Prepare for this week’s assignments, which is to write an annotated bibliography for assigned article(#112).Article in attachment.How to write in doc file.Research in International Business and Finance 37 (2016) 541–555
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Research in International Business
and Finance
journal homepage: www.elsevier.com/locate/ribaf
Full length Article
Investing in socially responsible mutual funds: Proposal of
non-financial ranking in Italian market
Antonella Petrillo a,∗ , Fabio De Felice b , Mónica García-Melón c ,
Blanca Pérez-Gladish d
a
b
c
d
Universsity of Naples “Parthenope”, Centro Direzionale, Isola C4, 8014 Napoli, Italy
University of Cassino and Southern Lazio, Via G. Di Biasio, 43–03043 Cassino (FR), Italy
INGENIO (CSIC-UPV), Universitat Politècnica de València, Camino de Vera s/n, 46022 Valencia, Spain
Universidad de Oviedo, Avda. Del Cristo s/n, 33006 Asturias, Spain
a r t i c l e
i n f o
Article history:
Received 7 August 2015
Received in revised form 9 January 2016
Accepted 27 January 2016
Available online 4 February 2016
Keywords:
Mutual fund performance
Socially responsible investment
Corporate social responsibility
AHP
a b s t r a c t
Currently, one of the main instruments of Socially Responsible Investment is mutual funds.
Their growth in the financial market has been remarkable over the past few years, which
has also paralleled the growth in the business ethics literature.
The aim of the present work is to present a methodology useful to define a portfolio
selection model for measuring the attractiveness of socially responsible asset investments.
The result is the definition of a non-financial ranking to complete financial information
about mutual funds for investors demanding Corporate Social Responsibility. The methodology focuses on social responsibility decision-making criteria and their weights agreed
by the main stakeholders. The research, based on a well-known multi-criteria method, the
Analytic Hierarchy Process (AHP), proves that the methodology is feasible and gives useful
results for investors demanding social responsibility.
© 2016 Elsevier B.V. All rights reserved.
1. Introduction
The increasing number of socially responsible enterprises encourages investors to create socially responsible funds,
investing in these enterprises and promotes increasing integration of the society through this socially responsible activity
(Oikonomou et al., 2012). The modern socially responsible investment is based on the growing social awareness on the part
of investors. The first modern socially responsible mutual fund, the so-called Pax World Fund was incorporated in 1971 in
the United States. The Fund was specifically incorporated for investors objecting the war in Vietnam. Since 1990, the socially
responsible investment industry has been rapidly growing in the United States of America and in some other countries such
as Australia or France. However, the growth and interest in Italy has been much more slower (Jegourel and Maveyraud, 2010).
Over the past several years, the world economy has been affected by the current long economic recession, and the asset
management industry has not been immune to these negative impacts. Thus, the overall asset management market in Italy
has seen total assets under management reduce considerably, due to, firstly, contagion effects from the global financial crisis.
Nevertheless, and despite this very difficult economic context, or perhaps because of it, the Socially Responsible Investing
(SRI) market is gaining popularity. The current socially responsible investment market in Italy could be described as an
∗ Corresponding author. Tel.: +39 081 547 6747; fax: +39 081 5476780.
E-mail addresses: antonella.petrillo@uniparthenope.it (A. Petrillo), defelice@unicas.it (F. De Felice), mgarciam@dpi.upv.es (M. García-Melón),
bperez@uniovi.es (B. Pérez-Gladish).
http://dx.doi.org/10.1016/j.ribaf.2016.01.027
0275-5319/© 2016 Elsevier B.V. All rights reserved.
542
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
emerging market. It seems that more and more people are responding positively to the investments that provide a good
financial return as well as a good return for society and the environment. This change in attitude has led to the growth of
Socially Responsible Investing. Socially Responsible Investing can be broadly defined as an investment process that integrates
not only financial but also environmental, social and governance considerations into investment decision making. In fact as
stated by Andrikopoulos et al. (2014) the legitimacy, the identity and the social impact of financial investments go beyond
the generation of revenues for providers of capital, through financial intermediation. Currently, the main instrument of SRI
is investment in socially responsible mutual funds. The term “fund” is used to refer to a ready-made financial product where
investors’ money is pooled into a portfolio and a fund manager decides which shares to buy. A socially responsible fund is
a fund where the selection of investments is based not only on financial but also on social, environmental, governance or
other ethical criteria.
There is an increasing agreement that not all the relevant information for an investment decision can be captured
in terms of financial criteria. Zopounidis and Doumpos (2013) acknowledge the growing inclusion of non-financial
criteria in recently published financial multicriteria decision-making models. Practitioners and researchers have acknowledged the growing concern of investors, individual and institutional, about ethical, environmental, social and governance
issues, even if just taken as a way of decreasing the investment risks. Some recent examples are the works by Drut
(2010), Ballestero et al. (2012), Dorfleitner and Utz (2012), Bilbao-Terol et al. (2013), Pérez-Gladish et al. (2013), and
Utz et al. (2014).
Therefore, any model of SRI asset allocation should integrate social and financial dimensions. The main objective of the
paper is to explore the impact of different portfolio restrictions, expenses and value added criteria on the performance of
both types of funds. In fact, recent studies suggest that in many situations a more complex decision model may be at work.
There are many economic problems such as the selection of portfolios, where the choice of the best decision should be
made taking into account several criteria and using multi criteria techniques. In this paper, a methodology, based on Analytic
Hierarchy Process (AHP) proposed by Saaty (1980), is developed for extending the portfolio selection model of Markowitz
(1959) in order to include the evaluation of the non-financial criteria. The proposed approach allows considering tangible
and intangible factors and involves acknowledging that the decision maker is responding to multiple objectives (De Felice
and Petrillo, 2014).
Our results illustrate how for the most inefficient funds the superior performance of SRI funds is significant. This paper is
structured as follows. First, we will shortly describe the Italian mutual fund industry in terms of assets under management
and returns. Subsequently, the different performance metrics and the research model are explained in Section 3 in order to
describe the methodology for the profiling of stakeholders and the ranking of the funds. In Section 4, the application of the
proposed methodology to the case study is presented. Finally, results obtained and conclusions are analyzed.
2. Literature review: the SRI market
Despite the economic importance of the European mutual fund industry, European-registered funds are an underresearch topic (Vidal-García, 2013). Ducassy and Montandrau (2015) asserted that empirical evidence of the influence of
shareholders and governance practices on corporate social responsibility (CSR) pollicises mixed, and most studies have been
conducted in the United States. Leite and Cortez (2014) have started to analyze the performance and investment styles of
