Socially Responsible Mutual Funds Research Articles

The power of ethical words

AbstractIn this research, we analyse the impact of the inclusion of ethical expressions in the prospectuses of socially responsible (SR) mutual funds on money flows. We contribute to the existing literature by proposing a text‐based measure that integrates three attributes that are relevant to whether clients are attracted: exclusiveness, intensity and lexical diversity. We analyse a sample formed of 266 SR US equity mutual funds in the period 1999–2019. Our findings show that both the proposed indicator and other alternative partial proxies based on textual data have a positive impact on the money flows of the SR funds. This effect is more relevant in the case of SR mutual funds belonging to smaller families. Besides, persistence in money flows is more intense for SR mutual funds that are more attractive because of their ethical expressions. Another finding shows that return‐chaser behaviour occurs among all SR investors, independently of the level of text attractiveness of the mutual funds in which they invest, revealing that they take into account both financial and non‐financial outcomes. Our results indicate that policymakers should control fund prospectus information, given its importance for investors' decisions. In addition, managers should be especially cautious with the information provided in prospectuses because of its impact on investor decisions.

Joining Forces: The Spillover Effects of EPA Enforcement Actions and the Role of Socially Responsible Investors

Abstract We find that firms reduce toxic emissions at their local plants following EPA enforcement actions against nearby plants operated by peer firms that compete in the same product market. These reductions are more pronounced for plants located near socially responsible mutual funds (SRMFs) that hold these plants’ parent firms’ shares. Close proximity to SRMFs is associated with real investment in abatement measures to mitigate emissions. While plants increase emissions again in the long run, such reversals do not occur in plants located near SRMFs. Taken together, our results suggest that local SRMFs complement EPA enforcement in influencing plants’ emissions. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Investing in virtue and frowning at vice? Lessons from the global economic and financial crisis

<abstract> <p>Socially responsible mutual funds (SRMF) and the "antisocially conscious", Vitium Global Fund Barrier Fund (formerly known as the Vice Fund, the term used in this paper) returns, volatility patterns, and causal effects are examined in this study within the context of the lessons learned from the 2008 Global Economic and Financial Crisis (GEFC). In times of a new and unprecedented crisis due to the COVID-19 pandemic, a look back to our recent past reveals that volatility patterns on daily stock returns presented some level of predictability on prices for both types of funds. The research findings are significant as funds' potential predictability could help market players when designing their investment strategies. More specifically, an increase in volatility persistence is found after the GEFC, together with an increase in the Vice Fund's resilience to market shocks. Although all funds, without substantial differences, take time to absorb the shocks. A noteworthy outcome relates to SRMF that was able to achieve higher returns and exhibited lower volatility levels during the crisis period. Whereas the Vice Fund revealed long-run sustainable performance offering fund managers and investors investment opportunities that are endorsed by the fund performance over the period. Furthermore, unidirectional causality was found running from the Vice Fund to the SRMF, exhibiting a clear dominance during the GEFC period. The research findings contribute to the debate on the future of socially responsible investment, indicating that SRMF appears to be driven by <italic>"antisocially conscious"</italic> funds signaling limited rewards for investors inclined to invest in funds that are considered socially responsible.</p> </abstract>

Cost and performance of carbon risk in socially responsible mutual funds

<abstract> <p>Investors and other financial actors are attracted by the role of socially responsible (SR) mutual funds in the transition to a low-carbon economy. In response to the demand for more information, Morningstar reported the level of carbon risk of funds by using the following indicators: Carbon Risk, Carbon Management, Carbon Operations risk and Carbon Exposure. Dealing with a sample of 3370 equity SR mutual funds worldwide from 2017 to 2021, this study analyzes the relationships between these indicators and the expense ratio and performance of the funds. In general, the results point to funds with lower carbon scores that have lower fees and perform better than those with higher scores. Considering the effects of the COVID-19 crisis, this evidence holds true for most of the sample period analyzed. With a spatial analysis, although the evidence generally holds, regional differences are found. Thus, funds that invest in the USA and Canada are on average cheaper and show lower carbon scores, while funds that are oriented to other areas, such as emerging markets, are more expensive and show higher scores. In summary, there is good news for the utility function of the investor and the planet: Green investing is cheaper and better.</p> </abstract>

A comparison of investment behavior, attitudes, and demographics of socially responsible and conventional investors in India

