The Price of Ethics: Evidence from Socially Responsible Mutual Funds
AbstractThis 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.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-29.
Date of creation: 2007
Date of revision:
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Web page: http://center.uvt.nl
ethics; mutual funds; socially responsible investing; investment screens; smart money; risk loadings;
Other versions of this item:
- Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "The Price of Ethics: Evidence from Socially Responsible Mutual Funds," Discussion Paper 2007-012, Tilburg University, Tilburg Law and Economic Center.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
- Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Social and Economic Stratification
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-02 (All new papers)
- NEP-FMK-2007-09-02 (Financial Markets)
- NEP-SEA-2007-09-02 (South East Asia)
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