Jonas Nilsson_final Paper

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Beyond the financial aspects of investing: Examining the decision

making environment of socially responsible mutual fund investors*

[Working title]

Authors: Jonas Nilsson1and Sebastian Siegl2

1Ume School of Business at Ume UniversitySE - 90187 Ume, Sweden

2School of Business and Economics, Abo Akademi,Tuomiokirkontori 3, FI-20500 Turku, Finland

Biographical information

Jonas Nilsson is a researcher at Ume School of Business at Ume University. Hisresearch interest includes consumer behavior, consumer investment behavior andsocially responsible investment. He was awarded his PhD in 2010 for a thesisinvestigating the decision making of retail socially responsible mutual fund investors.

Sebastian Siegl is a researcher at Abo Akademi, School of Business and Economics,.His research interest includes ESG investments with a particular emphasis on theregulatory aspects of the investments such as fiduciary obligations. He defended his

thesis Liability for mutual fund managers especially about ethical mutual fundmanagement in 2011

Acknowledgements

The authors gratefully acknowledge financial support from the Swedish Foundationfor Strategic Environmental Research (Mistra) through the Sustainable InvestmentResearch Platform (SIRP).

*

This paper is based on Jonas Nilssons PhD thesis "Consumer Decision Making in a ComplexEnvironment" (2010) and Sebastian Siegls PhD thesis Liability for mutual fund managers especially about ethical mutual fund management

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Beyond the financial aspect of investing: Examining the decision

making environment of socially responsible mutual fund investors[Working title]

Abstract

One of the more significant trends in the retail finance sector in the last few years hasbeen the introduction and growth of different types of socially responsible investment(SRI) products targeted towards private investors. These days, a vast number of SRImutual funds exist and previous research has shown that many consumers areinterested in including their social concern into their investment behavior. However,the SRI funds available to consumers differ drastically in both the issues they targetand the manner in which they incorporate these into the investment process. In thisway, consumers that want to make a good SRI decision do not only have to evaluatethe funds financial characteristics. Instead, an appropriate socially responsible (SR)investment decision involves evaluating both the financial and the socially responsiblecharacteristics of the fund. In critically examining the decision making environmentof SRI mutual funds, this article shows that this is not an easy task for consumers.Instead, the examination reveals an environment where complex information,credence attributes, limited transparency and an uncertain future exist in both thefinancial and the socially responsible characteristics of SRI funds. However, whileconsumers have some aid from legislators through the regulations that dictateinformation requirements for the financial aspects of the fund, few rules exist for how

mutual fund providers should present information regarding the socially responsiblecharacteristics of the fund. In all, this leaves consumers that want to make a goodsocially responsible investment decision in an especially vulnerable position. In orderto improve their situation, the underpinnings for a new information disclosureframework for SRI funds are presented.

Key Words: Socially responsible investment, retail investors, decision making,financial regulation

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1. IntroductionThe last few decades has brought a major change in the way consumers relate to thestock-market. From being something that only certain well-to-do segments wouldengage in, investing in the stocks or mutual funds is now something that concerns a

broad segment of society (e.g. Bogle, 2005). On this note, the Investment Company

Institute fact book report that as much as 45% of US households own mutual funds in2009 compared to less than 5% in 1980 (ICI, 2009). Moreover, the introduction of

privately managed pension plans in many western countries have put citizens incontrol of their own pension (e.g. Bateman, Louviere, Thorp, Islam, & Satchell, 2010;Morrin, Broniarczyk, Inman, & Broussard, 2008). In many ways, these two changesare indicative of an ongoing trend where consumers go from being 'savers', wheremoney is primarily allocated to a bank account, to becoming 'investors', where mutualfunds and stocks is a natural part of the consumers' assets (e.g. Krumsiek, 1997).

As consumer interest increasingly has turned to investing, the market for investmentproducts has experienced considerable growth. These days a wide selection of mutualfunds exist, giving consumers the choice of different regions, industries, andinvestment styles (Bogle, 2005). In this process of overall expansion and growth,there is one new addition to the marketplace that has generated much attention and

public debate: that of socially responsible investment (SRI) mutual funds. The sourceof interest in SRI from both consumers and media arguably revolve around the factthat this type of mutual fund actively incorporate non-financial consideration forenvironmental, social, and governance (ESG) issues into the investment process.Thus, through SRI it has become possible for consumers to do something that has

been an option in "traditional" consumer industries for decades; incorporateenvironmental and social concern into ones purchasing behavior. This is also

something that many consumers have opted to do as industry sources report that 1$out of every 11$ now is invested following some form of SRI guidelines (SIF, 2007).On the retail side, these numbers are not surprising as consumers in America nowhave more than 200 SRI mutual funds to choose from (SIF, 2007).

In actively considering ESG criteria it is safe to say that SRI is somewhat of adifferent, and in some circles even controversial, investment product. While mostother investment products have one single objective, solely focused on generating ashigh (risk adjusted) return as possible, SRI separates itself by having two overallobjectives with the investment process (Michelson, Wailes, van der Lann, & Frost,2004; Sparkes & Cowton, 2004; Sullivan & Mackenzie, 2006). Just like regular

investment products, one of these objectives is achieving high financial return at areasonable level of risk. However, on top of this, SRI also has the outspoken objectiveof achieving some sort of social or environmental change (Knoll, 2002; Krumsiek,1997; Schepers & Sethi, 2003). This duality of the objectives of SRI can be easilydistinguished in the SRI literature where the investment process has been described as"the construction of equity portfolios whose investment objectives combine social,ecological, and financial goals" (Sparkes, 2002 p. 26-27). This is in line with Taylorand Donalds (2007 p.5) observation that as often practiced [...] SRI serves a dual

purpose: financial and social.. Thus, in the eyes of SRI proponents, the investmentprocess does not only serve one (financial) goal. Instead, SRI represent a dual processwhere achieving some social, ethical, or environmental objective is an integral part.

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From the viewpoint of the consumer that wants to include social concern in theirinvestment behavior, this presence of dual goals somewhat changes the idea of what asuccessful investment decision is. First, and along the same lines as in "regular"investing, the individual SR-investor can make a successful financial investmentdecision (e.g. Beal, Goyen, & Phillips, 2005; Hummels & Timmer, 2004; Michelson,

et al., 2004). Success in this manner implies choosing a fund that generates a goodlevel of financial return at a reasonable level of risk. However, on top of this, the SR-investor can also make a successful socially responsible investment decision, whichimplies something completely different. Here, a successful investment decision could

be defined as one that has positive social, ethical, and environmental consequences(e.g. Michelson, et al., 2004; Schepers & Sethi, 2003). Moreover, a consumer that hasinvested in SRI could consider the investment as a success if it only is allocated tocompanies that follow international labor standards, do not pollute the environment,or have ethical marketing standards etc. (e.g. Dillenburg, Greene, & Erekson, 2003;Hummels & Timmer, 2004; Schwartz, 2003; Statman, 2008).

