Socially Responsible Investment Funds Research Articles

The Performance of Socially Responsible Funds: Does the Screening Process Matter?

In this study we examine whether the financial performances of socially responsible investment (SRI) mutual funds are related to the features of the screening process. Based on a sample of French SRI funds, we find evidence that a greater screening intensity slightly reduces financial performance (but the relationship runs in the opposite direction when screening gets tougher). Further, we show that only sectoral screens – such as avoiding “sin” stocks – decrease financial performance, while transversal screens – commitment to UN Global Compact Principles, ILO/Rights at Work, etc. – have no impact. Lastly, when the quality of the SRI selection process is proxied by the rating provided by Novethic, its impact is not significant, while a higher strategy distinctiveness amongst SRI funds, which also gives information on the quality of the selection process, is associated with better financial performance.

The Performance of Socially Responsible Mutual Funds: The Role of Fees and Management Companies

In this article, we shed light on the debate about the financial performance of socially responsible investment (SRI) mutual funds by separately analyzing the contributions of before-fee performance and fees to SRI funds’ performance, and by investigating the role played by fund management companies in the determination of those variables. We apply the matching estimator methodology to obtain our results and find that in the period 1997–2005, US SRI funds had better before- and after-fee performance than conventional funds with similar characteristics. The differences, however, are driven exclusively by SRI funds run by management companies specialized in SRI. While these funds significantly outperform similar conventional funds, funds run by companies not specialized in SRI underperform their matched conventional funds. We find no significant differences in fees between SRI and conventional funds except in one case: SRI funds are cheaper than conventional funds run by the same management company.

When the going gets tough: alliance formation as a strategic response to SRI negative screens

How should firms respond strategically when their whole industry is negatively screened by Socially Responsible Investment (SRI) funds due to the nature of its products (e.g., tobacco, alcohol, weapons) or its processes (e.g., biotechnology, nuclear power, mining, forestry)? We argue that an industry's exclusion from SRI funds due to negative screening should provide an incentive for firms to strategically manage the social responsibility aspects of their industry. Moreover, due to problems associated with free riding, we believe this incentive will likely result in the formation of multiple firm, intra-industry collaborative alliances engaged in social action and legitimation on behalf of the industry, rather than single firm efforts. We explore this argument by searching for evidence of such alliances within a sample of SRI negatively screened industries.

Financial Performance of SRI Excluded Firms

Socially Responsible Investments (SRI) can be characterized as ‘negative screening’: investors eliminate certain firms from consideration based not on perceived performance but on inappropriate behavior (labor issues or support of same sex unions for example) or for products considered inappropriate for society (alcohol and tobacco for example). There have been a large number of studies examining the effect of this negative filter on investment performance, but little research on the operational impact on a firm of being systematically excluded by SRI investors. This paper examines what financial consequences, if any, occur if a firm is excluded by a large number of SRI funds. We find that debt ratios, profit margins, operating costs, and cash positions of SRI-excluded firms are affected. These excluded firms tend to use more debt, hold higher cash positions, and have higher profit margins and lower operating costs than similar, non-excluded firms.

The Performance of Socially Responsible Mutual Funds: The Role of Fees And Management Companies

In this paper, we shed light on the debate about the financial performance of socially responsible investment (SRI) mutual funds by separately analyzing the contributions of before-fee performance and fees to SRI funds' performance and by investigating the role played by fund management companies in the determination of those variables. We apply the matching estimator methodology to obtain our results and find that in the period 1997-2005, US SRI funds had better before- and after-fee performance than conventional funds with similar characteristics. The differences, however, are driven exclusively by SRI funds run by management companies specialized in SRI. While these funds significantly outperform similar conventional funds, funds run by companies not specialized in SRI underperform their matched conventional funds. We find no significant differences in fees between SRI and conventional funds except in one case: SRI funds are cheaper than conventional funds run by the same management company.

