Socially Responsible Investment Funds Research Articles

A plea for a stronger role of non-financial impact in the socially responsible investment discourse

Purpose This paper aims to emphasize the importance and current deficits of non-financial impact (NFI) assessment of socially responsible investment (SRI) with reference to the action plan of the European Commission (EC) for a greener and cleaner economy. Design/methodology/approach The importance and current deficits of NFI assessment are evaluated theoretically and condensed to an equilibrated socially responsible investment (ESRI) perspective, based on a narrative literature review of highly ranked academic journals. Findings Due to a deficient exploration of NFI in theory and practice, the role of SRI funds for sustainability transition has not yet been adequately discussed. This has enabled a situation where a constantly rising market share of SRI has not led to similar sustainability achievements. This strongly contrasts with investors’ expectations, the self-portrayal of the sector and the goals of the EC’s action plan. As a solution, the developed ESRI perspective elevates NFI as a second cornerstone for theory and practice. ESRI, contrary to the EC, sets a primer on the role of SRI fund management for achieving sustainability goals. Originality/value This study reveals how SRI theory and practice neglect the importance of NFI. The presented ESRI perspective enables scholars to examine SRI practices more holistically through a new theoretical lens. One special focus is on the role of SRI fund management as a transmission mechanism to push portfolio companies’ business practices toward more sustainable behavior.

Exploring synergies and performance evaluation between Islamic funds and socially responsible investment (SRIs) in light of the Sustainable Development Goals (SDGs)

This study aims to evaluate risk and return characteristics of Islamic funds in comparison with SRI and investigate the possible synergies between the two in the light of the SDGs. The study also compares the financial performance of Islamic funds with conventional funds and Islamic market benchmarks. The analysis was carried out using the absolute and risk-adjusted-performance evaluation techniques based on data collected from 11 countries distributed in four geographical regions. The results demonstrate that there was no statistically significant difference between the returns of Islamic funds and SRI funds in all regions. Islamic funds were also the least risk-sensitive instruments compared to their counterparts in most of the regions. The results indicate that embedding ESG/SDGs considerations into Islamic funds investment decisions do not adversely affect their returns. Rather, it enhances their positive impact and contribution to mitigate the SDGs financing gaps. The analysis further demonstrates the possible synergies between the two categories of funds in line with Shariah principles. Hence, the study highlights the importance of developing a new asset class, “Shariah-compliant SRIs”, that is both Shariah-compliant and integrates ESG/SDGs considerations. The new asset class will target a wider investor base including both Shariah and impact investors, which will support the achievement of the SDG agenda.

Behavioural analysis of socially responsible investment managers: specialists versus non-specialists

We analyse the performance and performance persistence of US socially responsible investment (SRI) managers from a managers’ perspective, differentiating between specialist managers (only running SRI mutual funds) and non-specialists (running SRI and conventional mutual funds). We find that the SRI fund nature has a significantly negative influence on the non-specialist performance. Furthermore, top managers of both groups persistently outperform SRI funds. However, non-specialist managers obtain superior performance to specialist managers, perhaps because of learning synergies in both fund niches. Results also show more persistence with non-specialists, especially with regard to conventional mutual funds.

The Investment Performance of U.S. Islamic Mutual Funds

Islamic investment funds have become increasingly important because of high demand from many investors, including those outside the Muslim investment community. This article compares the performance and risk sensitivity of Islamic mutual funds in the United States with that of their conventional peers. This article also analyzes the performance of Islamic funds, and compares this performance with that of socially responsible investment (SRI) mutual funds. Capital Asset Pricing Model (CAPM)-based methodology was used for the analysis. The results suggest that over the entire study period (1987–2018), Islamic funds outperformed conventional funds with comparable characteristics. However, over the most recent period (2000–2018), there were no significant differences in performance. Moreover, Islamic funds achieved levels of adjusted performance that did not significantly differ from those of SRI funds. Conversely, for the earlier period (1987–2000), Islamic funds performed worse than SRI and conventional funds with similar characteristics.