However, choosing a SRI profiled mutual fund that could be considered appropriatefrom both a financial and socially responsible perspective may not always be an easytask for consumers. In fact, a look at the marketplace indicates the complete oppositeas several problems with how SRI funds are presented to retail investors have beenidentified. For example:

1. There is no objective standard as to what SRI is and how it should be practiced(Sandberg, 2009; Dunfee, 2003). Thus, in order to make an educated decision,consumers have to evaluate the SRI strategy of each individual fund.

2. As there is no objective standard, some funds use SRI screeningmethodologies that allow almost all publicly-held corporations. As aconsequence, many SRI portfolios do not differ much from funds that do notemploy SRI criteria (e.g. Hawken, 2004). Consumers may thus invest in anSRI fund, but actually get something similar to an index fund or an SRI fundwhere the realization of the social goal differs from the expectations of theconsumer.

3. However, for consumers it may not be easy to see this as there is a lack oftransparency and accountability in the screening process (e.g. Michelson,2004; Schwartz, 2003). Many consumers of SRI funds would therefore

probably be surprised to learn that they were invested in BP at the time of theGulf of Mexico oil leak (e.g. Laise, 2010).

4. Furthermore, the language used to describe SRI mutual funds is vague andleads to misperceptions. For example, some SRI funds do not invest incorporations that produce day after pills or other pharmaceuticals related to

birth control. These so called pro life funds have a completely differentinterpretation of the ethical dimension of the fund from SRI mutual fundsthat are pro choice. (EIRIS, 2008)

5. Given the vague terminology and lack of transparency, the fact that fundnames have been found to be deceptive, not reflecting the actual investmentstrategy of the fund is an issue for consumers (Hawken, 2004). For example asurvey on 185 environmental funds in the UK market found that 37 of thegreen funds surveyed had a larger estimated negative environmental impactthan the average of the broad UK Index. (Trucost, 2007)

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6. Finally, these issues are not surprising as the SRI-side of the mutual fundindustry is hardly regulated, making it something of a white spot. SRI hasinstead been argued to be a means of product differentiation (Cronin, 2004)

Considering these six issues and what they say about the overall current state of the

market for SRI mutual funds, one can wonder where this leaves the consumer thatwant to make educated SR-investment decisions. Much research has highlighted thatconsumers encounter several problems such as a vast amount of information andhighly difficult and complex products, when making regular investments in theretail or retirement context (e.g. Kozup, Howlett, & Pagano, 2008; Lee & Cho, 2005;Lichtenstein, Kaufmann, & Bhagat, 1999). However, given the SRI specific problems

presented above, the question becomes what happens to the decision makingenvironment when another, non-financial, aspect gets added onto these problems? Thequestion seems to be utterly important since, at least, some consumers (investors) basetheir investment decisions at least in part on the perceived ethicalness or social meritsof an investment (e.g. Hancock, 2005; Derwall, Koedijk and Ter Horst, 2011).

Against the background of the issues presented above, the purpose of this article is tocritically examine and analyze the decision making environment for consumers whowant to invest in SRI profiled mutual funds. In addressing this issue, we start ouranalysis by describing the obstacles to appropriate decisions in three separate stagesof the decision making process. In our analysis, we show that the previously identifiedcharacteristics of mutual fund investment of a vast amount of complex information,the presence of an uncertain future, and the presence of intangible credence qualities,also exist in the socially responsible characteristics of the SRI mutual fund. Moreover,a review of the regulatory environment shows that while there are fairly strict rules asto how financial information should be presented to consumers, few rules exist thatemphasize how mutual fund companies should present information about the sociallyresponsible characteristics of the fund. Against the background of a difficult decisionmaking environment and few regulations, we argue that the SR-investor is in anespecially vulnerable position. In order to aid the SR-investor we see a need for newlegislation in this area and therefore conclude the paper with the underpinnings of anew disclosure framework for SRI- mutual funds.

The rest of the paper is structured as follows. First, a general introduction to SRI inthe retail sector is given. Thereafter, the paper examines both the pre- and post-

purchase decision making environment of retail SRI funds based in three previously

identified obstacles to making good investment decisions. After this we discuss theregulatory environment of retail SRI funds. Finally, the paper offer conclusions andintroduces the underpinnings for a new information disclosure framework for SRImutual funds.

2. Consumer demand for SRI funds: social and environmental issues

is becoming more importantIn actively incorporating socially responsible dimension in the investment process,SRI profiled mutual funds are quite unique in an industry otherwise so focused onfinancial considerations. Although this inclusion of a non-utilitarian sociallyresponsible dimension into mutual funds is not a new phenomenon in the market for

investment services, it has historically been a marginal occurrence often revolvingaround religious beleifs. However, for consumers, there is nothing new to consider

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social and environmental factors when making purchasing decisions. In the consumerbehavior literature, these non-utilitarian factors are often considered to be a part of theconsumer decision making process (e.g. Bhattacharya & Sen, 2004; Shaw & Shiu,2003). Both academic research as well as regular news media frequently report thatthere are segments of consumers that actively incorporate ESG factors when shopping

(e.g. Jansson, Marell, & Nordlund, 2009; Roberts, 1995) and that the increasing socialconcern among consumers has contributed to an increasing number of differentsocially responsible products and services being introduced in consumer markets(Crane, 2001; Mayo, 2005; Strong, 1996). Examples of products and services thatincorporate environmental and social factors are numerous. Fair trade, organic, andecohave all grown to become common terms for many consumers.

Against this background, it is no surprise that many consumers perceive social andenvironmental factors as important when choosing to invest in SRI. Since the Rosenet al. (1991) influential article in the Journal of Consumer Affairs, a large amount ofresearch has been produced that confirm the role of ESG issues in private investment

behavior. For example, Beal and Goyen (1998) who survey investors in a explicitlyenvironmentally friendly company in Australia found that environmental issues weremore important than financial to the investors. Although few articles attribute thatmuch importance to ESG issues, many studies show a considerable impact of attitudestoward the social performance of the company or fund on investment behavior. Forexample, in a cross-cultural study of SRI in five countries, Williams (2007) find that

people that are concerned about social issues as consumers also do so as investors.Moreover, other studies that focuses specifically on the interplay between financialreturn and social responsibility show that some investors seem willing to sacrificesome financial return for a good socially responsible investment strategy (Lewis &Mackenzie, 2000; Lewis & Webley, 1994).

3. Examining the decision making environment for SRI mutual fundsThe last section showed that there seems to be a genuine demand for SRI servicesamong consumers. This section goes on to examine the obstacles present in thedecision making environment to making good SR-investment decisions. The analysisis based in three stages of the decision making process for private investments that allare common research topics in the consumer behavior literature on investmentdecisions. First, we review the nature of the pre-purchase information available toconsumers. Thereafter, the problems associated with the uncertain future ofinvestment decisions are discussed. Finally, we focus on post-purchase evaluations

and the presence of credence attributes.

The nature of pre-purchase information: rich and complex

One of the most common themes in the literature on consumer investment decisions isthat of the information available to consumers (Lee & Cho, 2005; Kozup et al., 2008).In many ways, at least two separate observations can be singled out from this body ofliterature. First, consumers face a vast amount of information. Second, thisinformation is usually highly complexin nature.

