Ethical investment has become a popular topic in the financial services industry, particularly in the United States, with 13% of investment dollars committed to such funds. This trend is also evident in the UK and Australia, where investment patterns show an increasing trend of funds being placed in ethical funds. Ethical investment involves integrating personal values, social consideration, and economic factors into investment decisions. While financial returns are important, ethical concerns are also considered. The increasing body of literature on ethical investment aims to further advance our understanding by examining the motives and actions of individual and institutional investors, discussing processes associated with ethical investment, assessing its impact on organizational behavior, and evaluating outcomes for special interest groups.

Research indicates that people invest in both socially responsible and conventional funds, with the motivations of ethical investors being complex. Ethical investors spread their funds across various risk-return profiles, potentially attracting both ethical and conventional investors. Some investors are committed to their socially responsible investments, even if they perform poorly or are ethically ineffective. This motivation may be to "feel good" or promote social change, even if it means receiving a slightly lower financial return than conventional investors. Gender and education play a role in explaining the growth of socially responsible investment, with women, young, and highly educated individuals being more likely to invest in such funds in Australia. However, more needs to be known about investor psychology in the context of socially responsible investment, and the marketing of financial services funds should not discount the needs and desires of socially responsible investors.

Ethical investment involves developing mechanisms to inform investors about organizations' involvement in activities that are seen as concerning or attractive in ethical terms. This process is integral to the development of social screens, which exclude or include companies from investment portfolios based on social and environmental criteria. There are two major ways to establish whether an investment is ethical: applying a negative screen, where certain businesses are avoided due to their potential harm to human health, and applying a positive screen, where firms identified as engaging in socially responsible practices are seen as more attractive investment options. However, precise data on the proportion of ethically screened investments is difficult to establish due to the lack of consensus on how to define ethical investments. Some fund managers favor a best-in-class or best-in-industry approach, where membership of an ostensibly "bad" industry does not automatically disqualify a company from investment. The availability and accuracy of company information is a crucial mechanism in the ethical investment process.

Hummels and Timmer's paper questions the provision of social, ethical, and environmental (SEE) information by multinationals like Nike, BP, and Monsanto. However, there are signs that shareholder engagement might be changing in contemporary organizations. Investor relations managers are becoming more sophisticated, and companies are acknowledging the need for improved disclosure and reporting on social and environmental performance. Transparency and disclosure are important considerations at both the company and fund level, as investors need to carefully examine prospectuses to ensure fund performance and ethical guidelines meet their needs. Ethical or socially responsible funds are not always forthcoming about which companies and why are included in their portfolios. Clear reporting procedures about fund managers' practices are crucial to provide investors with more confidence in investing in industries and companies consistent with their social priorities.

Ethical investment is a complex process that involves identifying better-managed businesses and assessing their social screening. However, some argue that imposing a zero tolerance level of unethical practices could be unworkable, especially for multinational firms with a wide reach. The issue of primary and secondary involvement is also a concern, as potential investors may be less concerned with investing in certain sectors. Some funds establish a maximum threshold figure to exclude certain companies, but this is subjective and not uniformly applied across funds. Positive screens, such as recognizing diversity within an organization, are subject to variability, and the operationalization of these behaviors is also a concern. Thus, ethical investment should be considered as a process rather than a set of specific aims.

Ethical investment is a contentious issue, with some arguing that it provides returns at least no worse than standard or conventional investing. This is due to the adoption of social screening practices, which can act as a positive signal to investors. Ethical firms also operate with longer time horizons than conventional investments, which may lead to better returns. However, there are also arguments that ethical investment will not reward investors, as it may attract a financial penalty and lead to lower returns than other forms of investment. This perspective can be summarized as a "doing poorly by doing good" argument. In the UK, ethical funds outperformed non-ethical funds from 1986-1993.

Market segmentation in consumer products involves firms competing for advantage by focusing on various dimensions such as price, quality, reputation, packaging, availability, and social responsibility. However, this segmentation strategy is not well accepted in capital market theory, as conventional portfolio theory assumes investors focus on expected risk and expected return. Ethical or socially responsible investment portfolios are less diversified, resulting in higher exposure to risk. Traditional investors can still benefit from diversification by including ethical funds in their portfolio strategy. However, ethical funds may attract higher transaction costs and management fees due to their small size and the need for specialized information data. Ethical fund managers also invest considerable time and effort in assessing and reassessing a firm's social performance, which may increase operating costs. Some critics argue that the recent good performance of ethical funds is an artifact of the types of companies invested in.

Ethical or socially responsible investing can influence corporate behavior, but more needs to be known about why such changes occur. Hirschman's work suggests that investors can respond to ethical lapses through "exit" and "voice" strategies. The sharemarket embodies the "exit" strategy, where investors withdraw their money from firms to avoid unethical activities. However, not all socially responsible funds exclude gambling. Firms whose share prices are sensitive to changing investor preferences are more responsive to ethical investors. The "voice" strategy, promoting shareholder activism, seeks to change firm behavior through lobbying and re-wording motions and resolutions. Institutional investors tend to be more responsive to investor voice on social issues, but it has costs associated with time.

Ethical investment is a form of institutional investment that pressures firms to either avoid certain behaviors or continue certain practices. However, this approach overlooks the impact of financial markets on the value of ethically invested funds and the potential for arbitrage and pairs trading. Ethical investment funds may focus on long-term earnings, but the pressure for consistent returns may encourage corporate strategies that maximize short-term share price at the expense of social, environmental, and ethical goals. This could lead to corporate practices like downsizing and underinvestment in research and development, which ethical investment funds aim to prevent.

The literature on institutional investors and firm strategy raises questions about the impact of ethical investment on firm performance. While increased levels of institutional investment may lead to a shift in strategic orientation towards short-term share price maximization, managers have more freedom in the face of investor pressure. Useem (1993) suggests that managers in US firms have adopted practices to blunt the impact of investor pressure, encouraging investment from different types of shareholders. However, institutions may have more potential influence over corporate strategy and firm behavior, and ethical investors may face more challenges due to their minority status in firms. The impact of ethical investment on firm behavior is indeterminant, and it is essential to move beyond macro-level studies to ameso-level analysis, focusing on factors at the firm level that mediate investor pressure and may prevent ethical investment from achieving its aims.

This special issue of articles explores the impact of ethical investment on corporate behavior, focusing on the influence of capital markets and shareholder activism. Two papers by Guay et al. and Marens discuss how non-governmental organizations can effectively employ shareholder activism and the decade of financial activism of US trade unions. Emerging developments, such as Total Social Impact (TSI) ratings, aim to enhance the impact of ethical investment on corporate and societal behavior. The more comprehensive measures for key stakeholders, the more effective socially responsible investment will be.

Ethical investment has experienced growth, but there are still challenges to address. The field is often loosely defined, with environmental issues being a primary focus. However, there may be areas like arts and cultural industries that are not considered legitimate for socially responsible investment. The lack of consensus on investor concerns and lack of transparency contribute to this issue. Ethical investment often implies altruism and self-sacrifice, but it may also lack explicit ethical awareness. It is crucial to screen ethical investment movements to ensure they are deemed ethical, as only when ethically screened can they be considered ethical.

This paper provides an overview of ethical investment debates, highlighting the complexity of issues such as socially responsible investors' motives, screening processes, financial returns, and corporate behavior links. It suggests treating ethical investment as a process, examining connections and disjunctures. The collection of papers offers new insights into the decision-making process and outcomes, showcasing the breadth of research and diverse perspectives on the topic.

Q.1) Review the article by demonstrating that you have grasped the central idea of the article.