PurposeIndia is an emerging economy and one of the preferred investment destinations for environmental, social and governance (ESG) fund issuers. Institutional investors invest retail investors’ money, and hence, it becomes imperative for ESG fund managers to understand the social investment preferences of retail investors. This study aims to compare the Indian socially responsible (SR) investors and conventional investors in terms of their socially responsible investment (SRI) awareness level, opinions about broad and specific ESG issues, investment behavior and demographics. In addition, this paper makes an attempt to have a deeper insight into Indian investors’ behavior toward SRI by segmenting the Indian retail investors based on their SRI awareness level, attitude toward ESG issues and intention to accept lower financial returns, and choices made by them as consumers.Design/methodology/approachAfter collecting the data through the survey method an independent t-test is used to compare SR investors with conventional investors. Chi-square has been used to analyze the data related to demographics, and cluster analysis is used to identify segments among Indian retail investors.FindingsThe results indicated that Indian SR investors’ SRI awareness level is more, they are more concerned about broad and specific ESG issues, they are more into faith-based investing, and are responsible consumers vis-à-vis conventional investors. As per demographic, SR investors are in the middle age group of 30–40 years, male, hold a postgraduate degree and have an annual income of 10–20 lakhs in comparison to conventional investors. The results of cluster analysis indicated that Indian retail investors can be classified into three groups based on their SRI awareness, intention to sacrifice financial return, attitude toward ESG issues and choices made by them as consumers.Research limitations/implicationsResults have implications for national and international fund managers, policymakers, regulators and society. These results will help mutual fund companies to provide curated SR mutual funds as per the behavior and choice of retail investors and penetrate the Indian investment market more deeply.Originality/valueThis research study contributes to the literature on SRI by identifying the differentiating characteristics of Indian SR and conventional investors and segmenting Indian retail investors on the basis of their SRI awareness, the importance of ESG issues and choices made by them as investors and consumers.

Measuring the financial and social performance of French mutual funds: A data envelopment analysis approach

AbstractSocially responsible investors pursue both financial and non‐financial goals. In this paper, we attempt to assess the performance of French socially responsible mutual funds (SRMFs). We consider the data envelopment analysis (DEA) approach, which allows us to assign a unique efficiency score while combining financial and social characteristics, using various combinations within different types of risk (total risk, market risk, and downside risk). We report the list of funds found to be DEA efficient using various output‐oriented models. We also compare our obtained results with the traditional and modern measures used in the literature (Sharpe, Treynor, and the information ratio). We contribute to the literature by testing the validity of the DEA methodology in the financial context. The findings have important implications for fund selection processes and would be mainly of interest to investors and fund managers who integrate environmental, social, and governance criteria into their investment choices.

Sin sectors and negative screening

AbstractIn this research, I analyse how exposure to sin sectors impacts the financial performance of socially responsible (SR) funds. I also analyse the question of whether or not these funds keep their word and are less exposed to the controversial sectors that they claim to exclude in their prospectuses. Additionally, I analyse how local political and religious factors exert an influence on the exposure of SR funds to sin sectors. Consequently, I analyse a sample comprising 136 SR mutual funds that were domiciled in the U.S. market in the period March 2017–April 2020 and who invest in domestic and global equity, of which 92 implement negative screens on at least 1 of 12 controversial activities. My results show that for seven (three) of the controversial sectors that were analysed, the exposure of SR funds to these sectors jeopardises (improves) their financial performance. Furthermore, SR mutual funds who perform negative screens tend to live up to their name and are less exposed to the sector/s that they claim to exclude. In addition, SR mutual funds managed by companies located in Democrat‐leaning states are less exposed to sin sectors, and that the effect of local religiosity depends on the specific sector analysed.

Joining Forces: The Spillover Effects of EPA Enforcement Actions and the Role of Socially Responsible Investors

We show that firms reduce emissions at their local plants following EPA enforcement actions against nearby plants of peer firms operating in the same product market. The emission reductions are larger for plants located close to socially responsible mutual funds (SRMFs) that hold the parent firm’s shares, and for plants belonging to firms with high operational flexibility. The close proximity to SRMFs is also associated with adoption of more abatement measures. While plants increase emissions again in the long run, these reversals are prevented for plants located close to SRMFs. We provide evidence that the threat of exit by SRMFs has real consequences for how the local plants respond to the enforcement action. The results suggest that local SRMF monitoring complements EPA enforcement.

Joining Forces: The Spillover Effects of EPA Enforcement Actions and the Role of Socially Responsible Investors

We show that firms reduce emissions at their local plants following EPA enforcement actions against nearby plants of peer firms operating in the same product market. The emission reductions are larger for plants located close to socially responsible mutual funds (SRMFs) that hold the parent firm's shares, and for plants belonging to firms with high operational flexibility. The close proximity to SRMFs is also associated with adoption of more abatement measures. While plants increase emissions again in the long run, these reversals are prevented for plants located close to SRMFs. We provide evidence that the threat of exit by SRMFs has real consequences for how the local plants respond to the enforcement action The results suggest that local SRMF monitoring complements EPA enforcement.