Considering first the sheer amount of information, consumers that want to invest in amutual fund have access to multiple sources when researching possible investment

decisions (e.g. Capon, Fitzsimons, & Prince, 1996). Financial advisors, financialnews, and fund fact sheets may all be sources used by the consumer (e.g. Lee & Cho,

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2005). However, on top of these, the last decade has brought a new source consistingof an almost infinite amount of information; the Internet (Wood & Zaichkowsky,2004). Using the internet, consumers have access to a never-ending stream offinancial information. Moreover, the growth of websites such as Morningstar.com,that actively collect and present financial information to consumers, has given the

consumer new tools to compare mutual funds to each other.

However, despite the fact that the growth of Morningstar.com and other financialwebsites could be considered to be good for consumers through the information thatthey provide, they also function as an addition to the already information intensedecision making environment. The information present on the websites go way

beyond the fundamental fund characteristics such as previous return, risk level and feecharged. Faced with characteristics such as large and small cap, industry focus,manager tenure, and total assets, consumers arguably have more information toconsider than before the introduction of Morningstar.com and similar websites.

Consumers thus face a vast amount of information. Due to human limitations ininformation processing, this may prove a problem in itself. However, previousresearch also point out that this information is often complex in nature (e.g. Devlin,2001; Kozup, et al., 2008; Martenson, 2008). This complex financial terminologyoften makes it difficult for laymen investors to properly understand the informationthat is available. One example of this is that consumers are often encouraged to searchfor mutual funds that have shown a good past return (e.g. Lichtenstein, et al., 1999).However, in order to properly evaluate this, several aspects must be considered. Forexample, the risk taken on by the mutual fund as well as the performance of the

benchmark index are examples of relevant factors that allow consumers to evaluatethe mutual funds performance in an appropriate manner. Here, expert investors useterms likestandard deviationto estimate risk and alphato assess return compared to a

benchmark index. However, given the poor knowledge among consumers aboutinvestments (Capon et al., 1996; Devlin, 2003), it is questionable whether non-expertinvestors would even understand this terminology at all. As an evaluation of previousreturn of a fund becomes shallow without it, this is an obstacle in making appropriateinvestment decisions.

The pre-purchase stage of the investment decision is thus characterized by acombination of both a vast amount and highly complex information. For a consumerthat want to invest in a mutual fund, the combination of the sheer amount of

information and the complexity of this information leaves the consumer in a difficultsituation when searching for different investment options.

However, while the pre-purchase search is difficult in regular investments, consumersthat wish to make a good financial and socially responsible investment decision inmany ways face an even more difficult search phase. On top of the already difficultfinancial fund characteristics, the SRI investor must also account for a number ofsocially responsible characteristics of the mutual fund (e.g. Nilsson et al., 2010). AsSRI funds differ drastically in their focus and the way they work towards these issues,the investor must decide what issues they support and what tools they want the fundto use to achieve an environmental and social impact. However, just like with the

financial characteristics, there is a vast amount of complex information to consider.

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With regard to deciding what issues to support, SRI funds focus on a broad spectrumof issues. One of the websites available to consumers, the US Social InvestmentForum (USSIF.com), specifies fourteen separate issues within four overall categoriesthat SRI funds work with. Here, environmental issues such as climate change andclean tech are mixed with animal testing and board issues such as executive

compensation. Moreover, production of harmful goods is mixed with attention tohuman rights and gender issues. In short, the SRI market as a whole deals with a greatrange of social, environmental and governance issues. However, given the broadnature of the issues that can be addressed by the different funds, it is no surprise thatthe available SRI funds vary considerably in the issues they support. Finding the fundthat address the right mix of issues could therefore be a task in itself.

However, SRI funds do not only differ in the issues they address. They also differ inthe way that they address them. One of the first aspects that a new social investormust decide is what strategies they want their fund to use. Here, the literature on SRIoutlines several different strategies that SRI mutual funds can use to impact the

companies that they invest in (Sparkes, 2002). The most basic strategy is that ofnegativescreening where the worst sin companies are excluded from the portfolio.However, several strategies also allow companies in sin industries in the investment

portfolio. For example, the second strategy of positive screening, includes bestcompanies in each class. Finally, the SRI fund may also use engagementas a tool forachieving social change. Here, the SRI mutual fund use dialogue as a way to employits influence as an owner to attempt to change certain ESG standards in the companytowards the better.

In many ways, the choice between engagement and negative and positive screeningmay have a large impact on the actual portfolio in which the consumer invests. Forexample, many consumers of SRI funds may be surprised to learn that their SRI fundactually invests in big oil companies and other industries that typically are notassociated with social responsibility. This difference in investment strategies becameclear to many investors at the time of the Gulf of Mexico oil spill when severalsocially responsible funds were invested in BP (Laise, 2010). However, investment in

big energy companies is perfectly all right if the fund uses a positive screening orengagement strategy. In this way it is not only important for socially concernedinvestors to focus on the right issues. It is also important to invest in a fund that usethe tools for social change that match the preferences of the investor.

In all, the fact that SRI funds differ drastically in both the issues they address and themanner in which they address them, highlight the lack of standardization of SRI funds(e.g. Dunfee, 2003; Sandberg, Juavle, Hedesstrm, & Hamilton, 2009). Forconsumers who search for information on SRI funds, the fact is that the term SRIhas little meaning. Instead, the SRI term means different things in each individualfund. Compared to other consumer products that are positioned as sociallyresponsible, this lack of standardization is somewhat unique. The normal practice isinstead for an independent organization to evaluate and decide whether a specific

product lives up to a certain pre-defined socially responsible standard. In this manner,the industry can, through the use of different labeling schemes (i.e. fair trade, organicetc. See for example Micheletti, 2003 p. 111), communicate the socially responsible

nature of the product to the consumer. With these labeling schemes, the consumerdoes not have to evaluate different pro-social claims by themselves. Instead, it is

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possible to choose the eco-, fair trade, or organic product by merely looking at a label.In the market for SRI, on the other hand, consumers have to search for information onhow each individual fund practices its specific SRI strategy.

In sum, consumers that want to make an appropriate SRI mutual fund investment

decision face an even more difficult situation in their pre-purchase search thanregular investors. In many ways, the dual nature of SR-investment means that SR-investors have additional information to take in (Hummels & Timmer, 2004). Thisadditional information is, just like the financial information, vast in amount and highin complexity. However, given the fact that there is little standardization in theindustry and that no labeling schemes exist, investors are forced to attempt to take inthe information. Given that consumers are limited in their problem solving ability(e.g. Bettman, 1998), this could represent a major obstacle to making appropriate SRIinvestment decisions.

The nature of the decision: an uncertain future

The previous section discussed the notion present in previous research that consumerpre-purchase information search is challenging to consumers as there is an abundanceof information that is highly complex in nature. However, the discussion also showedthat for a consumer that wishes to make an educated financial and socially responsibledecision, the pre-purchase search is even more challenging. However, another issue,also discussed in previous research, is that even if the consumer have done theirhomework and performed a thorough information search, the very nature ofinvestment means that there is an uncertain future that the consumer must deal with.