The Importance of Profit and Sound Financing in Socially Responsible Investment

Socially Responsible Investment (SRI) has grown exponentially in recent years. The rising importance of social, environmental, and governance (ESG) aspects in decision making as well as in asset allocation is undeniable. However, important challenges must be addressed. The dramatic increase in ESG investments has coincided with a period of extremely low rates and massive liquidity injections. Also, the definition of socially responsible investment is too broad and can generate misunderstandings (an approximation to the correct definitions can be found in Sandberg et al., 2009). Additionally, I find that a significant part of funds that follow ESG principles can fall into the trap of investing in heavily subsidized and high-debt sectors. Investors should monitor the risk of concentration, the soundness of profit estimates, and strength of balance sheets to avoid rent-seeking and depending heavily on subsidies and grants. Furthermore, I find that performance of ESG and SRI funds has been monitored only in a period of low rates, high liquidity, rising asset valuations, and bullish markets. More tools have to be used to monitor risk as markets enter a consolidation phase. I find that it is essential to focus on real economic returns in a mid-cycle environment as well as monitoring excess leverage to avoid the risk of a very important reduction in ESG investments in a market correction phase for markets with rising interest rates. I conclude that strong fundamental analysis, diversification, and avoiding herd mentality are essential to prevent large outflows and a negative impact on ESG growth once the cycle changes.

The Green and Brown Performances of Mutual Fund Portfolios

Interest in socially responsible investing (SRI) has skyrocketed within the mutual fund industry. Central to this development is whether SRI funds underperform conventional funds. Using a novel approach, we decompose mutual 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, lower Sharpe ratio, and similar degree of performance reversal. The magnitudes of these underperformances are, however, small, and align with SRI having a limited negative impact on fund performance while potentially offering some diversification benefits.

Is Socially Responsible Investment Outperforming Conventional Investment or Not? A Meta—Analysis

This meta-analysis provides an overview of the current literature on Socially Responsible Investment (SRI). It presents the underlying motivation, history and current best practices. The in-depth analysis examines a large body of research and addresses two key issues. The first objective was to determine the relative performance of SRI vehicles compared to their conventional benchmarks. The analysis revealed a lack of consensus in previous research. Some studies argue that SRI funds perform as well as, and/or worse than conventional benchmarks, while others challenge these findings. The second objective was to analyse the impact of corporate social responsibility on the company’s financial performance. Here, the analysis covered almost four decades, from the 1980s to 2020. It examined more than 100 academic studies, with an overall sampling period that ran from 1960 to 2019. The results provide a solid platform for future work. The study provides researchers with a well-documented, structured overview of the existing literature on SRI, and identifies gaps that could be filled by future studies.

Risk-Adjusted Returns of Socially Responsible Mutual Funds II: How Do They Stack Up in Australia?

This article investigates the risk-adjusted performance of Australian socially responsible investment (SRI) mutual funds, their self-specified benchmark indexes, and an alternative SRI index from 2009 to 2019. Adopting a multifactor risk-adjustment model, the article examines whether Australian SRI funds are specifying appropriate benchmarks in terms of their environmental, social, and governance (ESG) investment strategies and risk profiles. The results indicate that Australian SRI fund managers neither outperform nor underperform their self-specified benchmark and alternative SRI indexes. In addition, Australian SRI funds are highly statistically related to their broad-based capitalization benchmark and alternative SRI indexes. While the results show that popular capitalization indexes are suitable proxies for Australian SRI fund performance benchmarking—and that managers seem to be specifying indexes that mirror the risk-adjusted return properties of their funds’ ESG investment strategies—it remains unclear as to why SRI funds are not selecting benchmarks that are ESG focused. TOPICS:ESG investing, analysis of individual factors/risk premia, performance measurement Key Findings • Australian SRI fund managers neither outperform nor underperform their self-specified benchmark and alternative SRI indexes. • Popular capitalization indexes are viable proxies for Australian SRI fund performance benchmarking, reflecting the risk–return properties of the funds’ ESG investment strategies. • It remains unclear why SRI funds are not selecting benchmarks that are ESG focused.