Why Wine is not Glue? The Unresolved Problem of Negative Screening in Socially Responsible Investing

The purpose of socially responsible investing (SRI) is to: (1) allow investors to reflect their personal values and ethics in their choices, and (2) encourage companies to improve their ethical, social, and environmental performance. In order to achieve these ends, the means SRI fund managers employ include the use of negative screening, or the exclusion of companies involved in “sinful” industries. We argue that there are problems with this methodology, both at a theoretical and at a practical level. As a consequence, current SRI offerings cannot accurately reflect the values and ethical beliefs they propose to represent. Moreover, the use of a␣priori criteria is potentially misleading, as we show by discussing examples of glue and wine making. Applying this flawed approach SRI funds fail to influence the direction of the firms they deem most in need of re-directing. Rather than engaging in the simple a␣priori assumption that some industries are “saints” while others are “sinners” (Freeman, 2007) we suggest a new framework upon which the SRI screening methodology could be grounded. Embracing the philosophical tradition of American pragmatism, we suggest that SRI methodology could be improved by engaging in an analysis based on (1) the actual impacts of the company’s products and services, (2) the company’s relationships with its specific, real stakeholders, and (3) the contingent environment (social, economic, political, legal, and cultural) in which the business operates.

Socially Responsible Investment: Explaining its Uneven Development and Human Resource Management Consequences

ABSTRACTManuscript Type: ConceptualResearch Question/Issue: In this paper we address two research questions. First, to what extent has Socially Responsible Investment (SRI) developed unevenly across countries with different corporate governance systems and how might we explain this? Second, what consequences does its uneven development have for human resource management (HRM)?Research Findings/Insights: We map the nature and extent of SRI equities across five industrialized countries – Germany, Japan, the UK, the US and Australia. We find that differences between the institutional, corporate governance and cultural characteristics of national business systems explain variations in the size and significance of SRI across countries. We also find that SRI has an impact on HRM in institutional contexts such as where its influence is complemented by strong employee voice institutions.Theoretical/Academic Implications: The notion of “institutional complementarities,” within and across spheres of a corporate governance system is a useful theoretical lens for understanding the varied impact of SRI across different corporate governance systems. Further, future studies of HRM will need to consider the heterodox pressures produced by SRI that may influence its conduct.Practitioner/Policy Implications: Implications for SRI fund managers are considered, especially how they might use the notion of institutional complementarities to help in their investment decisions and in the impact they can exert. Specifically SRI funds are likely to be more effective where they can form alliances with other existing bodies or where they spur the development of such bodies. The implications for other actors in HRM and corporate governance are also considered.

The price of ethics and stakeholder governance: The performance of socially responsible mutual funds

Do investors pay a price for investing in socially responsible investments (SRI) funds, or do they obtain superior returns? This paper investigates these under- and overperformance hypotheses for all SRI funds across the world. Consistent with investors paying a price for ethics, SRI funds in the US, the UK, and in many continental European and Asia-Pacific countries underperform their domestic benchmarks by − 2.2% to − 6.5%. However, with the exception of some countries such as France, Japan and Sweden, the risk-adjusted returns of SRI funds are not statistically different from the performance of conventional funds. We also find that the underperformance of SRI funds is not driven by loadings on an ethics style factor. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying funds that will perform poorly. Finally, corporate governance and social screens yield lower risk-adjusted returns.

The Price of Ethics and Stakeholder Governance: The Performance of Socially Responsible Mutual Funds

Do investors pay a price for investing in socially responsible investments (SRI) funds, or do they obtain superior returns? This paper investigates these under- and overperformance hypotheses for all SRI funds across the world. Consistent with investors paying a price for ethics, SRI funds in the US, the UK, and in many continental European and Asia-Pacific countries underperform their domestic benchmarks by -2.2% to -6.5%. However, with the exception of some countries such as France, Japan and Sweden, the risk-adjusted returns of SRI funds are not statistically different from the performance of conventional funds. We also find that the underperformance of SRI funds is not driven by loadings on an ethics style factor. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying funds that will perform poorly. Finally, corporate governance and social screens yield lower risk-adjusted returns.