internationally oriented Socially Responsible Investment (SRI) funds, domiciled in European markets, in comparison with
characteristics-matched conventional funds. Furthermore, in spite of the astounding growth of Italian finance, there are no
studies that have compared Italian mutual funds with SRI. Prior literature suggests that investors are attracted to SRI vehicles
from a desire to match their investment policies with their values (Abdelsalam et al., 2014). The SRI industry could play a
key role in getting Europe’s economy back on track. The 5th Sustainable and Responsible Investment Study by the European Forum for Sustainable Investment (Eurosif, 2012) details the continued growth in assets under management (AuM)
of the European SRI market and also reveals opportunities for future growth. The study highlights the growing diversity
and sophistication of sustainable investment strategies in practice today. The assets managed by the European market for
socially responsible funds in the year 2012 has reached 95 billion euro consolidating the growth (+12%) of the recent years.
This result is a confirmation of the strength of this segment of the asset management business that has maintained positive
net inflows even during periods of markets volatility. The Italian mutual fund industry has suffered a significant downsizing
over the last 12 years, showing a constantly decreasing trend, from about 42% of GDP in 1999 (more or less aligned with the
European average) to 8% in 2011.
According to Fig. 1, in Italy the SRI market remains considerably less developed than many of its Northern European
neighbours.
It remains a niche investment strategy dominated by a few large institutional investors. According to European SRI Study
(Eurosif, 2012) despite the fact that the legal framework for SRI in Italy remains less robust than in many of its European
neighbours, several recent developments point to promising perspectives in the near term horizon. The overall development
of socially responsible investment in the country still largely lags behind, mostly as a result of insufficient information,
specifically little interest in and understanding of benefits and relevance of SRI on the part of investors.
Thus, one of the aims of this paper is to contribute to stimulate SRI in Italy by providing investors with more information
about socially responsible mutual funds. SRI strategies require an evaluation of the investment instruments in terms of a
diverse set of environmental, social and governance criteria. Nevertheless investors, especially retail, have a limited capacity
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
543
Fig. 1. SRI funds asset per country—06/30/2012. Source: Vigeo Italy.
for handling extensive information They are investors with medium-low financial knowledge willing to invest in already
made financial products without making more decisions than those concerning to risk assumption. For that, there is a
growing demand for decision making instruments tailored to the investors’ needs.
In a market as the Italy market, where the presence of socially responsible investment is still marginal, information is
crucial. As acknowledge by Eurosif (2012) two are the reasons for the scarce development of SRI in Italy: the limited supply
of these financial products and the lack of knowledge on the part of the investors of these investment tools.
Although numerous works have been published exploring firms’ Corporate Social Performance measurement, very few
studies can be found in the literature concerning mutual funds’ social responsibility degree measurement. Social responsibility preferences can differ from one investor to another depending on cultural and personal values and hence, the
decision-making criteria and their weights (Pérez-Gladish et al., 2012). Nevertheless, the availability of a ranking for mutual
funds based on a set of common non-financial criteria agreed by the main stakeholders could be helpful for those passive
investors without a clearly pre-defined socially responsible investment profile.
There are a number of self-named ethical or responsible funds, but a few third-party labels exist for socially responsible
financial products. The objective of these labels is to serve as a quality standard guaranteeing the systematic integration
of ESG criteria into mutual funds’ management. The first European label for SRI funds managed strictly on the basis of
Environmental, Social and Governance criteria was launched by Novethic in 2009 (http://www.novethic.com/). Ethibel
(http://www.ethibel.be/) also offers a SRI label for European investment funds in an attempt to guarantee investments only
in companies selected on the basis of social, environmental and governance criteria.
Nevertheless and, despite their unquestionable utility, these labels seem not to give sufficient information for individual
investors willing to invest in socially responsible mutual funds. On the one hand the labels tend to make simple classifications
such us ethic/non-ethic. On the other hand, generally, the labels do not include a complete set of ESG criteria. Therefore, in the
European market where more than 1200 SRI funds are available for investors, a ranking of these financial products based on
their ESG features could be much more attractive than a particular label. Moreover, a more comprehensive classification that
ranks order more than only the currently self-named socially responsible mutual funds would contribute to help individual
investors to increase the portfolio of possible choices, combining financial information with ESG information. To the authors’
knowledge, only one similar research has been carried out (Tsai et al., 2009). Although they also prioritize SRI, they do not
deepen in the stakeholder’s different profiles and solutions, which might be useful for the individual investors.
This is the purpose of the proposed methodology, to provide individual passive investors with a ranking of mutual funds
based on their degree of social responsibility. The degree of social responsibility has been determined for a selected set of
funds from the broad universe of large cap equity mutual funds sold in the Italian financial market. In order to reach this
goal two key questions have been addressed:
(i) the identification of the main stakeholders;
(ii) the determining of an agreed list of criteria and their weights for the priorization process.
Each of the questions will be tackled along the development of this paper. The proposed ranking does not intend to
replace classical financial rankings (e.g., Morningstar ranking of mutual funds). On the contrary, the objective of the proposed
non-financial ranking is to complete financial information about mutual funds. This information can be of great value for
marketing researchers, institutional investors and fund managers attempting to design and to invest in SRI products. The
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A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
Fig. 2. Methodology proposed to rank order the SR Funds.
information can also be used by communication managers to develop effective advertising campaigns in order to attract
retail and institutional investors.
3. The rationale
The proposed methodology aims at helping investors by laying the foundations for a rational and efficient choice in
their social investment decisions. The model requires the participation of two types of agents, (i) the facilitators of the
prioritization process, (ii) a panel of socially responsible investment stakeholders. The facilitators of the process (authors
of the paper) will select the list of Italian mutual funds to be evaluated and ranked. They will choose the proper list of
stakeholders and guide them all along the process of weighting the evaluation criteria. With these weights the facilitators
will finally evaluate the different funds. Fig. 2 shows the methodological approach proposed to rank order the SR Funds.