In many ways, the uncertain future is tied into the process oriented nature of mutualfund investment. In essence, when consumers choose to invest in a mutual fund, they

pay a mutual fund provider to analyze the market and, based on this analysis, buy andsell different financial instruments (e.g. Lichtenstein, et al., 1999). In the case of SRI

profiled mutual funds, investors also pay for the mutual fund provider to incorporatesocially responsible criteria in this investment process and thus perform an additional

process in the form of an analysis and selection of different investment objects basedon ESG characteristics (Cowton, 1999; Schepers & Sethi, 2003). For the consumer,these processes start at the time of the investment and continue as long as the investorstay in the fund.

The fact that consumers purchase a process oriented service means that consumers

often face problems with estimating the potential outcome of their choices (e.g.Gibbs, 1998; Goldstein, Johnson, & Sharpe, 2008). Several internal factors (such asskill of the manager) and external factors (such as general economic environment)will have an impact on the result of the investment. While consumers often have

problems estimating outcomes in complex services contexts, the consequences of apoor decision in the investment context is likely to be detrimental for the consumer,possibly resulting in a lower future standard of living. Few other services that theconsumer encounters carry such consequences with it.

However, in many ways, a consumer that wishes to make a good socially responsibleand financial investment decision face similar issues with estimating the outcomes of

one's SRI investment decision. For example, if the SRI profiled mutual fund workswith engaging investment objects, it is only after (and possibly during) the investment

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time period that the results of this process become clear. The impact of any particularstrategy or fund is unknown at the time of investment.

Moreover, in the context of SRI mutual funds, it may even be more difficult toestimate the social and environmental outcomes than the financial of the investment

decision. For example, with regard to the financial characteristics of a fund, legalobligations stipulate that each mutual fund must clearly state the funds investmentobjective and how this is supposed to be realized by in the fund prospectus state whatasset classes, markets, sectors and regions that the fund will operate in. Hence amutual fund that has declared it invests in blue chip US corporations can not abandonthis strategy and invest in Chinese or Russian small cap just because the fund managerfancy the investment opportunities in these markets more. Hence, based on the fundsinvestment framework it should be possible to make an estimate on the expectedreturn and potential losses or gains in the fund at least on an intuitive level where afund investing only in T-bills is a much safer alternative than an emerging marketsmall cap fund.

Thus, the financial aspects of the fund are regulated in a way that allow for theconsumer to estimate the future actions of the fund. However, little or no regulationexist that give the investor the same possibilities with regard to the information aboutthe socially responsible characteristics of the fund. Often the descriptions about whatthe fund will do are very shallow and broad. Taking the prospectus of Domini SocialEquity Fund as an example the investor can read that (p.8, emphasis added):

Domini evaluates the Funds potential investments against itssocial and environmental standards based on the businesses in

which they engage, as well as on the quality of their relations with

key stakeholders, including communities, customers, ecosystems,

employees, investors, and suppliers. For additional information

about the standards Domini uses to evaluate potential investments

and the securities held by the Fund, and certain limitations on

investments, please see Socially Responsible Investing. Domini

reserves the right to alter its social and environmental standards or

the application of those standards, or to add new standards, at any

time without shareholder approval.

Here, the contrast to the highly regulated financial aspects of the fund becomes clear.

Not only is it unclear what social and environmental standards mean. Domini can atall times change these standards, making them unstable over time. Thus, as opposedto the financial characteristics of an SRI mutual fund, there is no ex ante informationstandard for the consumer to lean on in order to make a qualified judgment about theSRI characteristics of the fund and it is more up to the fund to provide the content ofthe information.

In all, the potential outcomes of both the financial and socially responsible processesthat SRI funds perform are difficult to estimate for the consumer at the time of theinvestment. The uncertain future means that consumers cannot know exactly what toexpect at the end of the investment time period. However, given the lack of

regulations and specifications regarding how mutual funds can incorporate social

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responsibility into the investment process, this may be even more of a problem withthe socially responsible characteristics than in the financial characteristics.

Evaluating SRI funds after the purchase: credence qualities

The last two sections have shown that consumer that desire to invest in socially

responsible mutual funds face a difficult task in both collecting useful information aswell as estimating the possible consequences of their decisions prior to purchase.However, previous research that focus on regular investment behavior also showthat consumers encounter problems after the decision is made. For consumers,evaluating whether ones financial decisions were appropriate is often a difficult task(e.g. Ennew & McKechnie, 1998). Just like in the pre-purchase stage, the dual natureof SRI means that consumers of SRI funds encounter an even tougher task inevaluating the mutual fund in a post purchase setting.

A number of factors underlie the general difficulty to evaluate the performance ofmutual funds and other more complex financial services. For example, as consumers

have little access to the daily events of the mutual fund, transparency is an issue. Inmany ways the mutual fund could be likened to a black box, where consumers seeinputs and outputs. However, what goes on inside the box often remains a mystery.This fact also makes it difficult for consumers to separate the internal processes of themutual fund with the general external environment. Although the consumer will seethe final outcome, pinpointing the cause of this outcome may not be easy. Forexample, during a recession, a mutual fund may very well show negative returns for along period. However, this fact, in itself, does not mean that the mutual fund has

performed a poor wealth management process. Instead, the mutual fund may verywell have performed better than the market as a whole. However, as it is difficult forconsumers to separate the internal process and external market factors, it is likely thatfew individual consumers would be pleased with the process, despite it being betterthan average.

This discussion highlights the credence oriented nature of mutual fund investment: itis often very difficult (if not impossible) to accurately evaluate the processes thattakes place in the mutual fund. Instead, as discussed in previous literature, consumershave to rely of cues based in the past. One such cue, that is often regarded relevant forthe choice of mutual fund, is the past financial performance of the specific fund (e.g.Capon, et al., 1996; Feuerborn, 2001; Lichtenstein, et al., 1999; Schwartz, 2003). Theargument is that past performance is a signal of a well run mutual fund investment

process. However, even while there numerous performance indicators andmeasurements of how well a fund has performed in relation to its benchmark index orhow much of a funds performance that is a result of risk taking vis--vis managerskills its is questionable that consumers possess knowledge of for example Jensensalpha or Sharpe ratios.

However, just like in the other stages of the decision making process, a consumer thatalso want to evaluate whether their SRI mutual fund has performed well with regardto the socially responsible characteristics of the fund face an even tougher evaluation.In many ways, the 'black box' analogy is also valid with regard to the social

performance of a SRI mutual. There is little transparency and few processes that are

actually visible to consumers. However, while the financial outcomes of a mutual

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fund can be displayed in terms of figures and graphs, the social and environmentaloutcomes are virtually impossible to estimate.

