Socially Responsible Investment Funds Research Articles

Who is greener, more social and better-governed? Dual ownership by SRI mutual funds stands out

This study sheds new light on ESG performance and financial characteristics of companies that are constituents of portfolios of U.S. socially responsible investing (SRI) funds. We categorize SRI fund participation into three distinct types: debt-only, equity-only, and dual ownership of debt and equity. Companies with dual ownership tend to be held by relatively bigger and more concentrated SRI funds. Our holdings-based analysis reveals that these investee companies deliver superior ESG performance across all dimensions and have larger size, higher degree of financial safety, and higher profitability compared to those in equity-only or debt-only categories.

The Influence of Emotions and Social Value Orientation on Risk Tolerance and Sustainable Investment Choices

Purpose - The intricacy of the decision-making process has increased due to the inherent uncertainty surrounding investments. Therefore, the study aims to investigate the impact of individuals' Social Value Orientation (SVO), Emotional Instability (EI), and demographic factors on their Financial Risk Tolerance (FRT) levels. Additionally, it aims to investigate whether SVO and EI influence the adoption of socially responsible investment (SRI) funds and the diverse investment choices made by individuals. Methodology - A convenient sampling technique was employed to gather data from 355 Indian retail investors through a structured questionnaire. Subsequently, the collected data was then examined and interpreted using binary logistic regression and chi-square tests facilitated by the SPSS 26 software. Findings - The results emphasize that SVO, EI, Age, Marital status and Gender are significant predictors of investors' FRT. Furthermore, our study unveils that investors with a pro-social mindset are more inclined to invest in SRI funds compared to those who prioritize themselves. Originality – The current study contributes to the existing literature by introducing a novel and unexplored variable, i.e., SVO, for academic consideration in risk tolerance. Moreover, this study imparts a profound understanding of behavioural finance by illuminating the influence of investors' values and emotions on their inclination to embrace risk. Social Implication - By examining investors' preferences and interests in SRI, we gain valuable insight into the growing importance of sustainable funds. This aligns harmoniously with the overarching pursuit of Sustainable Development Goals (SDGs), as these conscientious investment funds scrutinize and eliminate companies that harm society.

Cleansing Investor’s Conscience: The Effects of Incidental Guilt on Socially Responsible Investment Decisions

This paper explores the effects of incidental guilt on Socially Responsible Investment (SRI) decisions of retail investors. Do investors who feel guilty invest more in SRIs to clear their conscience? Are guilty investors willing to sacrifice returns to restore their moral selves? Using survey data from an online quasi-experiment among a sample of US retail investors, we find that individuals who experience incidental guilt are willing to invest more in SRI funds than those in a neutral state. We show that this effect, albeit moderate in magnitude, cannot be explained solely by differences in retail investors’ moral reasoning, attitudes towards social responsibility, risk tolerance and demographic factors. When presented with a trade-off between sustainability, risk and return characteristics of the funds, guilty investors are more willing to sacrifice returns for greater sustainability than non-guilty participants. Our research provides new evidence of the effect that incidental guilt has on the sustainable investing decisions of retail investors.

Sustainable finance disclosure regulation insights: Unveiling socially responsible funds performance during COVID‐19 pandemic and Russia–Ukraine war

AbstractThe transition towards a more sustainable financial market demands transparency and trust from investors, objectives also pursued by the Sustainable Finance Disclosure Regulation (SFDR). Specifically, carefully assessing the risk‐adjusted performance of sustainable funds empowers investors to make informed decisions in alignment with their ethical and financial objectives. This article contributes to the debate on the performance of socially responsible investment (SRI) funds in times of crisis by evaluating the risk‐adjusted performance of a sample of SRI and conventional funds, ranked in light of the SFDR, during the COVID‐19 pandemic and the Russia–Ukraine war. Using a two‐step analysis, the results of the study show that funds with clear sustainability objectives, as defined by Article 9 of the SFDR, were able to outperform conventional funds, but only a few months after the onset of the crisis periods, thus demonstrating poor performance persistence. At the same time, sustainable funds with a focus on financial materiality, as defined by Article 8, were never able to generate significantly different risk‐adjusted performance from conventional funds. Our results show that the lack of performance persistence of Article 9 funds prevents an effective hedging role for investment strategies that consider extra‐financial criteria. They also confirm that the classification criteria introduced by the SFDR still need to be more specific and create more transparency in financial markets.