Socially responsible investments: Institutional aspects, performance, and investor behavior

This paper provides a critical review of the literature on socially responsible investments (SRI). Particular to SRI is that both financial goals and social objectives are pursued. Over the past decade, SRI has experienced an explosive growth around the world reflecting the increasing awareness of investors to social, environmental, ethical and corporate governance issues. We argue that there are significant opportunities for future research on the increasingly important area of SRI. A number of questions are reviewed in this paper on the causes and the shareholder-value impact of corporate social responsibility (CSR), the risk exposure and performance of SRI funds and firms, as well as fund subscription and redemption behavior of SRI investors. We conclude that the existing studies hint but do not unequivocally demonstrate that SRI investors are willing to accept suboptimal financial performance to pursue social or ethical objectives. Furthermore, the emergence of SRI raises interesting questions for research on corporate finance, asset pricing, and financial intermediation.

The role of fund management institutions in the development of socially responsible investments: an analysis of the Spanish case

Socially Responsible Investment (SRI) refers to investment practices that take into account financial, social and environmental aspects. The objective of this paper is to identify the factors which may influence fund management companies in making a decision to manage and/or market SRI funds and the variables that can determine whether or not this company has an explicit Corporate Social Responsibility (CSR) policy. The results confirm our initial hypothesis that there is a positive relation between fund management companies' internal policy on CSR and the fact that they manage and/or market SRI mutual funds.

Socially responsible investment funds: Investor reaction to current and past returns

This paper investigates and compares the determinants of fund flows for socially responsible investment (SRI) funds and conventional funds. We consider the impact of current and past measures of monthly and annual return on fund flow. The results suggest SRI fund flows are less sensitive to returns than conventional funds. Our model also shows that flow is persistent and SRI investors are more likely to invest in a fund they already own relative to conventional investors. These results reflect the difficulty SRI investors face in finding alternative investments that meet their non-financial goals.

Socially Responsible Investment Funds: Investor Reaction to Current and Past Returns

This paper investigates and compares the determinants of fund flows for socially responsible investment (SRI) funds and conventional funds. We consider the impact of current and past measures of monthly and annual return on fund flow. The results suggest SRI fund flows are less sensitive to returns than conventional funds. Our model also shows that flow is persistent and SRI investors are more likely to invest in a fund they already own relative to conventional investors. These results reflect the difficulty SRI investors face in finding alternative investments that meet their non-financial goals.

The Investment Performance of Socially Responsible Investment Funds in Australia

Interest in the notion of the possible financial sacrifice suffered by socially responsible investment (SRI) fund investors for considering ethical, social and environmental issues in their investment decisions has spawned considerable academic interest in the performance of SRI funds. Both the Australian and international research literature have yielded largely mixed results. However, several of these studies are hampered by methodological problems which can obscure the significance of reported results, such as the use of small sample sizes, inconsistencies in the time frames selected to analyse performance and different modelling frameworks used to estimate investment returns. This study attempts to redress some of these issues by investigating the returns performance of 89 ethical funds in Australia over the period 1986–2005. Using a multi-factor CAPM model [Fama, E. F., and K. R. French (1996) J. Finance 51(1), 55] (which controls for factors such as size, book-to-market value and momentum) we find that ethical funds significantly under-perform the market in Australia, particularly in the most recent 5 years of our sample period (2000–2005). Risk adjusted returns (using Jensen’s alpha) indicate that average annual underperformance is around 1.52% in the 2000–2005 period for our sample and .88% over the whole sample period. Our results contrast with many previous studies (both Australian and international), which have not found statistically significant differences in the performance of ethical funds relative to market benchmarks and/or a matched sample of conventional funds.

The Price of Ethics: Evidence from Socially Responsible Mutual Funds

This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds’ riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.

Socially Responsible Investments: Methodology, Risk Exposure and Performance

This paper surveys the literature on socially responsible investments (SRI). Over the past decade, SRI has experienced an explosive growth around the world. Particular to the SRI funds is that both financial goals and social objectives are pursued. While corporate social responsibility (CSR) - defined as good corporate governance, sound environmental standards, and good management towards stakeholder relations - may create value for shareholders, participating in other social and ethical issues is likely to destroy shareholder value. Furthermore, the risk-adjusted returns of SRI funds in the US and UK are not significantly different from those of conventional funds, whereas SRI funds in Continental Europe and Asia-Pacific strongly underperform benchmark portfolios. Finally, the volatility of money-flows is lower in SRI funds than of conventional funds, and SRI investors’ decisions to invest in an SRI fund are less affected by management fees than the decisions by conventional fund investors.