Starting with the transparency issue, consumers often receive only a limited insightinto the screening and engagement process within the SRI mutual fund (Michelson, et

al., 2004; Schwartz, 2003; Tippet, 2001). Moreover, the interactions between the SRImutual fund and its investment objects are often intangible, difficult to grasp, andmultifaceted (e.g. Cowton, 1999). For providers of SRI mutual funds, this makes itdifficult to describe to consumers how the mutual fund actually integrates the sociallyresponsible dimension in the investment process in an understandable manner. Forexample, one study showed that as much as 330 different criteria are used to evaluatethe social performance of companies (Lnnroth, Beloe & Linghede, 2001). This factmakes even the more tangible and static parts of SRI, such as negative screening,difficult to communicate to consumers. Moreover, with the more intangible andmultifaceted interactions associated with engagement and dialogue between mutualfund and investment objects, this problem becomes even more pressing. In many

ways, it is almost impossible for consumers of SRI mutual funds to see and take partin this dialogue based process, which they actually pay the provider to perform. Ontop of this, the issues discussed between company and mutual fund are also often of asensitive nature. Thus, neither the mutual fund nor the investment object may be keenon publishing the content of their interaction, even if it were possible to do so.

On top of this is the previously discussed fact that there is a lack of processstandardization as to how SRI profiled mutual funds should incorporate the sociallyresponsible dimension into the investment process (Michelson, et al., 2004; Sandberg,et al., 2009; Schepers & Sethi, 2003). Because of this, and the lack of third partyevaluations of the SRI market, consumers largely have to perform an analysis of the

processes associated with social responsibility themselves. However, as the process,due to transparency and complexity issues is largely based on credence qualities, suchan evaluation is a tough challenge for consumers.

In sum, both the financial and the socially responsible components of SRI funds aredifficult to evaluate also in a post-purchase stage. Both processes take place within theblack box of the mutual fund making both high in credence qualities. However,while the financial performance of a mutual fund might be hard to evaluate for aconsumer there is a more or less clear standard within this area. The performancemeasurements mentioned above and the Morningstar five star rating system (with

performance measurements such as Sharpe ratios) are examples of standardized waysof measuring the performance and easily available information. It is problematic thatconsumers are not familiar with what these concepts mean but the information can befound and an intuitive understanding of for example the Sharpe ratio is not overlycomplicated to achieve in a fund prospectus or on website such asMorningstar.com.

The post-purchase information related to the social responsible characteristics of theSRI mutual fund is a different story altogether. Here, there is no standardized way ofmeasuring how well the SRI work that the fund has conducted has been. One cannotdeduct this work into a specific performance indicator (even if that is what most SRIrating agencies do) that is not highly normative or qualitative (disregarding

quantitative measurements of for example pollution). In the example with the Dominifund above the fund was supposed to evaluate the funds potential investments

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against its social and environmental standards based on the businesses in whichthey engage, as well as on the quality of their relations with key stakeholders,

including communities, customers, ecosystems, employees, investors, and suppliers.It is, perhaps, not an easy task to evaluate if all this has been achieved or what theoutput is supposed to be?

In all, this provides a tough environment for consumers of socially responsible mutualfunds. Not only do they have to deal with the problems evaluating the financial

performance of their fund. They also have to deal with the fact that it is a just asdifficult to evaluate the social and environmental performance of the mutual fund. Inan environment where few standardized measurements exist, this could be even amore difficult challenge for consumers.

A summary of the decision making environment of SRI profiled mutual funds

In all, the discussion above shows that the obstacles that consumers face in making

good financial investment decisions, as identified in previous research, is also presentwhen attempting to make good socially responsible investment decision. Just like forfinancial information, ESG information exist in a great amount and is often complexand difficult to understand. Just like in regular investments, an uncertain future is alsoa major characteristic of SRI as any positive social and environmental consequenceswill not surface for an extended time period. Finally, just like the financial dimension,the socially responsible dimension is high in credence attributes. The limitedtransparency, high level of intangibility, and the influence of external factors on thefinal outcome means that even the best educated and involved investors cannot fullyevaluate how the SRI strategies of the mutual fund. Thus, in short, all the aspects thatmake regular investments difficult is also present in the socially responsibledimension of SRI profiled mutual funds. A consumer that desire to make a goodfinancial anda good socially responsible decision thus face a tough task.

The natural follow up question to this conclusion is whether consumers that desire toinvest in SRI profiled mutual funds get any assistance from law and policymakers. Ingeneral, the investment industry is ruled by several regulations designed to aid privateinvestors. The question whether this is true also for ESG information is discussed inthe next section.

4. Examining the regulatory environment of SRI funds

Mutual funds are corporations or business trusts administered for the benefit of theirshareholders. It is the responsibility of the board of directors or in the case of a trust,trustees to ensure that the fund is managed in the best interests of the fund's investors(Gremillion, 2005; Freshfields Bruckhaus Deringer, 2005).

While there are different types of mutual funds with somewhat different regulationpending on what type of fund it is, mutual funds are subject to the InvestmentCompany Act of 1940. The Investment Company Act focuses on disclosures andinformation about investment objectives, investment company structure andoperations and imposes a number of requirements for mutual funds offered to thegeneral public such as:

- A declared investment objective13


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- A prospectus and statement of additional information to inform potentialinvestors of every relevant aspect of the mutual fund companys operation

- A daily net asset per share value (NAV) must be prepared- The mutual funds name must be consistent with its investment objective.

Historically, that has not always been the case and in 2001 the SEC issued a

rule, Section 35(d) of the Investment Company Act, in order to align a fundsnames with the main type of investments undertaken by the fund. This isreferred to as the "name test or name rule" under which a fund must investin at least 80% of the securities referenced in its name.

- The Investment Company Act furthermore circumscribes proper investmentsof investment companies and rule out specific speculative investments (SEC,2001; Gremillion, 2005; Freshfields Bruckhaus Deringer, 2005)

Regulation on the disclosure of financial information in mutual funds

Investors pursue different objectives when purchasing mutual funds. Some seekcapital preservation other capital appreciation and some SRI investor also want to

adhere to some social goal. A fund manager is obliged to pick a particular investmentobjective to pursue and operate the fund accordingly. Furthermore differentinvestment managers bring different philosophies of investing to their funds. Thesame investment objective, say maximum capital appreciation in one specific marketsuch as the US stock market, can be implemented in dramatically different ways

pending on the investment managers strategy. Since mutual funds differ ininvestment objectives and/or investment philosophy, different mutual funds exhibitdifferent risks, volatility, expenses and performance. A fund may invest primarily inthe shares of a particular industry or market sector, such as technology, utilities orfinancial services, a specific geography such as country funds or emerging marketfunds. Also the size of the companies that the fund invest in may vary from micro tosmall to mid to large cap. Bond funds can be characterized by their investment gradeor risk (junk, high yield, corporate bonds, corporate, government bonds etc). (Mobus,2007)

Every registered mutual fund however must explicitly define what investmentobjectives it seeks to pursue, as well as how it will trail that objective. The investmentobjective as stated in the mutual fund's prospectus is the legal document that offersinformation about how the fund's assets are invested. The purpose with the prospectusis to provide essential information about the fund to help investors make informeddecisions about whether to purchase the fund described in the prospectus. Therefore a

funds prospectus should disclose the fundamental characteristics and risks of thefund with emphasis on the funds overall investment approach and strategy.