We propose the following five-step procedure to calculate the score for each fund.
Step 1: Select the portfolio of Equity Mutual Funds (EMF)
For the selection of the SRI mutual funds (SRIMF) portfolio we propose the use the Morningstar database. As we have
argued in the introduction we are interested in the ranking of equity mutual funds based on SR criteria.
Step 2: Arrange the panel of Socially Responsible Investment’s (SRI) stakeholders
As pointed out in several recent contributions to literature on CSR, firms’ relationships with society are actually relationships with stakeholders. To determine the stakeholders for the SRI funds we have focussed (i) in the literature but also (ii)
we have tried to answer the question: who may be interested in the existence of a ranking for SRI funds?
The answer to question (ii) leads us to consider who is demanding and supplying such products. On the supply side, the
Italian law says that the only possible vendors of such products are:
• G1. Financial institutions and insurance companies;
• G2. Financial asset managers.
On the other side, not regulated by law, stakeholders would be investors interested in these types of funds. Following the literature and considering also the stakeholders listed by Eurosif for this study we distinguish the following
groups:
• G3. Corporate social responsibility specialists (CSR) whose mission is to provide information to groups both of the supply
and the demand side (Battacharya et al., 2008);
• G4. Associations of trade unions (Guay et al., 2004);
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
545
Table 1
List of evaluation criteria (Vigeo, 2012).
Description
Sub criteria
CORPORATE GOVERNANCE (CG)
Effectiveness and integrity, guarantee of independence and efficiency of the Board of
Directors.Effectiveness and efficiency of auditing and control mechanisms, in
particular the inclusion of social responsibility risks, respect for the rights of
shareholders, particularly minority shareholders, transparency and rationale for the
remuneration of directors.
BUSINESS BEHAVIOUR (BB)
Consideration of the rights and interests of clients, integration of social and
environmental standards in the selection of suppliers and on the entire supply
chain, effective prevention of corruption and respect for competitive practices.
ENVIRONMENT (ENV)
Protection, safeguarding, prevention of damage to the environment, implementation
of an adequate management strategy, eco-design, protection of biodiversity and
co-ordinated management of environmental impacts on the entire lifecycle of
products or services.
HUMAN RESOURCES (HR)
Continuous improvement of professional relations, labour relations and working
condition
HUMAN RIGHTS AT THE WORKPLACE (HRts)
Respect of freedom of association, the right to collective bargaining,
non-discrimination and promotion of equally, elimination of illegal working
practices such as child or forced labour, prevention of inhumane or degrading
treatment such as sexual harassment, protection of privacy and personal data.
COMMUNITY INVOLVEMENT (CIN)
Effectiveness, managerial commitment to community involvement, contribution to
the economic and social development of territories/societies within which the
company operates, positive commitment to manage the social impacts linked to
products or services and overt contribution and participation in causes of public or
general interest.
CG1 Board of DirectorsCG1 Audit and Internal
ControlsCG3 Shareholders’ RightsCG4 Executive
Remuneration
BB1. Customer aspects (Product safety, Information to
customers, Responsible Contractual Agreement)BB2.
Integration of environmental and social factors in the
in supply chainBB3. Legal aspects (Prevention of
corruption, Prevention of anti-competitive practices,
Transparency and integrity)
ENV1. Product pollution (Environmental strategy and
eco-design, Development of Green products and
services, Protection of biodiversity)ENV2. Process
pollution (water resources, atmospheric emissions,
waste management environmental nuisances,
management of environmental impacts from the
process)ENV3. Management of environmental impacts
from the use and disposal of products/services
HR1. Promotion of employee relations and
participationHR2. Career management (career training
and development, promotion of employability)HR3.
Respect of labour conditions (working hours,
remuneration, health and safety)
HRts1. Respect for human rights standards and
prevention of violationsHRts2. Elimination of child
labour, discrimination and forced labour
CIN1. Promotion of social and economic
developmentCIN2. Social impacts of company’s
products and services
• G5. Private investor. For these we followed the study carried out in 2012 in Spain and Italy by in which they conclude that
SR investors are likely to be females, medium-high income and mother of a family. This result is similar to that obtained
by Pérez-Gladish et al. (2012) for Australian investors. We have chosen the stakeholders following these profile patterns;
• G6. Others (organization promoting companies interest about corporate social responsibility (Sievänen, 2014).
Table 2
List of selected funds.
#
Name
ISIN
#
Name
ISIN
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Ailis Equity Europe Fund
Allianz Azioni Europa
Allianz Europe A
Allianz Europe B
Allianz High Dividend A
Allianz High Dividend B
Anima Europe Equity Prestige
Anima Europe Equity Silver
Anima Geo Europa A
Anima Geo Europa Y
Anima Sicav European Equities A
Anima Sicav European Equities B
BPER Intl SICAV Equity Europe
EIS Europe Equities A
EIS Europe Equities I
EIS PB Equity EUR I
IE0002058729
IT0000386588
IE00B1G9YY97
IE00B1G9YZ05
IE00B05BLK46
IE00B05BLL52
IE0007999117
IE0032465449
IT0001095469
IT0004302029
LU0376710454
LU0376710538
LU0085741386
LU0402185994
LU0402186026
LU0717016389
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Epsilon QValue
Eurizon Azioni Europa
Euromobiliare Europe Equity Fund
Fondersel Europa
Fonditalia Equity Europe
Fonditalia Equity Europe T
Gestnord Azioni Europa A
Gestnord Azioni Europa C
Interfund Equity Europe
Investitori Europa
Malatesta Azionario Europa
Pioneer Azionario Val Eurp a dist. A
Pioneer Azionario Val Eurp a dist. B
Synergia Azionario Europa
VG SICAV European Equity I
VG SICAV European Equity R
IT0001496097
IT0001050167
IT0000384385
IT0001012498
LU0058495945
LU0388707423
IT0001053138
IT0004941685
LU0074299321
IT0003160170
IT0003553903
IT0001029864
IT0004813785
IT0004464308
LU0338938177
LU0554960723
546
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
Table 3
List of interviewed stakeholders.
Group
Description
Stakeholders interviewed
G1
G2
Financial institutions and insurance companies
Financial Asset managers
G3
CSR—corporate social responsibility specialists
G4
Associations of trade unions
G5
Private investor. Average profile, woman between 35 and 45
years old, higher education, mother of a family
Others (organization promoting companies interest about
corporate social responsibility
Five office directors of one of the main Italian Banks (Male)
One manager of an international investment company (Male)
One manager of an international investment company
(Female)
One academician expert on CSR (Male)Two academician
expert on CSR (Female)
One representative of a Italian Union (Female)One
representative of a Italian Union (Male)
Three individual investors who takes SR into consideration
when choosing the funds (Female)
Two managers of an Italian association that help companies to
access to finance (Male)One manager of Italian Union
Industrialist (Male)
G6
Social
Responsibility of a
Company
Corporate
Governance (CG)
Board of directors
(CG1)
Audit and internal
controls (CG2)
Shareholders’
rights (CG3)
Community
involvement
(CIN)
Human Rights
(HRths)
Respect for
H.Rights standards
and prevention of
violation (HRths1)
Elimination of
child labour,
forced labour and
discrimination
(HRths2)
Promotion of
Social and
Economic
Development
(CIN1)
