial effect of shareholder activism initiatives.
research themes in the SRI literature and presenting visual evidence
Regarding ESG metrics, there is a strong argument that the quality
of the prevalent disconnection in the literature. This review also
and reliability of ESG metrics need to improve. The role of ESG metrics
support the findings of Friede (2019) by presenting new insights into
as a proxy of sustainability performance is highly prominent in empir-
the importance of ESG metrics, as demonstrated by their vital role as
ical studies in the SRI performance theme. However, there are two
a proxy for sustainability performance and an enabling factor of the
main measurement problems with ESG metrics: lack of transparency
SRI market. These findings, along with the future research
634
WIDYAWATI
opportunities identified, are intended to enhance the theoretical and
empirical understanding of SRI that is essential for the future development of SRI.
ACKN O WLE DGM EN TS
The earlier version of this review paper has been presented at the
2017 European Business Ethics Network (EBEN) Annual Conference.
The author would like to thank the anonymous reviewers of the conference for the valuable feedback. The author would also like to thank
Professor Tom Smith and Professor Martina Linnenluecke for their
continuous support as advisory team of the author's PhD program.
The author receives financial support for the PhD from Indonesia
Endowment Fund for Education Scholarship (LPDP RI) under a doctoral degree scholarship. This paper is part of the author's PhD thesis.
CONFLICT OF INTE REST
The author declares that she has no conflict of interest.
ENDNOTES
1
U.S. SIF: The Forum for Sustainable and Responsible Investment, previously known as U.S. Social Investment Forum, is a U.S.‐based
membership association that act as the non‐profit hub for the SRI in the
United States.Eurosif is the leading association for the promotion and
advancement of SRI in Europe.
OR CI D
Luluk Widyawati
https://orcid.org/0000-0001-5626-0627
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How to cite this article: Widyawati L. A systematic literature
review of socially responsible investment and environmental
social governance metrics. Bus Strat Env. 2020;29:619–637.
https://doi.org/10.1002/bse.2393