Socially Responsible Investments: Costs and Benefits for University Endowment Funds

We find that university endowment funds experience 6% higher donations following the adoption of socially responsible investment (SRI) policies, providing strong evidence that SRI policies influence capital flows to universities. These effects are primarily driven by donors who derive more nonpecuniary utility from SRI objectives. However, SRI funds have greater management costs and portfolio return volatility than other funds and do not experience higher asset growth rates (donations plus investment income). Finally, SRI policies are associated with other university benefits, including enhancements to the fund’s risk management practices, more student applications, and more funding for faculty research in sustainability science.

Factors influencing SRI fund performance

Purpose The purpose of this paper is to examine socially responsible investment (SRI) fund performance and investigate the factors influencing fund performance. Design/methodology/approach The study uses return data from the Morningstar database for 152 SRI funds from January 1995 to May 2015. The initial analysis includes the use of various risk-adjusted performance measures, including Sharpe ratio, Treynor ratio, Information ratio, Sortino ratio and M2. The study also uses four factor models, including Jensen single-factor model, Fama–French three-factor model, Carhart four-factor model and Fama–French five-factor model to explain SRI fund returns. Finally, a cross-sectional regression analysis is applied to investigate the determinants of SRI fund returns. Findings The results show that, on average, the SRI funds provide comparable risk-adjusted returns relative to various benchmark market indices. Market factor is significant in explaining SRI fund returns. Examining each factor model, the results do not support Fama–French’s three-factor model as neither size nor value factor is significant. The author finds weak support for Carhart’s momentum factor along with the market factor. Finally, the Fama–French five-factor model shows market, size and operating profit factors explain SRI fund returns. The study also finds the fund performance is stronger for funds with the higher turnover ratio, the larger fund size and more managerial experience and lower for funds with higher expense ratio. Also, funds formed with negative screening perform better than positive or mixed screened funds. Originality/value SRI funds have received considerable attention from investors. This study contributes to the literature by examining SRI fund performance and investigating factors influencing their performance using multiple factor models and cross-sectional regression analysis. The findings are relevant for investors who demand responsible investment opportunities without sacrificing returns for nonfinancial screenings. Findings also suggest that investors should consider fund characteristics when selecting SRI funds.

Exploring the strategic variety of socially responsible investment

Purpose The purpose of this study is to segment and profile socially responsible investment (SRI) funds based on investment strategies they use. Specifically, the paper investigates how different SRI strategies are applied and how they are related to fund-level characteristics, with the goal of recognising their potential dominant combinations in SRI practice. Design/methodology/approach Cluster analysis was complemented with one-way ANOVA to classify 147 SRI funds from 11 European countries into different groups based on the diversification (number and type) and application (intensity of usage) of the investment strategies. Discriminant analysis and chi-square tests were conducted to profile the clusters. Financial performance was examined by running multiple hierarchical regression and dominance analyses to determine meaningfulness of particular investment strategies within each of the SRI fund clusters. Findings Three basic SRI fund clusters were recognised: strong-intensity strategic heterogeneity, weak-intensity strategic heterogeneity and weak-intensity strategic homogeneity. The combination of SRI strategies used in the weak-intensity strategic homogeneity cluster significantly explained the variance in mid-term financial returns. Practical implications Fund managers may use these results to make more informed investment decisions on the selection and the application of SRI strategies. Social implications Financial industry has significant and broad and not only economic but also social implications. This research effort results in better understanding of the SRI universe, potentially leading to a broader consideration of the societal impact of financial investment. Originality/value The author provided useful insights into existing bundles of SRI strategies used in the European SRI market, recognised dominant investment strategies within SRI strategy portfolios and reported how strategic variety is related to fund-level characteristics.

Performance Evaluation of SRI Funds: An Analysis of Fund Types

Socially responsible investing (SRI) continues to get the attention of both practitioners and academicians as the demands for these funds increased sharply during the last decade. This study provides additional evidence on performances of SRI in mutual funds. The empirical findings show that although SRI funds experience lower average returns relative to the non-SRI control sample and various benchmarks, they provide higher returns relative to the control group and benchmarks using various risk adjusted measures. Among the subgroups analyzed, SRI Fixed Income funds offer the highest risk adjusted returns to investors while SRI Global funds provide the lowest returns. Finally, using Jensen’s alpha for individual funds, we find that about half of the funds experience negative alphas and 20 percent of SRI funds have statistically significant negative alphas compared to 7 percent of funds with that of positive alphas. Overall, the findings show mixed results concerning SRIs performance.