Social mpact of
company’s
products and
services (CIN2)
Business
Behaviour (BB)
Environment
(ENV)
Human Resources
(HR)
Customer aspects
(BB1)
Product pollution
(ENV1)
Integration of
environmental
and social factors
in the supply
chain (BB2)
Process Pollution
(ENV2)
Legal aspects
(BB3)
Executives’
remuneration
(CG4)
Management of
environmental
impacts from the
usage and disposal
of
products/services
(ENV3)
Promotion of
employee relations
and participation
(HR1)
Career
management
(HR2)
Respect of labour
conditions (HR3)
Fig. 3. Hierarchy of criteria according to VIGEO.
These six groups have been profiled by means of our methodology and besides they are potential users of our ranking of
Investment Funds.
Step 3: Select evaluation criteria
In the present step, the evaluation criteria were identified through literature review and report analysis. Hoepner and
McMillan (2009) identify 14 papers dealing with the definition of criteria for social, environmental and ethical screening in responsible investment. The reporting of information on company performance with respect to environmental,
social and governance (ESG) criteria has received considerable practical attention. In fact, several rating agencies provide databases which evaluate corporations with respect to a certain number of ESG criteria. Some examples are KLD
(Kinder, Lydenberg, Domini & Co.) in U.S., EIRIS (Ethical Investment Research Service) in the UK or Vigeo in France, MSCI
ESG STATS, KLD (known under the name KLD Research & Analytics Inc.) is considered by most of the academic authors
the largest and most complete source of information regarding corporate social responsibility (Jo and Harjoto, 2011).
However, some authors as Chatterji and Levine (2009) have acknowledged the low validity of the rating agencies measurement of management systems. In his work, he focuses on KLD but his conclusions could be extended to other rating
agencies.
Table 4
Sample of the AHP questionnaire for prioritization of first level criteria (Equitics’ dimensions).
Which criterion do you consider more important?
In which degree?
CG X
1
BB
3X
5
7
9
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
547
Table 5
Weights for the SR dimensions and criteria obtained by each group of stakeholders and by the whole group..
CG
CG1
CG2
CG3
CG4
BB
BB1
BB2
BB3
ENV
ENV1
ENV2
ENV3
HR
HR1
HR2
HR3
HRths
HRths1
HRths2
CIN
CIN1
CIN2
G1
G2
G3
G4
G5
G6
Banks and
insurance
Financial asset
managers
CSR
specialists
Associations of
trade unions
Private
investor
Others
0.068
0.180
0.319
0.360
0.141
0.139
0.334
0.212
0.454
0.120
0.200
0.329
0.472
0.293
0.454
0.170
0.376
0.237
0.308
0.692
0.143
0.600
0.400
0.265
0.522
0.138
0.243
0.097
0.170
0.371
0.371
0.258
0.135
0.485
0.296
0.219
0.113
0.411
0.382
0.207
0.210
0.667
0.333
0.108
0.667
0.333
0.150
0.282
0.367
0.225
0.125
0.214
0.363
0.374
0.263
0.168
0.366
0.334
0.300
0.180
0.464
0.161
0.375
0.233
0.394
0.606
0.055
0.292
0.708
0.072
0.119
0.148
0.392
0.340
0.132
0.229
0.152
0.618
0.037
0.255
0.308
0.437
0.393
0.150
0.096
0.754
0.274
0.625
0.375
0.091
0.667
0.333
0.177
0.150
0.502
0.233
0.115
0.102
0.263
0.191
0.546
0.192
0.118
0.232
0.649
0.068
0.352
0.085
0.563
0.190
0.242
0.758
0.272
0.250
0.750
0.160
0.302
0.382
0.126
0.190
0.104
0.184
0.148
0.668
0.052
0.536
0.232
0.232
0.299
0.461
0.078
0.461
0.232
0.450
0.550
0.150
0.717
0.283
WHOLE GROUP
0.148
0.259
0.309
0.263
0.168
0.143
0.291
0.241
0.468
0.117
0.327
0.289
0.385
0.224
0.382
0.162
0.456
0.229
0.448
0.552
0.136
0.532
0.468
Questioning the quality of the information provided by social rating agencies is not one of the goals of this paper. The main
objective is to propose a method to rate mutual funds taking into account agreed weights for the different social criteria.
The KLD system allows companies to be rated according to different social dimensions. Each of these dimensions is
evaluated on two criteria, namely strengths and concerns. Strengths and concerns are both rated on binary scales, where “1”
signifies “existing” and “0”, “not applicable”. However, the use of binary variables to measure Corporate Social Performance
is very rigid and limits the amount of information contained in the evaluation.
Therefore, and in order to avoid the limitations due to the use of binary variables we will work with a different
database which is also well known in the SRI field, the Equitics® database from Vigeo. Vigeo is a leading European expert
in the assessment of companies and organisations with regard to their practices and performance on ESG issues. Vigeo
has developed Equitics® a model based on internationally recognized standards to assess the degree to which companies under review take into account their social responsibility objectives in the definition and deployment of their
strategy. They offer access to ratings in 6 dimensions, which are commonly used by the rating agencies: Human Rights;
Human Resources; Environment; Business Behaviour; Corporate Governance and Community Involvement. These six
dimensions are broken down into 17 non-financial criteria. A description of these criteria is presented in the following
(Table 1).
Equitics® provides aggregated scores using continuous variables taking values from 0 to 100 for each social criterion and
thus, it overcomes the problems arisen from the use of binary variables (e.g., KLD). Because of these reasons, we will work
with Vigeo’s database in order to illustrate the proposed method. As far as the authors know, this is the first paper using
Vigeo’s criteria and scores
Step 4: Weight the evaluation criteria
Vigeo’s evaluations for each firm in each dimension (criteria group) are summed up into the CSR scores by means of the
arithmetic sum. However, in this way of aggregating they do not consider the fact that the different dimensions or criteria
groups might have different relative importance for the investors. For example, one investor might think that “human rights”
is the most important dimensions to assess the CSR of a company but another investor might think that “Business behaviour”
is the most important. In our opinion both opinions should be considered.
In this work we propose to “weight” the different dimensions according to a properly selected group of stakeholders and
use these weights to calculate the CSR score of each company.
For the weighting of the evaluation criteria the Analytic Hierarchy Process method is used. AHP is based on the fact
that the inherent complexity of a multiple criteria decision making problem can be solved through the construction of
hierarchic structures consisting of a goal, criteria and alternatives. In each hierarchical level paired comparisons are made
with judgements using numerical values taken from the AHP absolute fundamental scale. A 9-point scale was applied for
the comparison: scale values are namely unimportant (1), somewhat important (3), important (5), very important (7) and
extremely important (9). This is an absolute scale; thus, priorities derived from it are normalized or idealized to obtain an
absolute scale. The determination of relative weights in the AHP model is based on the pairwise comparison conducted with
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A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
Fig. 4. Weights of the SR dimensions obtained for each group of stakeholders.
respect to their relative importance towards their control criterion. These comparisons lead to dominance matrices from
which ratio scales are derived in the form of principal eigenvectors. Thus, pairwise comparisons will be carried out based
on this evaluation scale: a comparison matrix can be defined: each matrix element defined as dominance coefficient (aij )
represents the relative importance of the ith (i.e., the row index in matrix A) component over the jth (the column index
in matrix A) component. Each matrix element derives from a set of numerical weights (w1 , w2 ,. . ., wm ) which reflects the
recorded judgements: aij is defined as wi /wj :