This follows from the requirements of SEC:s Form N-1A which is intended topromote effective communication between the fund and prospective investors. Theprospectus disclosure requirements in Form N-1A are intended to extract informationfor an average or typical investor, i.e. an investor who lack financial or legalexpertise. Therefore the information should be balanced and assist an investor incomparing and contrasting different funds. The information provided in Form N-1Ashould be as simple and direct as reasonably possible and include only as muchinformation as is necessary to enable an average investor to understand the particular

characteristics of the fund. (SEC FORM N-1A)

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In 2008 the SEC decided to improve mutual fund disclosure by adopting amendmentsto Form N-1A which obliges that every mutual fund prospectus includes keyinformation about the funds investment objectives, strategies, risks and costs. Fundsare required to provide the summary information in plain English and in astandardized order. The initiatives were motivated in order to enable mutual fund

investors more easily obtain the key information they need such as a description of thefunds investment objectives and strategies, fees, risks, and performance. The basicimpetus behind the initiative was that many investors often found fund prospectusesto be lengthy, legalistic and confusing. (SEC, 2008)

Regulation on the disclosure of ESG Information in (SRI) mutual funds

In 2003, the SEC decided that mutual funds and investment advisers should disclosetheir policies and procedures for voting in corporate elections and report how theyactually voted on different issues at different companies. This would benefit investors

by improving transparency and enabling fund shareholders to monitor their fundsgovernance and engagement activities. Currently mutual funds are required to (1)

disclose their governance policies and procedures for voting proxies and (2) provideshareholders the result of proxy votes casted by the fund. (Freshfields BruckhausDeringer, 2005)

Advocates of SRI investing, such as Peter Kinder, President of KLD Research &Analytics, Inc., has argued that these proxy voting policies in practice implicates thatmutual funds are required to evaluate publicly traded corporations not only based ontheir financial aspects but also based on the companys corporate social performance.[The Securities and Exchange Commission] will require fiduciaries to factor intotheir judgments social and corporate responsibility issues. (Kinder, 2005 p. 24)According to Freshfields Bruckhaus Deringer (2005), it is not yet certain to whatextent this argument presently reflects US securities law as applied. On the sametopic, Richardson (2009, p. 17) notes: In Canada and the United States, mutual fundsmust disclose their proxy voting policies and voting records when acting as

shareholders. Yet, financiers may choose not to invest ethically, so long as they

disclose that decision."

Looking at the ESG disclosure regulations one easily comes to the assumption that itis somewhat of a white spot in the regulatory landscape and an area that seems not tohave caught the interest of the legislator. Furthermore, it is uncertain, to say the leasteven if initiatives such as the one related to proxy voting has been based on SRI

considerations or rather been interpreted as such an initiative by some proponents ofSRI-investing. Extending the discussion a bit wider and looking beyond theinformation disclosure part of the mutual fund regulation or even the mutual fundregulation in general, the US legislator has not paid the question of SRI or ESGinclusion into a fund much attention. In the rare times this has been the case it has

been in the context of banning such investments if the ethical or socialconsideration at hand might adversely affect the investment returns. These

prohibitions of using SRI criteria are not typically made in a mutual fundenvironment but in the context of the Uniform Prudent Investor Act (UPIA) andERISA (Employee Retirement Income Security Act of 1974).

UPIA and ERISA are not pertinent for all, or even most mutual funds, but worthstudying from the legislators dealing with the use of SRI considerations in the

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portfolio construction. For example, in a 2008 US Department of Labor Bulletin, it isclarified that ERISA grants no permission to base an investment decision on any otherfactor than an economic one. In the bulletin it is deducted that: ERISAs plain textdoes not permit fiduciaries to make investment decisions on the basis of any factor

other than the economic interest of the plan. (Interpretive Bulletin 2509.08-1). The

conclusion in UPIA is very much alike: No form of so-called "social investing" isconsistent with the duty of loyalty if the investment activity entails sacrificing the

interests of trust beneficiaries - for example, by accepting below-market returns - in

favor of the interests of the persons supposedly benefited by pursuing the particular

social cause. (Uniform Prudent Investor Act, Section 5Loyalty, Comment).

The referenced legislation above shall not be interpreted as an indication that retailmutual funds are now allowed to integrate SRI concerns in their investment decision

process; it is merely an indication of what assumptions and prioritizations thelegislator previously has made. Risk and return objectives have been the main focuswhen outlining investment directives. For this reason the short conclusion to be made

about the lawmakers underlying assumptions about why a consumer invests in amutual fund based is that the motivation is a financial raison d'tre. This conclusion isstrengthened by the fact that the legislator seems to have been highly influenced bymodern portfolio theory (MPT).

According to MPT, efficient portfolios are highly diversified and efficient portfolioswill provide higher risk adjusted returns than un-efficient portfolios. (Markowitz,1952). UPIAs close tie to MPT is obvious. Within the context of the prudent investorrule the standard of prudent investment is defined as (a) duty of loyalty and duty todiversify investments; and (b) the prudence of an investment is determined by usingmodern portfolio theory. While the modern prudent investor rule is not applicable formost mutual funds, these funds owe duties of both loyalty andcareand the decisionsof company directors are, usually subject to the Business Judgment Rule (BJR)(Freshfields Bruckhaus Deringer, 2005).

MPT has also largely impacted Employee Retirement Income Security Act of 1974(ERISA) which is applicable to the extent the mutual fund is providing an employee

benefit plan. (Freshfields Bruckhaus Deringer, 2005). ERISA obligates the fiduciaryto act: [] prudently, solely in the interest of the plans participants andbeneficiaries and for the exclusive purpose of providing benefits to their participants

and beneficiaries. ERISA also states that the investments of the plan should be

diversified so as to minimize the risk of large losses, unless under the circumstances itis clearly prudent not to do so which shows the clear connection to modern portfoliotheory. (ERISA, 29 USC 1104(a): Prudent man standard of care).

MPT has been criticized, for amongst other things being unrealistic since investors donot act as rational as stipulated in the theory and hence do not diversify their holdingsas assumed (Shleifer, 2000).And while there are some indications that the legislatorhave adhered to the findings within behavioral finance when it comes to regulatinghow financial information concerning a fund such as risks, investment objectivesshould be presented nothing of a similar kind has happened concerning the SRI /ESGfactors. It is somewhat surprising that no complimentary rule of a similar rationale

have been adapted concerning ESG and SRI issues.

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ESG Soft law initiativesSince there is no clear SRI legislation concerning information disclosurerequirements we in this section turn to the soft law initiatives of the US SRI market,i.e. initiatives from interest organizations, NGO:s and from the private sector. In theUS it is surprising how few soft law initiatives that exist in comparison to for example

the European market.