Does Ethical Reinforcement Pay? Evidence from the Canadian Mutual Fund Industry in the Post‐Financial Crisis Era

AbstractThis study elucidates the link and effect ofethical reinforcement in the post‐financial crisis eraby taking two congruent directions to demonstrate that ethical reinforcement can be accomplished by either a continuous ethical training or a meticulous code of business ethics—which members of the mutual fund industry claim they adhere to—asbothhave a positive effect on the funds’ performance, including sizeable gains to investors. Furthermore, evidence divulges that ethical reinforcement moderates the performance of ethical or socially responsible investments (SRI) funds more than nonethical investments, suggesting that a perspective of ethical or SRI classification of a fund aloneis not sufficient, but it is necessary to have the institutional ethical environment and/or managers’ continuous ethical training. This result supports the notion of financial market discipline and reveals some factors behind SRI or ethical funds returns, notably during the period following the recent financial crisis.

Do “Good Guys” Finish Last? The Relationship between Morningstar Sustainability Ratings and Mutual Fund Performance

Given the rapid growth of investment products focused on socially responsible investing (SRI), in March 2016, Morningstar began reporting standardized metrics to “grade” the sustainability (i.e., SRI) level of thousands of mutual funds. By analyzing this new metric, the authors aim to help clarify the ongoing debate surrounding whether SRI positively or negatively affects investor returns. They find that funds with high sustainability scores have about the same risk-adjusted returns (i.e., alphas) as other funds. Thus, SRI investors can apparently follow a social mandate without sacrificing financial performance, but also without garnering any incremental financial benefit as well. They find, however, that the vast majority of high sustainability funds are concentrated in the large-cap space, which implies that strict adherence to social criteria could inadvertently result in less diversified investor portfolios. They also find that funds with high Morningstar sustainability scores generally mimic those of self-proclaimed SRI funds, suggesting that the new metric opens up a larger pool of potential funds for investors focused on SRI. Lastly, they find that funds that specifically designate and market a social mandate experience more stable cash flows; therefore, the self-proclaimed mandate may be more beneficial for the fund company than it is for investors.

Measuring the environmental performance of green SRI funds: A DEA approach

In this paper, we tackle the issue of evaluating an important class of green investing that integrate classical financial tasks with some environmental issues: the so-called green mutual funds.In order to do this, we first propose three measures of environmental sustainability which may give financial agents information on the greenity of their investments. These alternative indicators could serve as an overall measure of environmental sustainability and overcome the drawback that limits the evaluation of green investments to the measurement of CO2 emissions while often more than one environmental aspects may be considered.Secondly, we propose some models aimed at evaluating the performance of green mutual funds by taking into account the proposed environmental measures as well as some classical financial indicators. The analysis is carried out in a Data Envelopment Analysis (DEA) framework, since DEA models can consider strategic non-financial objective measures in addition to traditional financial metrics in order to give a more balanced view of socially responsible investments (SRI). The presented models include indicators of environmental sustainability in different ways, either by penalizing a high environmental consumption or by rewarding an environmental saving entailed by a low consumption. The environmental measures and the models proposed are applied to a set of European green funds in the periods 2012–2015 and 2010–2015 to conduct an extensive analysis.

Go Green with Socially Responsible Investing? Socially Responsible Investing Performance During the Financial Crisis

This chapter studies the performance of socially responsible investing (SRI) mutual funds, especially during the financial crisis. The findings show that SRI funds earn worse crisis-period returns than conventional funds. As SRI funds invest more in high corporate socially responsible (CSR) firms, the results are inconsistent with earlier evidence that high CSR firms earns superior crisis-period stock returns than low CSR firms. We explain this by longer investor horizon and more prosocial clientele of SRI funds. SRI funds on average have longer investor horizon than conventional funds, and fund flows of SRIs are less sensitive to past returns compared to conventional funds. SRIs poor crisis period returns do not seem to persist over the longer term.