w1 /w1

A2 w2 /w1

A=

· · · · · ·
w /w
A
A1
m
m
1
w1 /w2
w2 /w2
···
wm /w2

w2 /wm

···

w /w
w1 /wm
m
m
These matrices are positive and reciprocal (aij = 1/aji ). The synthesis of AHP combines multidimensional scales of measurement into a single one-dimensional scale of priorities. If the decision maker quantifies that a criterion i is equal important
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
549
Fig. 5. Group Weights of the SR dimensions obtained for stakeholders and analysis of the different profiles.
to another criterion j, the comparison matrix will contain value of aij = 1 = aji ; on the other hand, the ith criterion is absolutely
more important as an jth criterion (aij = 9; aji = 1/9).
As one main problem of MCDM is that judgements are potentially inconsistent, a consistency analysis has been carried
out. Saaty proposed to apply the consistency index (CI) calculation aiming to verify the consistency of the comparison matrix.
The consistency index (CI) of the derived weights could then be calculated by Eq. (1):
CI = ( max − n)/n − 1
(1)
where, max is the maximum eigenvalue of the comparison matrix, and n is the number of compared alternatives. If CI is
less than 0.10, satisfaction of judgements may be assumed.
The method has the additional advantage of being easy to explain to the experts that have to assess the different criteria
in a simple and systematic way. More details on the AHP can be found in García-Melón et al. (2012) and De Felice and Petrillo
(2013).
Step 5: Prioritization of companies and funds
Once the main stakeholders, the agreed criteria and, the preferential weights have been obtained we will evaluate and
rank equity mutual funds (EMF). We will rely on two different databases: Equitics® rating and Morningstar’s EMF database.
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A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
Table 6
ISR value obtained for each fund according to the different stakeholders’ profiles.
#
Name
WHOLE
G1
G2
G3
G4
G5
G6
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Ailis Equity Europe Fund
Allianz Azioni Europa
Allianz Europe A
Allianz Europe B
Allianz High Dividend A
Allianz High Dividend B
Anima Europe Equity Prestige
Anima Europe Equity Silver
Anima Geo Europa A
Anima Geo Europa Y
Anima Sicav European Equities A
Anima Sicav European Equities B
BPER Intl SICAV Equity Europe
EIS Europe Equities A
EIS Europe Equities I
EIS PB Equity EUR I
Epsilon QValue
Eurizon Azioni Europa
Euromobiliare Europe Equity Fund
Fondersel Europa
Fonditalia Equity Europe
Fonditalia Equity Europe T
Gestnord Azioni Europa A
Gestnord Azioni Europa C
Interfund Equity Europe
Investitori Europa
Malatesta Azionario Europa
Pioneer Azionario Val Eurp a dist. A
Pioneer Azionario Val Eurp a dist. B
Synergia Azionario Europa
VG SICAV European Equity I
VG SICAV European Equity R
29.99
23.96
30.90
30.90
27.62
27.62
32.81
32.81
30.98
30.98
31.49
31.49
28.23
30.01
30.01
21.93
31.54
33.15
31.21
28.77
35.17
35.17
28.81
28.81
33.07
28.56
33.01
32.39
32.39
33.08
25.29
25.29
32.32
26.90
33.22
33.22
30.63
30.63
35.18
35.18
33.18
33.18
33.35
31.49
31.62
30.01
32.70
20.14
34.11
35.57
34.04
30.87
37.29
37.29
31.68
31.68
35.13
30.39
35.37
34.45
34.45
36.13
26.93
26.93
32.07
26.52
32.92
32.92
29.52
29.52
35.16
35.16
33.04
33.04
33.36
31.49
30.79
30.01
32.27
21.74
33.75
35.49
33.42
30.93
36.63
36.63
31.07
31.07
34.42
30.41
35.32
34.47
34.47
35.63
26.55
26.55
29.93
24.18
31.24
31.24
28.26
28.26
32.78
32.78
30.65
30.65
31.74
31.49
28.83
30.01
30.31
20.78
31.74
33.21
31.87
28.51
36.35
36.35
29.06
29.06
33.76
28.68
33.02
32.08
32.08
34.04
25.37
25.37
29.78
24.07
30.45
30.45
26.96
26.96
32.76
32.76
31.07
31.07
30.78
31.49
29.16
30.01
30.14
20.55
31.01
32.50
31.12
28.56
34.31
34.31
29.16
29.16
32.02
28.36
32.38
31.90
31.90
33.09
23.46
23.46
31.22
25.15
32.49
32.49
29.38
29.38
34.18
34.18
32.19
32.19
32.81
31.49
29.88
30.01
31.40
21.99
32.98
34.49
32.79
29.80
36.74
36.74
30.29
30.29
34.54
29.63
34.31
33.26
33.26
34.59
26.69
26.69
30.94
25.17
31.93
31.93
28.74
28.74
33.89
33.89
31.98
31.98
32.34
31.49
29.76
30.01
31.17
21.27
32.60
34.12
32.42
29.64
36.16
36.16
30.05
30.05
33.92
29.37
33.95
33.12
33.12
34.41
25.82
25.82
Table 7
SRI ranking for funds.
SRI value
SRI ranking
10–20
20–30
30–40
40–50
We will adapt Equitics® criteria to our agreed list of criteria and then, given each firm’s share in each mutual fund we will
evaluate and rank the equity mutual funds.
In order to achieve a ISR value for each fund, an intermediate step must be carried out. That is to calculate the ISR value
for each of the companies in the investment fund (Eq. (2)).
ISRCj =
17

