Performances and risk of socially responsible investments across regions during crisis

Abstract

AbstractVery few studies verified whether Socially Responsible Investments (SRIs) add value during a financial turmoil. We fill this gap. We conduct the analysis by employing the Fama and French (2015) five‐factor model along with the usual Fama and French's (1993) and Carhart's (1997) models. We also propose an innovative methodology that takes into consideration the higher moments of the explanatory variables in order to deal with the non‐normality and the heteroskedasticity of return distributions. Rather than inspecting Socially Responsible (SR) mutual funds as done by most of the existent literature, we concentrate on SR indexes, in the conviction to overcome some of the limitations that can potentially bias an analysis carried out on mutual funds. Our results show that both SR and conventional indexes performed almost in the same way independently of the financial market conditions. Little evidence can at best support the conclusion that SRIs dampened the downside risk during the recent financial crisis in North America only. At the same time, SRIs do not seem to suffer from a risk‐adjusted perspective during normal times. As expected, SRIs bear a higher level of idiosyncratic volatility compared to their respective conventional investments. Our innovative methodology plays an important role in explaining the cross section of SR returns.