Socially responsible mutual fund exit decisions

AbstractThis paper studies, for the first time, socially responsible (SR) mutual fund exits. We analyse a sample of 534 U.S. SR equity mutual funds in the period 2003–2017, in which 182 exit events occurred (53 liquidations, 109 mergers within the same family, and 20 mergers across different families). The results obtained indicate that both liquidations and mergers are more likely among smaller funds that suffer net money outflows in the previous year to the event. At the family level, mergers are more frequent in outperforming families with a larger number of funds, whereas liquidations occur in families with a lower number of funds. When comparing mergers within the same family with mergers across different families, we observe that the former share more drivers with liquidations than the latter. In addition, we observe that religious and environmental funds are more likely to suffer exit events than other SR fund types. Finally, other interesting findings point out that mergers financially benefit investors in merged SR mutual funds and the financial outcomes of acquiring fund investors are not jeopardized.

Investments in ESG-Rated Mutual Funds: Is Good Better than Great?

Socially responsible mandated mutual funds are a popular class of funds characterized by strategies that address sustainability, responsibility, and impact. The dramatic growth of socially responsible mandated mutual funds during the last decade, makes it important to understand how their social metrics (environmental, social, and governance; ESG) relates to their financial performance. This article compares the risk-adjusted returns of socially responsible mutual funds (SRMF) with funds rated by Morningstar® Portfolio ESG ScoreTM grouped into low, medium, and high ratings. We find that during the period of pre-recession boom, the funds with high-ESG ratings had a significantly higher risk-adjusted performance than did funds with a low-ESG or mid-ESG rating. This trend continued during the early parts of the Great Recession. During periods of economic recovery and growth, SRMF rated low on ESG performed significantly better than highly rated SRMFs. For medium rated SRMFs, other than prior to the Great Recession, fund performance was not consistently significantly different from highly rated SRMFs.

Ethical strategy focus and mutual fund management: Performance and persistence

The aim of this study is to analyze whether managers, practitioners and individual investors could obtain higher risk-adjusted returns by allocating their investments to funds that integrate specific levels of socially responsible (SR) criteria in their portfolios. This is achieved by comparing the performance of mutual funds according to their SR characteristics: environmental, governance, social, and sustainability attributes. For a large sample of 3920 equity SR mutual funds around the world, performance is measured using a multifactor model that incorporates relevant benchmarks according to the fund investment objectives, and using Carhart's (1997) methodology to measure mutual fund performance persistence. In general, fund performance is not significant, the average being negative and close to zero. Funds achieving relatively high levels of SR attributes in their portfolios seem to experience overall worse performances. This evidence is, however, mainly driven by the behavior of worst-performing funds. Moreover, investing in the previous best SR funds could lead investors to greater overall returns in most areas and levels of SR attributes considered. This evidence highlights the role of managers in enhancing the returns of a portfolio with a well-defined SR investment policy. Therefore, there is no incompatibility between pursuing higher ethical (and sustainable) values as well as greater financial performances from investments—provided managers have the skills necessary to choose the right SR funds.

Fund Characteristics and Performances of Socially Responsible Mutual Funds: Do ESG Ratings Play a Role?

This paper examines the risk-adjusted performance and differential fund flows for socially responsible mutual funds (SRMF). The results show that SRMF rated high on ESG, perform better than lower rated ESG funds during the period of economic crisis. The findings also show that low ESG rated SRMF had higher differential cash-flows than high rated ESG funds except for the period of economic down turn. The findings are of interest to financial advisors, investors, mutual fund managers, and researchers on how SRMF performance responds to periods of economic downturn and expansion

Does socially responsible mutual fund performance vary over the business cycle? New insights on the effect of idiosyncratic SR features

AbstractThis study analyses the performance and market timing of US socially responsible (SR) mutual funds in relation to business cycle regime shifts and different grouping criteria: Ethical strategy focus, SR attributes scores and Morningstar category. Different methodologies are applied and results highlight the importance of considering specific benchmarks related to the investment style in evaluating the SR fund performance. Our results show that, in aggregate, the abnormal performance of SR funds is negative and significant in expansion periods, but no significant differences are found in recession periods. When specific benchmarks are considered, performance improves in recession periods, particularly for environmental funds, those with high SR attributes scores, and funds from the nine Morningstar style box categories. Market timing of SR funds takes positive values and is partially significant. Previous evidence of negative timing after a recent financial crisis vanishes when specific benchmarks are considered. For comparative purposes the performance of conventional US mutual funds is also analysed. There are no significant differences between the performance of SR and conventional mutual funds when a fair comparison is made within the same style categories. When all the SR funds are considered, they underperform conventional funds in expansion sub‐periods, but in recession sub‐periods they perform better, although the differences observed are not significant.