The Rise of Socially Responsible Investment Funds: The Paradoxical Role of the Financial Logic

Socially responsible investing (SRI) is gaining traction in the financial sector, but it is unclear whether the dominant financial logic complements or competes with the social logic in the founding of SRI funds. Based on insights we gained from observation at an Asian SRI industry association, interviews with SRI professionals in the U.S. and Europe, and other fieldwork, we questioned explanations for SRI’s conflicted relationship with the financial logic. Our observations prompted us to build a panel database of SRI fund foundings from 1970 to 2014 in 19 countries so that we could examine how a dominant logic interacts with alternative logics to promote or stifle institutional change. We decomposed the financial logic into interdependent dimensions as the provider of means (resources, practices, and knowledge) for novel financial ventures to be founded and the enforcer of profit-maximizing ends that constrain such foundings. Our theory suggests a paradoxical role for the financial logic, which explains an intriguing empirical finding: the founding of SRI funds has a curvilinear, inverted-U-shaped relationship with the prevalence of the financial logic. We propose and find that the relationship between the dominant financial logic and the social logic of SRI shifts from complementary to competing as the financial logic becomes more prevalent in society and its profit-maximizing end becomes taken for granted. We examined how certain alternative logics—those of unions, religion, and green political parties—moderate these effects. Our results shed light on how and to what extent institutional change can occur in fields in which one institutional logic is dominant. They also reveal country-level institutional factors that drive SRI.

Distance bias of socially responsible investment

PurposeDespite the benefits of international diversification, the home equity bias phenomenon is well documented in the portfolio choice literature. The purpose of this paper is to investigate whether the same investment behavior applies to domestic socially responsible investments (SRIs) where ethical screenings should be the selection criteria.Design/methodology/approachThe authors apply the model by Coval and Moskowitz (1999), Grinblatt and Keloharju (2001) and Agarwal and Hauswald (2010) to uncover the effect of distance relative to screenings on SRI domestic portfolio choice. For the first time, the authors test the robustness of distance effect by using time bias, which is the travel time between the fund manager and the company’s headquarter.FindingsThe authors find that SRIs exhibit a strong preference for locally headquartered firms. After controlling for screening activity and other fund characteristics, the authors still find a strong distance bias in SRI fund portfolio decision-making. The authors find that this bias is mostly observed in SRI fund with social screening and that fund holding characteristics determine the propensity of fund managers to invest locally. The results suggest that the local bias puzzle exists in SRI.Research limitations/implicationsThis study provides avenue for future research to examine whether the same local bias is found in SRI investment in other countries where they have different characteristics and behavior. Also, the evidence that local bias exists in SRI investment may need further analysis as to whether this is conflicting with the objectives of SRI, which focus more on ethical beliefs.Practical implicationsThe results suggest that many local firms in the same city currently held by an SRI fund will not be held by this fund if it is in another city. The implications of the findings are that geographic proximity, along with ethical screenings, is an important dimension to how SRI fund invests.Originality/valueThis study is the first that examines local bias in SRI funds by using portfolio holding data.

Who are the Socially Responsible Investors?

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 affluence and age play a role in SRI. We find that participation in SRI funds is lower for young and retired investors. Moreover, we find that young adults are more often ESG investors, while retired investors are more likely to participate in charitable funds. Further, financial wealth is important for SRI participation but becomes less relevant once investors are sufficiently rich. For the exposure to SRI funds, the overall picture is quite different as it is negatively related to wealth, income, risky share, and education.

Development trends of socially responsible investment funds: View from Poland

The issue of socially responsible investment (SRI) has been gaining increasing popularity in recent years. The idea of responsible investment, along with sustainable development, primarily assumes complying with ethical principles. The aim of this study is to survey the extent to which investment funds in Europe and Poland are guided by SRI. The criteria for identifying SRI funds are analysed, and their net asset value against the background of all investment funds in Europe is examined. The range of activities of SRI funds in Poland, which is surprisingly low, is also investigated. This paper uses the review method of legal regulations and analysis of the results of published studies concerning SRI funds. The results of the study confirm the growing importance of socially responsible funds in Europe. This paper is also a call for uniform reporting standards, so that SRI funds are more easily benchmarked against other investment funds.
 Keywords: Socially responsible investment funds, sustainable development, RESPECT index, financial reporting.