Socially responsible investing and the performance of Eurozone corporate bond portfolios

Abstract

AbstractThis paper investigates the performance of socially screened bond portfolios of 189 Eurozone companies between 2003 and 2016. Bond portfolios are formed on the basis of an aggregate measure of corporate social responsibility (CSR) and on specific dimensions of CSR, namely, Environment, Social, and Governance dimensions. Our results show that the performance of highly socially rated bonds is not significantly different from that of low‐rated bonds. We also observe that in an earlier stage, portfolios of high‐rated bonds outperformed portfolios of low‐rated bonds. Yet over time, this outperformance disappears. These results suggest that the errors‐in‐expectations and shunned‐security hypotheses are not only useful in explaining the performance of socially responsible equity portfolios but that they are also useful in explaining the performance of socially screened bond portfolios over time. Overall, our results indicate that investors can form bond portfolios based on sustainability criteria without compromising financial performance.