Socially responsible investment fund performance: the impact of screening intensity

Perhaps the most common criticism of socially responsible investment funds is that imposing non‐financial screens restricts investment opportunities, reduces diversification efficiencies and thereby adversely impacts performance. In this study we investigate this proposition and test whether the number of screens employed has a linear or curvilinear relation with return. Moreover, we analyse the link between screening intensity and risk. Screening intensity has no effect on unadjusted (raw) returns or idiosyncratic risk. However, we find a significant reduction in α of 70 basis points per screen using the Carhart performance model. Increased screening results in lower systematic risk – in line with managers choosing lower β stocks to minimize overall risk.     

Hidden Gem or Fool’s Gold: Can passive ESG ETFs outperform the benchmarks?

Using a unique and extensive dataset of 121 socially responsible investing (SRI) equity exchange-traded funds (ETFs) from January 2010 to December 2020, this study examines how passive SRI ETFs perform compared with their non-SRI benchmarks composed of S&P500 ETFs. Over the full sample period, our results show that an equally weighted SRI ETF portfolio underperforms its benchmark portfolio. Notably, we do not find significant differences in the two portfolios’ performance in the second half of our sample period. However, in the last two years, the SRI ETF portfolio significantly outperforms the benchmark. For the SRI investment strategies, we show that positive screening (or inclusion) rather than negative screening (or exclusion) can beat the benchmark portfolio. In particular, environmental inclusion screen provides significantly higher abnormal returns. Finally, we find that SRI ETFs’ performance can be explained by increasing industry competition and declining market concentration.     

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.     

The performance of socially responsible investments: A meta-analysis

In this article, we use a meta-analysis to examine the performance of socially responsible investing (SRI). We find that, on average, SRI neither outperforms nor underperforms the market portfolio. However, in line with modern portfolio theory, we find that global SRI portfolios outperform regional subportfolios. Moreover, high-quality publications, publications in finance journals and authors who publish more frequently on SRI are all less likely to report SRI outperformance. In particular, we find that including more factors in a capital market model reduces the likelihood that a study will find SRI outperformance.     

Style and performance of international socially responsible funds in Europe

This paper analyses the performance and investment styles of internationally oriented Socially Responsible Investment (SRI) funds, domiciled in eight European markets, in comparison with characteristics-matched conventional funds. To the best of our knowledge, this is the first multi-country study, focused on international SRI funds (investing in Global and in European equities), to combine the matched-pairs approach with the use of robust conditional multi-factor performance evaluation models, which allow for both time-varying alphas and betas and also control for home biases and spurious regression biases.In general, the results show that differences in the performance of international SRI funds and their conventional peers are not statistically significant. Regarding investment styles, SRI and conventional funds exhibit similar factor exposures in most cases. In addition, conventional benchmarks present a higher explaining power of SRI fund returns than SRI benchmarks. Our results also show significant differences in the investment styles of SRI funds according to whether they use “best-in-class” screening strategies or not. When compared to SRI funds that employ simple negative and/or positive screens, SRI “best-in-class” funds present significantly lower exposures to small caps and momentum strategies and significantly higher exposures to local stocks.     

Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets

This paper empirically examines the theoretically ambivalent relationship between socially responsible investing (SRI) and stock performance. It contributes to the existing literature by considering both the US and the entire European stock markets and by using consistent world-wide corporate sustainability performance data. Our portfolio analysis from 1998 to 2009 is based on the common four-factor model according to Carhart (1997), which comprises market return, size, value, and momentum factors. We show for the US and the European stock markets that SRI is associated with large-sized firms. The insignificant abnormal stock returns for SRI in both regions are the main result of our paper. Therefore, our study supports the view that SRI stocks are correctly priced by market participants, although we cannot rule out that a corresponding mispricing has existed before the beginning of our observation period in 1998.     

Socially responsible investing (SRI): From mainstream to margin?

This article discusses the place of ethics within socially responsible investing (SRI) and tries to understand whether the debate about the spread of SRI strategies for all asset management practices (SRI mainstreaming) is necessary for SRI development. We conclude that the mainstreaming of SRI in global investment funds has transformed the original goal of “making good” into a quest for profitability. We also add that SRI must place ethics at the center of the debate in order to regain the primary virtuous logic it had when it was still part of a “margin” or niche market.     

