Using a sample of 2,516 U.S. mutual funds over the 2010–2017 period, we examine the effects of socially responsible investing (SRI) on mutual fund performance. We use two proxies for deviations from SRI: social active share (SAS), and social tracking error (STE). Respectively, they capture the differences in holdings and returns between a fund and a socially responsible index, the MSCI KLD 400. In univariate analyses, the SAS results align with more socially responsible funds outperforming less socially responsible funds, while the STE results provide mixed evidence. In multivariate analyses, both SAS and STE show that more socially responsible funds outperform their less socially responsible peers. We also find that socially responsible funds exhibit lower risk. Taken together, our results provide evidence that SRI does not damage fund performance but can reduce fund risk.
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