Abstract
This paper analyzes the persistence of environmental, social, and governance (ESG)-scores in socially responsible (SR) mutual funds. ESG-scores can be used as a measure for the level of social responsibility of an SR mutual fund. It is shown that ESG-scores persist for approximately two years. However, the persistence of the ESG-scores is terminated after approximately three years. This implies that value-driven investors of SR mutual funds who seek high-ESG investments cannot rely upon a long-term continuation of high ESG-scores and thus need to rebalance their portfolio from time to time. The lack of long-term persistence in the ESG-scores is caused by changes in the holdings of the SR mutual funds.
Highlights
Responsible investing (SRI), which is sometimes called ethical investing or sustainable investing, is attracting increasing attention both in practice and in academia (Renneboog, Ter Horst, & Zhang, 2008a; Capelle-Blancard & Monjon, 2012)
Description: In each calendar year from 2003 to 2009, funds are ranked in quartile portfolios based on their ESG-scores
Since the portfolios are constructed in the original formation year by the ranking of the ESG-scores of the respective funds, it is clear that portfolio 1, which contains exactly the funds with the highest ESG-scores in that year, shows the highest ESG-score, portfolio 2 the second highest ESG-score, and so on, in the formation year
Summary
Responsible investing (SRI), which is sometimes called ethical investing or sustainable investing, is attracting increasing attention both in practice and in academia (Renneboog, Ter Horst, & Zhang, 2008a; Capelle-Blancard & Monjon, 2012). While some contributions (Moskowitz, 1972; Luck & Pilotte, 1993; Derwall, Guenster, Bauer, & Koedijk, 2005; Kempf & Osthoff, 2007; Edmans, 2011) confirm a superior financial performance for certain socially responsible screens, most studies, do either find no difference in the performance of SRI and traditional investments (Hamilton, Jo, & Statman, 1993; Kurtz & DiBartolomeo, 1996; Guerard, 1997; Bauer, Koedijk, & Otten, 2005; Schröder, 2007; Statman & Glushkov, 2008) or even negative performance (Brammer, Brooks, & Palvin, 2006; Renneboog, Ter Horst, & Zhang, 2008b; Hong & Kacperczyk, 2009; Mǎnescu, 2010) Another branch of literature analyzes the persistence of the financial performance of mutual funds in general These studies converge that there is no evidence that fund managers are able to consistently generate financial over-performance for more than one year
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