Constructing a Social Profitability Index: Socially Responsible Investing in Electric Utilities

Abstract: Building on a theory about the Social Profitability Index (SPI), this paper is the first to construct an SPI in practice ranking investment opportunities based on social and financial returns within the electric utility industry. The social return is the investor-preference weighted social gain from avoiding carbon emissions by changing to renewable production technology in a firm. Using data from listed companies in the U.S. electrical utilities sector, we find that the SPI of a company is heavily dependent on its carbon intensity and moderately dependent on the company's location. This makes different technologies suit different companies due to the influence that location has on renewable technology efficiency. In conclusion, investing in "sinful", high carbon intensity electricity companies is optimal for socially responsible investors who can change part of the company technology through shareholder activism.