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The Price of Ethics: Evidence from Socially Responsible Mutual Funds

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Author Info
Renneboog, L.D.R.
Horst, J.R. ter
Zhang, C. (Tilburg University, Center for Economic Research)

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Abstract

This 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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2007-29.

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Date of creation: 2007
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Handle: RePEc:dgr:kubcen:200729

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pastor, Lubos & Stambaugh, Robert F., 2002. "Mutual fund performance and seemingly unrelated assets," Journal of Financial Economics, Elsevier, vol. 63(3), pages 315-349, March. [Downloadable!] (restricted)
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  2. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March. [Downloadable!] (restricted)
  3. Elster, Jon, 1989. "Social Norms and Economic Theory," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 99-117, Fall. [Downloadable!] (restricted)
  4. Marco Becht & Julian Franks & Colin Mayer & Stefano Rossi, 2008. "Returns to Shareholder Activism," OFRC Working Papers Series 2008fe07, Oxford Financial Research Centre. [Downloadable!]
  5. Statman, Meir, 1987. "How Many Stocks Make a Diversified Portfolio?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 353-363, September. [Downloadable!]
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  7. Bauer, Rob & Otten, Roger & Rad, Alireza Tourani, 2006. "Ethical investing in Australia: Is there a financial penalty?," Pacific-Basin Finance Journal, Elsevier, vol. 14(1), pages 33-48, January. [Downloadable!] (restricted)
  8. Bauer, Rob & Koedijk, Kees & Otten, Roger, 2005. "International evidence on ethical mutual fund performance and investment style," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1751-1767, July. [Downloadable!] (restricted)
  9. Zakri Y. Bello, 2005. "Socially Responsible Investing And Portfolio Diversification," Journal of Financial Research, Southern Finance Association and Southwestern Finance Association, vol. 28(1), pages 41-57. [Downloadable!] (restricted)
  10. Travis Sapp & Ashish Tiwari, 2004. "Does Stock Return Momentum Explain the "Smart Money" Effect?," Journal of Finance, American Finance Association, vol. 59(6), pages 2605-2622, December. [Downloadable!] (restricted)
  11. Renneboog, L.D.R. & Horst, Jenke ter & Zhang, Chendi, 2006. "Is ethical money financially smart?," Discussion Paper 9, Tilburg University, Center for Economic Research. [Downloadable!]
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  12. Akerlof, George A, 1980. "A Theory of Social Custom, of Which Unemployment May be One Consequence," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 749-75, June. [Downloadable!] (restricted)
    Other versions:
  13. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(4), pages 553-80. [Downloadable!] (restricted)
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  1. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "Socially Responsible Investments: Methodology, Risk and Performance," Discussion Paper 2007-31, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Renneboog, L.D.R. & Horst, J.R. ter & Zhang, C., 2007. "Socially Responsible Investments: Methodology, Risk Exposure and Performance," Discussion Paper 2007-013, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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