In Europe, theEuropean Sustainable Investment Forum, (EUROSIF) has launched theso called European SRI Transparency Code which is a fairly straight forwarddocument divided in six sections covering different aspects of SRI mutual fundmanagement. The focus of the code is retail SRI mutual funds and the purpose is toincrease accountability to consumers. (Eurosif, 2010 A)

Section 2 of the code, ESG Investment, for example starts off by statingSignatories should be clear about the fund(s) purpose and its (their) ESG investmentcriteria whereupon four specific questions follows, such as How does the fund

define SRI?, and How are criteria changes communicated to investors? Sectionfour, Evaluation and Implementation contains questions of the type What is the

policy and procedure for divestments on ESG grounds? and What divestmentsoccurred in the past year related to the SRI fund criteria? Section five and six dealswith Engagement and voting principles.

Signatories to the code should be open and disclose accurate, adequate and timelyinformation to enable consumers, to understand the SRI policies adopted by a fundand responses should be annually updated. As of January 2011, there are about 350signatories.

On a similar note, and as mentioned earlier, in the US, Social Funds(socialfunds.com) offer mutual fund investor tools for retail investors. Funds are

presented in terms of amongst other things their SRI Fund Profiles. Social Funds usethe following categories of Social Issues: Shareholder activism, Communityinvestment, Environment, Human rights, Employment, Products and Services,Weapons, Animal testing, Nuclear power, Alcohol, tobacco & gambling. Also it isindicated if the strategy used to address the social issue prevailing in the fund is

positive screening or restrictions in terms of exclusionary screens.(http://www.socialfunds.com/funds/profile.cgi) This is however no code to subscribeto but an information sight where the classifications and categorizations have been

made by a third party. Hence, it will not affect how for example a fund prospectusshould be written and if a consumer is to benefit from the work made by Socialfunds,he or she needs to visit a website. Hence, this is an additional source of informationand there are many benefits with targeting the material provided by the fund insteadof relying on external sources. These benefits will be further developed below.

Overall view of the regulatory environment of SRI profiled mutual funds

When reviewing the regulatory environment as relevant to SRI profiled mutual fundsit seems safe to argue that the current information requirements on SRI mutual fundsare not overly exhaustive and sub-optimal both from a financial and SRI information

perspective. This is said when both soft and hard law initiatives are taken into

account.

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Moreover, a comparison between the strictly financial information requirements vis--vis SRI information requirements indicate great differences when it comes to howdeveloped and detailed the different frameworks are. The financial framework has

been shown considerably more effort and is more mature than the outline of SRIinformation requirements which are in search of content and structure.

While we have demonstrated that there are problems related consumers assessment,evaluation and assimilation of financial information, it has also been demonstratedthat the SEC seems to be aware of this problem. For example, the amendedrequirements in Form N-1A are indeed intended to effectively promote consumerfriendly information to prospective investors in mutual funds. There is an essentialsupposition of an average investor motivating that key information should be

provided in plain English and standardized in order to enable comparisons betweendifferent funds. (SEC, 2008) Thus, while there might be more to do in this area due tothe fact that investors still have problems effectively assimilating the financialinformation, it at least seems as if the supervisory authority has identified the problem

and addressed it in a relevant way.

However, concerning SRI information, much less has happened and the fewinitiatives that can be identified are driven by interest organizations rather than thelaw maker. One might also question the impact of these soft law initiatives since noformal standard has been established and since the numbers of signatories are notgreat. United Nations initiative, Principles Responsible Investments (PRI) is ofcourse an initiative with has gained widespread acceptance and with close to 900signatories, of which many are the leading asset managers and asset owners of theworld. (http://www.unpri.org/signatories/).

While there is a mandatory online annual reporting and assessment survey forsignatories, the PRI however, do not deal with how customer information should bedisplayed. The PRI did announce on their 2009 Annual General Meeting that in 2012an annual mandatory public reporting requirement for signatories will be implementedwhere signatories will have to disclose progress in implementing the Principles. Butthis initiative, as welcome as it seems, is still underway and indicators are currently

being developed. Consequently it is not yet possible to determine the applicability ofthis reporting initiative. It should also be noted that the principles are voluntary andaspirational and that there are no legal or regulatory sanctions associated with them(www.unpri.org). It is also important to note that these principles are not just for fund

managers but applicable for different types of institutional investors and assetmangers and therefore the reporting and assessment routines will probably not bedeveloped to cater to the needs of retail mutual fund investors.

In sum, it is obvious that the legislators and supervisory authoritys focus has beenon the risk and return rationales and not so much other objectives such as SRI. Rightor wrong, a probable reason for this is that modern portfolio theory has had a largeimpact on US investment regulation. However, as discussed earlier research hasindicated that SRI mutual fund investors are often driven by other motives and actsomewhat differently than with is presupposed in modern portfolio by factoring in andvaluing other aspects of an investment, such as the perceived ethicalness. The

legislator, however, has of yet been reluctant to consider how SRI concerns affect

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investment decisions which might be somewhat surprising taken into account howwide spread the practice of SRI investing has become.

5. Discussion

The purpose of this paper was to critically examine and analyze the decision makingenvironment for SRI profiled mutual funds. In the outset of the paper we asked thequestion what happens to the decision making environment when another, explicitlynon-financial, aspect gets added onto the already challenging decision of choosingappropriate mutual funds in retail and pension savings.

After reviewing both the general decision making environment and the regulatoryenvironment we have reached two conclusions. First, it seems safe to say that it is justas difficult to evaluate the socially responsible characteristics of an SRI mutual fundas it is to evaluate its financial characteristics. Similar obstacles, based in informationamount and type, uncertain future, and credence intensity, exist in both the financialand the socially responsible dimension of the mutual fund. Second, the regulatoryenvironment for the financial aspects of investments seems much more developedthan for the aspects related to social responsibility. Few rules apply that dictate howESG information should be presented to investors. In this manner, consumers getmore help from the lawmaker when evaluating the financial characteristics than whenevaluating the ESG characteristics of the mutual fund.

Against this background, it seems obvious that investors who desire to invest withtheir conscience face an even tougher challenge than regular investors. Makingappropriate SR-investment decisions implies evaluating both the financial and the

socially responsible characteristics of the fund. Considering that only dealing with thefinancial aspect of mutual fund investment often is considered to be a challenging task(Kozup & Hogarth, 2008; Lichtenstein, et al., 1999), the combination of ESG andfinance result in an even more difficult situation. In many ways, consumers whodesire to invest in SRI are in an especially vulnerable position.

Why the difficult situation for SR-investors is a problem

Coming to the conclusion that investment in SRI funds is a very difficult decision andthat there is no clear legal standard for SRI mutual fund information disclosure onemight wonder how big a problem this is? After all, many things are difficult forconsumers and these things may not necessarily need regulation. However, we believe

that in the case of SRI profiled mutual funds, there are a number of reasons as to whyincreased regulation is appropriate.