Socially Responsible Investing: the green attitudes and grey choices of Australian investors

This Australian study seeks to better understand the disparity between the positive attitudes towards Socially Responsible Investing (SRI) and the level of investment in SRI, by examining both the attitudes to SRI and the investment choices that are made. It is hypothesised that those who are more committed to principles of environmental sustainability are more likely to invest in SRI. To test this, 318 people from two large Queensland organisations are surveyed in relation to their investment attitudes and preferences. We find that there are significant differences in investment attitudes with environmentalists placing more importance on SRI investment criteria. However, there was no significant difference between environmentalists and non‐environmentalists in terms of utility scores from an investment selection experiment with the environmentalists placing higher importance on financial performance criteria than SRI criteria, making choices similar to those with the lowest level of environmental activism. Furthermore, the observed lack of congruency between attitudes and choices in relation to environmental criteria may have implications for the growth of SRI funds.

Beyond dichotomy: the curvilinear relationship between social responsibility and financial performance

AbstractA central and contentious debate in many literatures concerns the relationship between financial and social performance. We advance this debate by measuring the financial–social performance link mutual funds that practice socially responsible investing (SRI). SRI fund managers have an array of social screening strategies from which to choose. Prior studies have not addressed this heterogeneity within SRI funds. Combining modern portfolio and stakeholder theories, we hypothesize that the financial loss borne by an SRI fund due to poor diversification is offset as social screening intensifies because better‐managed and more stable firms are selected into its portfolio. We find support for this hypothesis through an empirical test on a panel of 61 SRI funds from 1972 to 2000. The results show that as the number of social screens used by an SRI fund increases, financial returns decline at first, but then rebound as the number of screens reaches a maximum. That is, we find a curvilinear relationship, suggesting that two long‐competing viewpoints may be complementary. Furthermore, we find that financial performance varies with the types of social screens used. Community relations screening increased financial performance, but environmental and labor relations screening decreased financial performance. Based on our results, we suggest that literatures addressing the link between financial and social performance move toward in‐depth examination of the merits of different social screening strategies, and away from the continuing debate on the financial merits of either being socially responsible or not. Copyright © 2006 John Wiley & Sons, Ltd.

Do Socially Responsible Fund Managers Really Invest Differently?

To date, research into socially responsible investment (SRI), and in particular the socially responsible investment funds industry, has focused on whether investing in SRI assets has any differential impact on investor returns. Prior findings generally suggest that, on a risk-adjusted basis, there is no difference in performance between SRI and conventional funds. This result has led to questions about whether SRI funds are really any different from conventional funds. This paper examines whether the portfolio allocation across industry sectors and the stock-picking ability of SRI managers are different when compared to conventional fund managers. The study finds that SRI funds exhibit different industry betas consistent with different portfolio positions, but that these differences vary from year to year. It is also found that there is little difference in stock-picking ability between the two groups of fund managers.

The Financial Performance of a Socially Responsible Investment Over Time and a Possible Link with Corporate Social Responsibility

This paper empirically examines the financial performance of a UK unit trust that was initially “conventional” and later adopted socially responsible investment (SRI) principles (ethical investment principles). Comparison is made with three similar conventional funds whose investment objectives remained unchanged. Analysis techniques employed in previous studies find similar results: mean risk-adjusted performance is unchanged by the switch to SRI, with no evidence of over-or under-performance relative to the benchmark market index by any of the four funds. More interestingly, changes in variability of returns over time are also modelled using generalised autoregressive conditional heteroscedasticity models, not previously applied to SRI funds so far as is known. Results show a temporary increase in variability of returns, followed by a return to previous levels after around 4 years. Evidence shows the increased variability to be associated with the adoption of SRI rather than with a change in fund management. Possible explanations for the subsequent reduction in variability include the spread of corporate social responsibility activities by firms and learning by fund managers. In addition to reporting on a previously unobserved phenomenon, this paper raises questions for further research.