Selection of Socially Responsible Portfolios using Goal Programming and fuzzy technology

In this study we present a model for selecting portfolios when an ethical dimension on financial products is considered. We propose a method that can be used to define a measure of the ethical performance of the mutual funds that follow a Socially Responsible Investing (SRI) approach. Such funds would avoid investments in companies that fail to meet certain ethical criteria or would choose to invest in companies whose objectives are seen as ethically desirable. In order to do this, we present an index called “SRI-Attractiveness” that summarizes the “social, environmental and ethical performance” of each SRI-fund for a particular investor. This index relies on an aggregation process and uses Fuzzy Multi-Criteria Decision-Making techniques. In this approach, the first phase finds a fuzzy number that assesses how the fund fulfills the social attributes according to investors’ preferences. In the second one, a normalization process is presented on the basis of the construction of a fuzzy target that takes into account how the investor strictly adheres to the social responsibility criteria. Indeed, the SRI-approach also considers conventional financial objectives such as final wealth, net gains, or wealth relative to some benchmark. Therefore, any model of SRI-asset allocation should integrate social and financial dimensions. In this paper, the evaluation of the financial criteria has been handled by the Expected Value of final wealth and the Conditional Value-at-Risk. We use a mathematical programming technique that allows us to work with multiple criteria: Goal Programming models with flexible targets and constraints. A case study on a set of Socially Responsible mutual funds domiciled in the UK is presented to illustrate the applicability of the proposed method.