Are green and socially responsible funds more efficient than conventional funds? A DEA approaches

PurposeThe main goal of this paper is better understand the risk/return trade-off of investing in socially responsible investment funds (SRIF) and green investment funds (GIF).Design/methodology/approachTo achieve our aim a green investment fund portfolio, a socially responsible investment portfolio and a conventional fund (CF) portfolio from the United States of America (USA) were selected to compare the efficiency of these three different portfolios, by using Value-Based Data Envelopment Analysis (DEA) methodology.FindingsThe results point out that SRIF and GIF are more efficient than CF. For five years, the CFs have not outperformed the GIF.Originality/valueThe results suggest that there is a growing awareness on the part of investors that sustainable companies are the companies that will allow a better quality of life and a more sustainable environment. It seems that somehow managers and investors are aware that the market will compensate them for thinking about a cleaner and more equitable world.

Does Socially Responsible Investing Change Firm Behavior?

Abstract Using micro-level data, we examine the behavior of socially responsible investment (SRI) funds. SRI funds select firms with lower pollution, more board diversity, higher employee satisfaction, and better workplace safety. Yet, both in the cross-section and using an exogenous shock to SRI capital, we find that SRI funds do not significantly change firm behavior. Moreover, we find little evidence that they try to impact firm behavior using shareholder proposals. Our results suggest that SRI funds are not greenwashing, but they are impact washing; they invest in a portfolio of firms with better environmental and social conduct but do not follow through on their promise of impact.

The green and Brown performances of mutual fund portfolios

The past decade has seen an increasing interest in socially responsible investing (SRI) in the mutual fund industry. Central to this development is whether SRI funds underperform conventional funds. Using a novel approach and a sample of 2,255 mutual funds, we decompose fund portfolios into socially responsible (green) and non-socially responsible (brown) components. We find that, in comparison to the non-socially responsible component, the socially responsible portion exhibits a lower raw return, lower risk-adjusted return (alpha), lower Sharpe ratio, and similar degree of performance reversal. The magnitude of this underperformance is, however, relatively small. The results align with SRI having a limited negative impact on fund performance while potentially offering some diversification benefits.

Households' investments in socially responsible mutual funds

We use a large administrative panel data set to study which characteristics are related to households’ investments in socially responsible investing (SRI) mutual funds. To isolate financial and non-financial preferences for SRI investments, we distinguish between two types of SRI funds; ESG and charitable funds. We also analyze to what extent liquid wealth and age play a role in allocation of SRI funds. We find that participation in SRI funds is lower for young and retired investors. Moreover, we find that young adults are more likely to be ESG investors, while retired investors are more likely to participate in charitable funds. Further, liquid wealth is important for SRI participation but becomes less relevant once investors have sufficient liquid wealth. For the exposure to SRI funds, the overall picture is quite different as it is negatively related to wealth, income, risky share, and education. The relationship between investors’ characteristics and the returns on their conventional fund portfolio are similar for conventional and SRI investors. Our analysis indicates that SRI investors might have non-financial objectives for their SRI investments. Finally, we find that, on average, SRI investors earn higher returns on their total fund portfolio compared to conventional investors.

Ethical window dressing: SRI funds are as good as their word

In this research, we tested the existence of ethical window dressing in the Socially Responsible Investment (SRI) domestic equity funds registered in the US market. For this purpose, we compared the environmental, social, and corporate governance (ESG) attributes of disclosed and undisclosed portfolios. We reject that the ESG portfolio image is significantly better in reporting months than in non-reporting months. Examining portfolio trading based on different proxies, we found residual signals of ethical window dressing. None of these signals correspond to easy-to-interpret information. Thus, SRI funds do not manipulate the disclosed ESG image to attract money flows.