Ijk wk
(2)
k=1
where:
Ijk : value of the company j for the k indicator,wk : relative importance of k indicator,k: each of the indicators Vigeo uses
to assess the degree of social responsibility of the companies,
Cj: each of the companies.
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
551
Table 8
Rank order of the funds according to their SR index.
#
Name
SRI aggreg. value
Morningst. ranking
21
Fonditalia Equity Europe
35.17

22
Fonditalia Equity Europe T
35.17

18
Eurizon Azioni Europa
33.15

30
Synergia Azionario Europa
33.08

25
Interfund Equity Europe
33.07

27
Malatesta Azionario Europa
33.01

7
Anima Europe Equity Prestige
32.81

8
Anima Europe Equity Silver
32.81

28
Pioneer Azionario Val Eurp a dist. A
32.39

29
Pioneer Azionario Val Eurp a dist. B
32.39
n.d.
17
Epsilon QValue
31.54

11
Anima Sicav European Equities A
31.49

12
Anima Sicav European Equities B
31.49

19
Euromobiliare Europe Equity Fund
31.21
n.d.
9
Anima Geo Europa A
30.98

10
Anima Geo Europa Y
30.98

3
Allianz Europe A
30.90

4
Allianz Europe B
30.90

14
EIS Europe Equities A
30.01

15
EIS Europe Equities I
30.01

1
Ailis Equity Europe Fund
29.99

23
Gestnord Azioni Europa A
28.81

24
Gestnord Azioni Europa C
28.81
n.d.
SRI ranking
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A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
Table 8 (Continued)
#
Name
SRI aggreg. value
Morningst. ranking
20
Fondersel Europa
28.77

26
Investitori Europa
28.56

13
BPER Intl SICAV Equity Europe
28.23

5
Allianz High Dividend A
27.62

6
Allianz High Dividend B
27.62

31
VG SICAV European Equity I
25.29

32
VG SICAV European Equity R
25.29

2
Allianz Azioni Europa
23.96

16
EIS PB Equity EUR I
21.93
n.d.
SRI ranking
Since the composition of each selected fund is given by the Morningstar database, the following procedure will be applied
to calculate the CSR index of each fund (Eq. (3)).
ISRFi =
ni