ESG Ratings and the Performance of Socially Responsible Mutual Funds: A Panel Study

This study uses the Fama-French 5-factor model to examine the risk-adjusted performances of Socially Responsible Mutual Funds (SRMF) relative to the market over a 12-year (2005–2016) period. The timeframe of this study overlaps the periods leading up to, during, and immediately past the Great Recession. This study also examines whether the Environmental, Social, and Governance (ESG) ratings assigned to the SRMF signal fund performance over time. The results indicate that although the SRMF underperformed in the market during the 2005–2016 period, there was no difference in the SRMF performance with respect to the market during the Great Recession period. Furthermore, our results indicate that the SRMF with higher ESG ratings outperformed the SRMF with lower ESG ratings during the Great Recession period. Implications of this study’s findings for investment analysts, portfolio managers, and financial planners are included.

Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance?

Regarding the contribution of socially responsible (SR) screening to mutual fund performance, we propose a new decomposition of the variability of SR mutual fund returns that isolates the contribution of SR screening, allowing it to be compared with other, traditional sources of performance. Our results, based on a sample of SR equity mutual funds, show that SR screening does contribute to the variability of mutual fund performance, together with asset allocation decisions and active management. This contribution is, on average, between 4% and 10%, roughly two times lower than the contribution made by active portfolio choices.

Socially (ir)responsible investing? The performance of the VICEX Fund from a business cycle perspective

We assess the performance of the VICEX Fund, which lies at the opposite end of the spectrum to socially responsible mutual funds (SRMF). This fund is morally controversial due to its higher return premium on investments in well-established vice companies. The empirical findings provide sufficient evidence to demonstrate that the VICEX Fund outperforms the market and provides higher return premiums than SRMF during expansion periods, but underperforms during times of economic distress. Our findings suggest a link between performance of funds and economic resilience. The VICEX Fund offers investors an excellent opportunity endorsed by its long-run sustainable performance.

Competition of socially responsible and conventional mutual funds and its impact on fund performance

This paper examines the impact of both socially responsible (SR) and conventional entrant funds on SR incumbent funds using an overlap in portfolio holdings to measure the impact of competition in the US mutual fund industry. This paper’s findings indicate that over the past decade the increase in competition from SR entrants has been associated with an increase in fees but not in capital flow. Moreover, our results show that the increase in the number of SR fund entrants does not have a negative impact on fund performance. This finding implies that despite the significant increase in the number of SR funds entering the market, open and free competition fosters the performance of SR fund participants. Our study concludes that despite the recent growth in the number of SR funds, the SR mutual fund market does not exhibit the key features of a competitive market.

Are they any good at all? A financial and ethical analysis of socially responsible mutual funds

In this article, we examine a broad sample of socially responsible (SR) and conventional mutual funds with respect to financial and ethical parameters. We cannot document profound differences in their financial performance. With regard to ethical performance, we indeed find that an investor who seeks to avoid the least ethical of all available funds can do so by purchasing SR mutual funds. Still, we also demonstrate that SR mutual funds are not holding considerably more ethical assets on average. Moreover, the label ‘SR mutual fund’ does not in any way guarantee the exclusion of clearly unethical firms, which contrasts to the common perception of screening out poor assets.

Do Social Responsibility Screens Really Matter? A Comparison with Conventional Sources of Performance

This paper questions the contribution that socially responsible (SR) screening makes to mutual fund performance. We propose a new decomposition of the variability of SR mutual fund returns making it possible to isolate the contribution of SR screening and compare it with the other traditional sources of performance: market movements, asset allocation (country, industry and style) choices and active management. Our results, based on a sample of SR equity mutual funds investing either globally or solely in the U.S., show that SR screening does contribute to the variability of mutual fund performance, alongside other portfolio choices such as asset allocation decisions and active management. This contribution is rather modest on average (4% for U.S. and 10% for global funds), roughly two times lower than that made by active portfolio choices. There is a significant dispersion among funds: 25% of them have a negligible SR contribution (below 1%) while for 5% of them the contribution of SR screening is above 14%.