Comparing SRI funds to conventional funds using a PCA methodology

In this paper, we investigate characteristic differences between Socially Responsible Investment (SRI) funds and conventional funds across 35 different categories, including previously unexplored areas, such as fund manager skills and investment strategies. Further, we examine SRI and conventional funds globally rather than from just one country (e.g., US) or one region (e.g., Europe), covering funds listed in 22 different countries. We also adopt a new Principal Component Analysis (PCA) methodology for matching SRI funds against their conventional counterparts that significantly increases the sample size from previous studies, reducing selection bias and possibly explaining contradictory findings in the prior literature. Contributing to the literature, our findings show that: (i) SRI funds have more diversified portfolios than conventional funds; (ii) SRI funds have lower cash holdings while investing more in US equities; and (iii) SRI fund managers charge a smaller fee and are more successful in managing their portfolios. This is reassuring for investors who invest in SRI funds and for the future health and sustainability of the planet.

Measuring the dynamic efficiency of socially responsible investment funds: evidence from dynamic network DEA with diversification

This article proposes some alternative multi-period diversification-consistent data envelopment analysis (DEA) models to assess the dynamic performance of socially responsible investment (SRI) funds accounting for both finance and SRI criteria. First, three portfolio possibility sets (PPSs) are constructed based on some alternative dynamic input-output processes of SRI funds. Second, three diversification-consistent DEA models are developed by combining the directional distance function (DDF) measure with the proposed PPSs. Finally, this article selects 45 SRI funds to investigate the impact of social responsibility scores (SRSs), intermediate linkages, efficiency weights, and projection directions on their efficiency and ranking, respectively.

Performance of Socially Responsible Investment Funds in China: A Comparison with Traditional Funds

This paper empirically examines and compares social responsibility investment funds to traditional funds, and explores the performance of the existing social responsibility investment funds in China. Based on 64 social responsibility investment funds (SRI Funds) and 64 traditional funds, this paper extracts the data of the sample fund from the fourth quarter of 2016 to the fourth quarter of 2019 as sample data to conduct a comparative analysis of the difference between the SRI fund and the traditional fund in terms of return and risk, and to then empirically study the performance of the funds. The results show that the difference between the return of China’s socially responsible investment funds and the traditional funds is insignificant, and the risk of socially responsible investment funds is significantly lower than that of traditional funds. The regression analysis is also carried out on a model of social responsibility as a factor affecting the performance of the funds. Subsequently, the results show that social responsibility has a significant positive impact on the fund’s return in the Chinese market.

The trajectory of the SRI fund industry in Brazil

This article utilises data collected from the platforms quantum axis, Morningstar, and central system from Comissão de Valores Mobiliários (CVM) to present a descriptive analysis of the Brazilian socially responsible investment (SRI) funds. It was noted that, overall, the Brazilian SRI funds adopt in their policies the third generation SRI approach (positive screen), and no fund with negative screen was found. From 2001 to December 2017, the Brazilian SRI funds industry had a total of 64 funds with sustainable characteristics in its name, which represents a negligible percentage compared to the total of the Brazilian funds industry.

Do Socially Responsible Investment Funds Sell Losses and Ride Gains? The Disposition Effect in SRI Funds

An increasing percentage of the total net assets under professional management is devoted to ethical investments. Socially responsible investment (SRI) funds have a dual objective: building an investment strategy based on environmental, social, and corporate governance (ESG) screens and providing financial returns to investors. In the current study, we investigate whether this dual objective has an influence on the behavior of mutual fund managers in the realization of gains and losses. Evidence has shown that most investors in SRI funds invest in those funds primarily because of their social concerns. If the motivations of SRI managers align with those of SRI investors, SRI managers might then have more incentives than conventional managers to hold onto losing stocks if they feel their social value compensates for the economic loss. We hypothesize that SRI managers would be less prone to the disposition effect than conventional managers. Pertaining to the disposition effect, we do not find evidence of a difference in the behavior of SRI fund managers compared with that of conventional fund managers. Our results hold, even when considering market trends, management structure, gender, and prior performance.