ISRCj pij
(3)
j=1
where:
ISRFi : SR Index for Fund i,
ISRCj : SR Index for Company j,ni : number of Companies included in Fund i,pij : proportion of Fund i invested in Company
j.
In Section 4, we synthesize case study developed for this research, according to the steps presented in the methodology
approach.
4. The model validation: a case study regarding ranking of Italian mutual funds
A case study analysis was carried out aiming to test and validate the proposed approach.
We have focused on large cap equity mutual funds as large companies are more likely to be scanned by social rating
agencies. We have considered funds whose region of sale is Italy and whose investment area is Europe. And also, funds
whose percentage of equity is more than 80%. Taking into account these restrictions, a total set of 32 funds have been
analyzed (see Table 2).
As stated above, six main groups of stakeholders have been identified. In the selection of stakeholders, we have taken into
account their level of expertise in the SRI field, their knowledge of the selected funds, and their willingness and availability
to participate in this study. Besides, we have also considered some other personal average data such as: gender, age, etc.
according to the reviewed literature.
A description of participant stakeholders is given in the Table 3. For some of them it has not been possible to give more
details about their names or companies, due to confidential reasons. In brackets we show the gender: male or female. In
total, 16 stakeholders have been selected.
The selected criteria from the Equitics® model developed by Vigeo (see Table 1) have been arranged as a hierarchy
according to the AHP procedure, as shown in Fig. 3.
For the weighting of the evaluation criteria the AHP method was used. AHP requires a hierarchical model of criteria, to
pairwise compare all the criteria and to obtain a final weight for them. A questionnaire was designed for this purpose. This
was conducted through a personal interview with each of the 16 stakeholders. Interviews were carried out either with faceto-face meetings or by videoconference depending on the interviewee’s preferences. First, a set of instructions was presented
to explain which comparisons were to be made according to the hierarchical structure proposed and the 1–9 point Saaty’s
A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
553
scale. Last, the surveys were processed using specific software. Weights or relative importance for each criterion and for
each stakeholder were derived. A sample of the questionnaire with a couple of the questions stated is shown in Table 4.
From your point of view, which criterion between CG Corporate governance and BB Business Behaviour is more important
to assess the Social Responsibility performance of a company?
In this example, we see the stakeholder says that, in order to assess the Social Responsibility of a company, Corporate
Governance issues are moderately more important than Environmental issues.
Every stakeholder obtained a different set of weights, according to his/her preferences as will be shown. In order to
obtain the global weighting according to all the stakeholders, the aggregation of all the individual priorities by means of
the geometric mean was used as suggested by Saaty. Once the final weights were achieved the facilitators informed all the
stakeholders about the global and the individual results searching for their agreement.
The results obtained are presented in Table 5.
All the stakeholders were offered on the one hand to validate their individual results, asking them if these really represented their values. According to most of them, the obtained individual results really put forth their inner values. On the
other hand, they also were asked if the aggregated results were meaningful for them. Most of them observed and highlighted
the way the weights “moderate” and tend to approximate to each other when many people are judging. The final agreed
weights for the second level of criteria (i.e., criteria: CG1, CG2, . . ., BB1, BB2, etc.) are the ones we are going to use to assess
the CSR of the companies.
A graphical comparison (Fig. 4) of the first level of criteria is also presented in order to analyze the different profiles of
the stakeholders.
These results allow two different types of stakeholders’ analysis: individual profiles, overall analysis or comparison
analysis.
Starting with the individual analyses (Fig. 4), it seems that most stakeholders respond to what is expected of them. For
example, G4 Trade unions have given much importance to the dimension Human Rights, Human Resources and Business
Behaviour. A similar profile is observed for G1 Bank, G3 CSR Specialist and G6 Others, which can be interpreted as the criteria
that are more directly related to their interests. Regarding the G5 Private Investor, this group has given great importance to
Community Involvement. In the second position they have ranked the Environmental dimension and Human Rights located
ahead of Environmental and Corporate Governance. Indeed, currently, Corporate Governance is receiving the most attention
from the Financial Asset Manager (G2).
The aggregation of individual profiles in one group (Fig. 5) allows an overall analysis.
Clearly, the average results are more balanced than the individual ones. We can observe that the main dimensions are in
order of importance: Human Rights, Human Resources and Corporate Governance.
We have analyzed the prioritization results in two ways: (1) Using the weights of the SR criteria for each individual
investor and (2) Using the weights of the SR criteria according to the whole group of stakeholders.
With all these calculations in mind and applying Eqs. (2) and (3) to the Vigeo’s Equitics® data, the results obtained for
the final prioritization of the 32 analyzed funds are the following.
The obtained values are the result of a weighted sum as explained in Eq. (2). Therefore, each fund can get a value between
0 and 100 depending on the particular values of each company for each criterion (Ijk in Eq. (2)), the criteria weights (wk in
Eq. (2) and the percentage of the fund invested in each company (pij in Eq. (3)). All Ijk values in the database are positive and
thus can be added without problems.
The obtained values must not be considered definitive or absolute. On the one hand, the ranking may vary as the companies
vary in the Vigeo Equitics® assessments. On the other hand funds change their composition continuously and hence the
SR Index will vary accordingly. Therefore, the methodology assesses the funds for a particular time span, as long as the
funds’ composition last. Also it allows predicting how they will perform by changing their composition and, finally, allows
calculating performance trends and researching about the evolution of funds’ SR (Table 6).
Discussing the aggregated results, last column in the table, it can be seen that Funds F21 and F22 are the best ranked
followed close by F30. In a second level, there is a large group at a certain distance headed by six funds: F7, F8, F11, F17, F27,
F28 and F29. At the end of the ranking four funds (F2, F16, F31 and F32) are clearly lower than the others. Two of them F31
and F32 are the open-ended investment trust funds (SICAV in Europe), which are mainly devoted to benefits.
Going through the individual results, interestingly the ranking is very robust and there are no significant differences
among the stakeholders; i.e., the best and worst funds are similar for every stakeholder. There are two main reasons for this
coincidence. On the one hand, when in the database there were cells without information, we assigned cero to the cell. That
is to say, when for a particular company (j) and a particular criteria (k) Vigeo’s Equitic® had no value in the corresponding
cell (Ijk in Eq. (3)), that meant the company had not reported anything, and that was considered a fault as CSR leans on
accountability and transparency. The penalty was to assign 0 to the gap. Hence, no matter the different criteria weights, the
funds with more companies presenting lesser values have lower SR Indexes.
On the other hand, responsible companies usually perform positively in all criteria and hence, the different criteria weights
have a lower than expected influence in the companies’ rank order. Therefore, those funds with more of these responsible
companies had better final scores.
A ranking could be developed to communicate the SRI level. It would be a communication technique similar to the black
stars of the Morningstar rating used to communicate the funds’ financial performance. We have put forward four levels
(Table 7) and have ranked each fund according to the results obtained comparing to their Morningstar rating (see Table 8).