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.     

Time-varying fund manager skills of socially responsible investing (SRI) funds in developed and emerging markets

We examine stock selectivity and timing abilities in the market-wide return, volatility and liquidity of SRI fund managers. We find that multi-dimensional fund manager skills are time-varying and persistent in the short run, with developed market funds exhibiting longer persistence in all dimensions. Fund manager skills tend to be affected by fund characteristics (i.e., expense ratio, fund size, turnover and management tenure) and market characteristics (i.e., ESG market capitalization, mandatory ESG regulation and 10–2 yield spread). Fund managers of developed (emerging) market funds outperform (underperform) the market indices. For both fund types, fund managers possess exceptional volatility and liquidity timing despite poor return timing. Moreover, fund managers focus more (less) on timing the market’s return and less (more) on picking stocks when the prospect of recession keeps increasing (decreasing). Interestingly, if fund managers attempt to time the market-wide return or liquidity, stock selectivity will be worsened by their timing behavior.     

Where's the greenium?

In this study, we investigate whether investors are willing to trade off wealth for societal benefits. We take advantage of unique institutional features of the municipal securities market to provide insight into this question. Since 2013, states and other governmental entities have issued over $23 billion of green bonds to fund eco-friendly projects. Comparing green securities to nearly identical securities issued for non-green purposes by the same issuers on the same day, we observe economically identical pricing for green and non-green issues. In contrast to a number of recent theoretical and experimental studies, we find that in real market settings investors appear entirely unwilling to forgo wealth to invest in environmentally sustainable projects. When risk and payoffs are held constant and are known to investors ex-ante, investors view green and non-green securities by the same issuer as almost exact substitutes. Thus, the greenium is essentially zero.     

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.     

Fund ESG performance and downside risk: Evidence from China

Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which funds’ better ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels.     

Extreme downside risk and market turbulence

We investigate the dynamics of the relationship between returns and extreme downside risk in different states of the market by combining the framework of Bali et al. [Is there an intertemporal relation between downside risk and expected returns? Journal of Financial and Quantitative Analysis, 2009, 44, 883–909] with a Markov switching mechanism. We show that the risk-return relationship identified by Bali et al. (2009) is highly significant in the low volatility state but disappears during periods of market turbulence. This is puzzling since it is during such periods that downside risk should be most prominent. We show that the absence of the risk-return relationship in the high volatility state is due to leverage and volatility feedback effects arising from increased persistence in volatility. To better filter out these effects, we propose a simple modification that yields a positive tail risk-return relationship in all states of market volatility.     

The effects of environmental,social and governance disclosures and performance on firm value: A review of the literature in accounting and finance

This paper not only attempts to survey the burgeoning literature on environmental, social and governance disclosures and performance and their effects on firm value, but its focus also lies on highlighting stylised observations coming from the most recent work that has not yet become part of the ‘conventional wisdom’ in the field. In addition, it outlines some of the crucial knowledge gaps and interesting questions that have not, as of yet, been addressed and thus outlines a potential agenda for future research on socially responsible investing. Lastly, it introduces the papers published in this special issue of the British Accounting Review.     

Currency excess returns and global downside market risk

We assess cross-sectional differences in 23 bilateral currency excess returns in an empirical model that distinguishes between US-specific and global risks, conditional on US bull (upside) or bear (downside) markets. Using the US dollar as numeraire currency, our results suggest that global downside risk is compensated in conditional and unconditional, bilateral currency excess returns. This finding is mostly driven by the emerging markets' currencies in our sample. We also find that the link between the global downside risk and risks associated with a typical carry trade strategy is much weaker for emerging markets' currencies than for developed markets' currencies.     

Risk selection in the London political risk insurance market: the role of tacit knowledge,trust and heuristics

This study demonstrates that the basis of decision-making and risk selection in the London Political Risk Insurance (PRI) market is a combination of Art and Science with such factors as trust and reputation playing an important role. The study breaks new ground by uncovering and examining different methods and strategies of political risk underwriting employed in the insurance market, which does not rely on statistical tools as seen in more traditional insurance types. Adopting a grounded theory approach, the data was generated through 14 semi-structured and unstructured interviews conducted with PRI experts from five PRI companies and two leading political risk broking houses. The data also included documentation reviews and observations.