Fund Ratings of Socially Responsible Investing (SRI) Funds: A Precautionary Note

We examine fund ratings of socially responsible investing (SRI) equity funds in emerging and developed markets by validating the assumptions of the equally weighted U.S. News mutual fund scorecard and the causal interrelations among its rating agencies—Morningstar, Lipper, Zacks, CFRA and TheStreet—for improvement priorities. In so doing, we apply a novel interdisciplinary methodology including cluster analysis, classification analysis, partial least squares structural equation modeling and importance performance analysis. We find evidence against the U.S. News assumptions, as individual rating agencies have unequal effects and exhibit the causal relationships among one another. We suggest emerging (developed) market fund managers allocate their resources—which are often limited—with the first priority to improving fund ratings of CFRA (Zacks), followed by Zacks (CFRA), TheStreet (Lipper), Lipper (Morningstar) and Morningstar (TheStreet). The positive causal relationships among rating agencies indicates that investors consider multiple rating agencies of the U.S. News for investment decisions, rather than simply use any single one of these rating agencies or their equally weighted aggregation. Interestingly, we find disagreement among rating agencies, with Zack (TheStreet) displaying rating deflation for emerging (developed) market funds. Disagreement among rating agencies may increase the monitoring effort of fund managers who usually “shop” for additional ratings in the hope of maximizing their average ratings.

Investing in Socially Responsible Mutual Funds

We construct optimal portfolios of mutual funds whose objectives include socially responsible investment (SRI). Comparing portfolios of these funds to those constructed from the broader fund universe reveals the cost of imposing the SRI constraint on investors seeking the highest Sharpe ratio. This SRI cost depends crucially on the investor's views about asset pricing models and stock-picking skill by fund managers. To an investor who believes strongly in the CAPM and rules out managerial skill, i.e. a market-index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainly-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, i.e., investors who rely heavily on individual funds' track records to predict future performance.

Nudges in SRI: The Power of the Default Option

AbstractWe introduce nudges in order to incite investors to choose Socially Responsible Investment (SRI) funds instead of traditional funds. We have set up two online experiments with a total of 713 US retail investors, using three types of nudges to elicit their effects on investors’ SRI investments level: making SRI the default investment, introducing a SRI explanation message, and priming ethical values by displaying shocking images. Making SRI the default option is the most efficient nudge to influence investors towards SRI. Its effect is twofold. First, around 50% of investors do not opt-out of the default allocation. Second, even investors who opt-out of the default allocation invest more in SRI than those in the control group, an effect that appears driven by anchoring. Although investors subjected to both priming and message content marginally increase their SRI investment, priming or message content in isolation appears to have a non-significant influence. For choice architects who want to steer retail investors towards SRI funds, making them the default option appears to be the most powerful nudge.

Does Socially Responsible Investing Change Firm Behavior?

Socially responsible investment (SRI) funds are increasing in popularity. Yet, it is unclear if these funds improve corporate behavior. Using novel micro-level data, we find that SRI funds select firms with higher environmental and social standards: the firms they hold exhibit lower pollution, greater board diversity, higher employee satisfaction, and higher workplace safety. Yet, using an exogenous shock to SRI capital, we find no evidence that SRI funds improve firm behavior. The results suggest SRI funds invest in a portfolio consistent with the fund's objective, but they do not significantly improve corporate conduct.

Does Proxy Advice Allow Funds to Cast Informed Votes?

This paper estimates to what extent proxy advice allows funds to vote as if they were informed. A fund’s vote is classified as “informed“ if the fund accessed the company’s proxy statement from the SEC’s Edgar website prior to voting. A fund’s proxy advisor, if any, is identified from the format of its Form N-PX filing. Our main finding, for the period 2004-2017, is that proxy advice did not result in funds voting as if they were informed – more often than not it pushed them in the opposite direction – and this distorting effect was particularly noticeable for ISS. The finding is robust to several strategies designed to control for endogeneity of acquiring information and seeking proxy advice, including fixed effects and instrumental variables. We also show that advice distorted votes toward policies favored by socially responsible investment (SRI) funds, and provide suggestive evidence that proxy advisors slanted their recommendations toward the preferences of SRI funds because of pressure from activists.

National culture and socially responsible fund flows

We investigate the impact of national culture on socially responsible investment (SRI) fund flows. Drawing on prior literature suggesting that non-financial attributes and social preferences explain SRI decisions, we hypothesize that cultural traits may drive SRI fund flows. We use a dataset covering mutual funds from 45 countries over the period 1997 to 2019. Our results reveal that higher SRI flows are associated with low masculinity and uncertainty avoidance and, to a lesser extent, to high religiosity.On the contrary, power distance and individualism affect conventional fund flows but do not have any significant differential effect on ethical money flows.