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In order to integrate the sustainability dimension, the most important insights related to corporate governance systems from stakeholder and sustainable development theories (Freeman, 1984; Gladwin et al. , 1995; Bansal & Roth, 2000). Corporate Social Responsibility and Financial Performance Socially responsible investments (SRI) are a combination of investors’ financial goals and their concerns about the social, environmental, and ethical (SEE) issues (UK Social Investment Forum, 2005).

SRI is considered a tedious investment process that takes into consideration the social, environmental, and ethical outcomes that may be borne out for the selection, retention and implementation of investments, both positive and negative, within the setting of stringent financial analysis (Mansley, 2000). The main issue that must be addressed with SRI investments is the return of investment; that is, the profitability of those investment strategies. Is the performance of SRI strategies as effective or as ineffective as conventional investment strategies?


One way of assessing this is to evaluate the performance of SRI investment strategies in light of what is called “socially responsible companies”. These are organizations which incorporate social and environmental considerations into their international strategic decision-making policies and best practices (Mansley, 2000). A socially responsible company places the interests of third parties or shareholders on equal footing with social, community and environmental interests of third parties or shareholders engaged in its activities.

Through the prudent control of its activities with stakeholders, it aims at a three-prong economic, social and environmental performance through which it is able to attain its overall goal of sustainable development. This is precisely the reason why socially responsible companies are also tagged sustainable companies (Mansley, 2000). As socially responsible investors conventionally invest in these socially responsible companies, the performance of socially responsible companies is a critical element in their performance. In fact, numerous past researches have concentrated on this topic, but have yielded somewhat differing results.

Orlitzky, Schmidt, & Reynes, S. L. (2003) have conducted a meta-analysis of 52 studies of corporate financial performance and corporate financial performance. The results lend support to the idea that socially responsible investing pays off. The relationship has been found to be strongest for the social dimension within corporate social performance. When isolating the environmental responsibility, the same conclusion is arrived at, although to a lesser degree. Dilitz (1995) and Sauer (1997) assert that there are no statistically significant differences between socially responsible investments and conventional investments.

Dilitz investigated the alphas and abnormal returns for 28 socially screened equity portfolios in order to arrive at the conclusion. There was no adjustment for style factors. Sauer studied the Domini Social Index performance by risk- adjusted, and has yielded a similar conclusion. Bauer, Koedjik & Otten (2002) investigated the performance of global ethical mutual funds, corrected for investment style. The results suggest no significant difference in risk-adjusted returns between ethical and conventional funds for the period 1990-2001.

Kneader, Gray, Power, & Sinclair (2001) studies the financial performance of 40 worldwide ethical funds and 40 international non-ethical funds against their benchmark. The results suggest that there are no statistically significant differences between their performances. They found that ethical funds have lower risk in comparison with their non-ethical counterparts. The cross-sectional analysis suggests that the risk-adjusted returns are not significantly related to the size, age or ethical status of the fund.

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