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A. Petrillo et al. / Research in International Business and Finance 37 (2016) 541–555
As it can be seen in Table 8, the SRI ranking does not match the Morningstar ranking. However, in some cases results are
similar. Definitively, when making decisions about their portfolio composition both should be taken into account together
with the investment constraints of the individual investor.
5. Conclusions
In this research, we have focused on obtaining a ranking of investment funds according to the social responsibility of
their companies. The aim is to complement the existing financial tools in Italy. In Italy there is a low level of implementation
of these products and yet, there is an apparent great potential for the socially responsible investment. We believe, not only
individual investors would be potential beneficiaries of this tool, also the companies themselves, institutional investors,
fund managers, financial institutions, marketers and advertisers would also be potential beneficiaries.
The methodology takes into account the different social responsibility (SR) criteria, or ESG considerations (after Environmental, Social and Governance). For this, it relies on the Vigeo’s Equitics® database with six SR dimensions divided into
up to 17 criteria. To our knowledge, this is one of the scarce research projects that exploit the great potential of Equitics® .
The preferences regarding ESG criteria vary from one investor to another depending on their gender, age, culture, interests,
personnel preferences, historic conjuncture, etc. Therefore, the procedure allows analyzing particular profiles of investors
and companies by giving different weights to the SR criteria. Analytic Hierarchy Process (AHP) is applied for the weighting. To
show the adaptability of the methodology, but also aiming at obtaining a balanced proposal for the criteria weights, a panel
of SR financial market stakeholders has been arranged. By means of AHP, their individual preferences regarding Equitics®
SR criteria have shown in the criteria weights and meaningful differences have been found. In the case study 32 Italian large
cap equity mutual funds were assessed. The ranking was calculated for each individual set of criteria weights and for the set
of average weights. Results showed the dimensions Human Rights, Business Behaviour and Human Resources were the most
preferred and hence most weighted. However, they were similarities and differences among the stakeholders that showed
their inner values and approaches towards socially responsible investment.
In conclusion, the proposed methodology could help to discussing those differences looking for a better understanding
among vendors, demanders and opinion makers, on the one hand. On the other hand, the methodology helps designing the
large cap equity mutual funds to adapt better to the different stakeholders’ preferences.
It must be stressed out the final SR score obtained for each fund cannot be considered as a final assessment. The funds
vary in composition with time, and also vary the SR performance of companies they invest on. Being based on Equitics®
data, the methodology allows easily updating the SR scores as the funds and companies change with time.
Finally, and coming back to the main aim of the research, the obtained results for the funds are more meaningful for
individual investors when combined with other financial information and their own restrictions and expectations. Individual
investor are increasingly asking for more complete information, and this includes funds’ SR performance, be it due to the
investor’s consciousness and care about ESG considerations, or be it due to a management of the investment risks. In both
cases the methodology provides complete, understandable and updated information that can be easily combined with other
sorts of financial information, such us the Morningstar classification of funds.
The aim of future work is to extend the study considering other case studies in order to propose the method as tool in
Europe. The methodology could help to design the large equity mutual funds to adapt better to the different stakeholders’
preferences.
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Review the following resources to prepare for this week’s assignments, which is to write an annotated
bibliography for your assigned articles, which I shall assign in class.
Annotated Bibliography
An annotated bibliography describes and evaluates literature on a topic in a collection of succinct, one-paragraph
entries of 250-350 words. There are four important points to know about an annotated bibliography. See below:
Review the resources listed in the Books and Resources area below to prepare for this week’s assignments.
Activity Resources:
Website Link
Annotated Bibliographies. Purdue Online Writing Lab (OWL). http://owl.english.purdue.edu/owl/resource/614/01
Instruction:View Website
Annotated Bibliography. University of Canberra: Academic Skills
Program.https://academicskills.anu.edu.au/resources/handouts/writing-annotated-bibliography
Instruction:View Website
How to Prepare an Annotated Bibliography. Cornell University
Library.http://www.library.cornell.edu/olinuris/ref/research/skill28.htm
Instruction:View Website
Here is your format to follow:
Name: Your name
Class: BUS 700A Capstone Advanced Strategy & Competition Syllabus
Reference:
Authors last name, authors first intials, (Year), Name of article (only the first letter of the article is
capitalized), name of Journal (normal capitalization), vol # only, Month # only, page # only, doi
(not caplitialized). (use a hanging indent-see Word settings)
(Space) (Rember your paper is only doubled spaced)
Start your paper here. Do not indent.
Name the hypothesis of the study.
State the methodology and main points.
Say if the study was a quantitative or qualitative study.
A quantitative study uses observable data.
A qualitative study uses surveys and case studies.
Tell who the subjects were (referred to as population) and how they were recruited.
State the findings or outcomes of the study.
Evaluate the study and the work’s relationship to other works in this area of study (see sample above).
Example: Annotated Bibliography
Adam, A. A. & Shauki, E. (2014). Socially responsible investment in Malaysia: behavioral
framework in evaluating investors’ decision making process. Journal of Cleaner
Production, 2(80), 224-24. doi:10.1016/j.jclepro.2014.05.075
Adam and Shauki (2014) presented the role of intention, attitude, subjective norms, perceived
behavioral control, and moral norms in explaining the socially responsible investment (SRI)
behavior of Malaysian investors. In their article, they describe SRI as a method of making
investment decisions according to social, ethical, or environmental considerations within the
context of rigorous financial analysis (2014). According to Adam and Shauki, (2014) investors’
decision-making behavior concerning SRI is hypothetically influenced by intention, perceived
behavioral control, and moral norms. However, in the context of SRI, the analysis of SRI in
Malaysia differs compared to that of other countries (2014). With regards to SRI in Malaysia,
behavior is significantly influenced by intention but not with perceived behavior control (2014).
Instead, perceived behavior in this country was found to be independent of both behavior and
intention (2014). The observation that intention alone was sufficient to predict behavior means
that Malaysian investors do have complete control over their decisions on SRI due to the
availability of both opportunities such as SRI funds or shares and resources such as information
on SRI investing and risks (2014). Therefore, Malaysian investors’ willingness to invest, which
is measured in some way by intention, most likely influences their decision making concerning
SRI (2014). In addition, beliefs about risk and return outcomes influence the intention of
Malaysian investors to invest in SRI instruments (2014). Beliefs related to feelings of control
such as easy access to funds and an understanding of SRI trading do not constitute a major focus
of the Malaysian investor’s decision making process where in real life an understanding of SRI
trading should be key (2014). The outcome beliefs of the Malaysian investor are therefore
probably formed through the influence of individuals who are especially versed in dealings with
moral, social, and financial issues (2014). In summary, Adam and Shauki, (2014) underscore the
finding that in terms of SRI in Malaysia, behavior is significantly influenced by intention but not
perceived behavior control. The view of SRI in Malaysia is different compared to other
countries (2014).

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