First, the fact is that social responsibility is becoming more important to consumers.As indicated earlier in this paper, the SRI criteria might be if not completely ruling, atleast of material importance for a consumer choosing to invest in an SRI fund and notin a conventional fund (e.g. Hancock, 2005; Derwall, Koedijk and Ter Horst, 2011).This increase in demand for socially responsible investment strategies means that SRIfunds no longer is a niche designed to appeal to the liberal population. Instead, inhaving shares of the market that reach up to 10% (SIF, 2007), SRI has become amainstream service that appeals to a broad segment of society. This widespread

acceptance of SRI means that regulation in the sector is only of importance to few no

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Another, highly related, problem is that there is an abundance of surveys measuringthe same thing and that the surveys seem to be more about product differentiation thananything else[...]raters seek to differentiate their ratings by taking differentapproaches to evaluating sustainability performance. (Sustainability 2010 A p.3).However, corporations that do not participate in the written surveys, due to the fact

that surveys are irrelevant or extremely extensive and complicated tends to getpunished (Butz, 2005; Ziegler & Schroeder, 2006).

Against the background of these arguments, we believe that it is relevant andnecessary for the lawmaker to expand the disclosure requirements for the ESGcharacteristics of SRI profiled mutual funds. In the next section we give policyimplications as to how this disclosure could be designed.

Introducing a new information disclosure framework for SRI profiled mutual

fundsFrom a legal standpoint, it seems fair to say that the information disclosure

requirements are, terra incognita, when it comes to howSRI criteria in mutual fundmanagement are to be described in for example the fund prospectus. Given the factthat consumers do factor in SRI considerations into their mutual fund investmentdecisions and given the fact that there are obvious problems related to what SRIinformation that is obtainable for an average investor we see a great need forincreased transparency and more standardized SRI information. In this matter thesame arguments used by SEC when the 2008 amendments to Form N-1A were madeare relevant (i.e. brief, easy to understand, easy to access standardized information in

plain English.)

We appreciate these requirements since they are founded on how information shouldbe developed and provided given investors limited capabilities of assimilating andcomprehending information of financial and legal character. Historically, regulatorshave been more focused on the supply of information rather than how the informationshould be framed and utilized in order to enable investors with to make a rationalchoice (Korling, 2010).

With special emphasis given to the fact that also SRI information should betransparent and easily accessible as well as comparable we offer an informationdisclosure framework for SRI mutual funds divided into three main sections whichshould cover most SRI information needed by an average investor to make a rational

decision while at the same time not being overly exhausting for the mutual fundcompanies. The offered information template have some, but relatively few,similarities to EUROSIF:s Transparency guidelines.

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Table 1: Specifying the funds objectives1.

a. Is the objective with the fund, in any part, something else than maximizing the risk adjustedreturns that is compatible with the funds investment objective (specified risk and return mandates)

b. If Yes what is/are the other objective(s)?c. If the objective is to strive for a social, environmental or governance cause, how is that objective

defined and evaluated?d. How are those other objectives assumed to affect the funds risk adjusted return given the risk

profile specified in the fund?e. Is there an identifiable trade-off between the objective of maximizing risk adjusted return and the

social, environmental or governance goal?f. In the case of a conflict which objective will be prioritized?

The first sectionof the proposed disclosure framework deals with the fact that SRImutual funds can have other objectives than maximizing the risk adjusted return. 1 a.specifies these objectives and 1 b. 1 e. narrow down these other objectives. Earlierin the article it was shown that SRI investment products differs from most otherinvestment products which solely focus on generating highest possible return while(most) SRI investment vehicles are said to cater to two overall objectives (Michelson,Wailes, van der Lann, & Frost, 2004; Sparkes & Cowton, 2004; Sullivan &Mackenzie, 2006). Beyond the objective of good risk adjusted return SRI also pursueobjectives of for example social or environmental character (Knoll, 2002; Krumsiek,1997; Schepers & Sethi, 2003). Sometimes (e.g. with strict negative screening), butfar from always, there might be an inherent conflict between the objective of financialreturn and the sociala or environmental goal. Section one in the informationdisclosure framework targets this potential conflict in order to high light it for aconsumer. In difference to for example UPIA or ERISA it is not suggested thatinvestments based solely or mostly on their ethical, social or environmental merits

should be universally abandoned only that the financial consequences of such aninvestment approach should be clearly communicated so that a consumer can make aninformed choice. Since it has been shown that there are consumers valuing the socialaspects of a SRI fund higher than the financial merits and due to the mere fact thatsome funds donate a pre-set portion of the funds assets to a charities the suggestionshould not be controversial.

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Table 2: Specifying the non-financial criteria2 About the non-financial criteria used in the fund

a. What is it with the fund that makes it categorized as SRI, ESG, sustainable, responsible orenvironmental?

b. What SRI strategies are adapted in the fund?

c. If the strategy is to engage with companies how will the result of the engagement be evaluated andcommunicated? List the GMAs the fund has voted on and the topics related to the voting as wellas the result plus any other engagement initiatives initiated by the fund.

d. Describe the screens, both positive and negative used in the fund?e. How many companies in the funds investment universe are excluded due to the negative criteria

subscribed by the fund?f. List all the companies that have been excluded due to the use of negative screening.g. How big a part of a companys yearly turnover is allowed to be generated from activities classified

as un-ethical?h. What type of control and evaluation is conducted in order to safe guard and to access how much of

a companys turnover that derives from what has been deemed unethical activities?i. What happens if a company does not fill out / answer questionnaires related to corporate social

performance from the mutual fund or rating agency?

j. Is external verification of data used in order to access a companys corporate social performance?k. Are NGO:s deemed reliable sources of information?

The purpose of Section 2 is to structure and narrow down the implications of the nonfinancial criteria used in the fund in order to enable comparisons between differentfunds based on SRI variable and to support consumers trying to evaluate if the ethicalconsiderations made by the fund match those considered important by the consumer.

This section specifically deals with the problems identified in the beginning of thepaper i.e. the lack of a defining objective of what SRI is and how it should bepracticed (Sandberg, 2009; Dunfee, 2003), the lack of an objective standard for

practicing SRI and the fact almost all publicly-held corporations are held by somemutual fund and hence that SRI portfolios do not differ much from funds that do notemploy SRI criteria (e.g. Hawken, 2004).

Section 2 will not only provide pre-purchase information about a fund but can also beused to evaluate post-purchase performance by containing questions related to howthe SRI objective has been realized over the year. Hence it is a structured way of

providing streamlined and easily comparable information on some key aspects of theSRI side of fund management. Some questions are related to the process of managingthe fund while others are more precise (e.g. how many companies that has beenexcluded). The sections is easy to implement both on funds practicing screening andfunds focusing on shareholder advocacy.

Table 3: Expected implications on investment risk and return3. Expected implications on investment risk and return

a. Is the purpose with the non financial criteria to maximize the risk adjusted investment returns orsomething else?

b. Describe how the non financial criteria applied in the fund are expected to affect the funds risk andreturn.

c. If non financial considerations are expected to increase investment returns, what theoreticalsupport can be invoked to uphold such a statement?

Section 3 in the disclosure framework compliments section 1 by bringing attentionback to the principle of the fund and if that is to maximize risk adjusted returns or

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