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The effect of socially responsible investing on portfolio performance

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  • Kempf, Alexander
  • Osthoff, Peer
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    Abstract

    More and more investors apply socially responsible screens when building their stock portfolios. This raises the question whether these investors can increase their performance by incorporating such screens into their investment process. To answer this question we implement a simple trading strategy based on socially responsible ratings from the KLD Research & Analytics: Buy stocks with high socially responsible ratings and sell stocks with low socially responsible ratings. We find that this strategy leads to high abnormal returns of up to 8.7% per year. The maximum abnormal returns are reached when investors employ the best-in-class screening approach, use a combination of several socially responsible screens at the same time, and restrict themselves to stocks with extreme socially responsible ratings. The abnormal returns remain significant even after taking into account reasonable transaction costs. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-10.

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    Date of creation: 2007
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    Handle: RePEc:zbw:cfrwps:0610

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    Related research

    Keywords: Socially Responsible Investing; Portfolio Management; Trading Strategy;

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    References

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    1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    2. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2001. "Corporate Governance and Equity Prices," NBER Working Papers 8449, National Bureau of Economic Research, Inc.
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    4. N. Kreander & R.H. Gray & D.M. Power & C.D. Sinclair, 2005. "Evaluating the Performance of Ethical and Non-ethical Funds: A Matched Pair Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7-8), pages 1465-1493.
    5. 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.
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    Cited by:
    1. Gunther Capelle-Blancard & Stéphanie Monjon, 2011. "The Performance of Socially Responsible Funds: Does the Screening Process Matter?," Working Papers 2011-12, CEPII research center.
    2. Manescu, Cristiana, 2009. "Stock returns in relation to environmental, social and governance performance: mispricing or compensation for risk?," Working Papers in Economics 376, University of Gothenburg, Department of Economics, revised 01 Mar 2010.
    3. Andreas Ziegler, 2012. "Is it Beneficial to be Included in a Sustainability Stock Index? A Panel Data Study for European Firms," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 52(3), pages 301-325, July.
    4. Nelson Areal & Maria Cortez & Florinda Silva, 2013. "The conditional performance of US mutual funds over different market regimes: do different types of ethical screens matter?," Financial Markets and Portfolio Management, Springer, vol. 27(4), pages 397-429, December.
    5. Andreas Hoepner & Thereza Aguiar & Ravi Majithia, 2014. "The Level of Compliance with the International Code of Marketing of Breast-Milk Substitutes: Does it Matter to Stock Markets?," Journal of Business Ethics, Springer, vol. 119(3), pages 329-348, February.
    6. Riedl A.M. & Smeets P.M.A., 2013. "Social preferences and portfolio choice," Research Memorandum 051, Maastricht University, Graduate School of Business and Economics (GSBE).
    7. Alan Gregory & Julie Whittaker, 2013. "Exploring the Valuation of Corporate Social Responsibility—A Comparison of Research Methods," Journal of Business Ethics, Springer, vol. 116(1), pages 1-20, August.
    8. Basso, Antonella & Funari, Stefania, 2014. "Constant and variable returns to scale DEA models for socially responsible investment funds," European Journal of Operational Research, Elsevier, vol. 235(3), pages 775-783.
    9. Janusz Brzeszczyński & Graham McIntosh, 2014. "Performance of Portfolios Composed of British SRI Stocks," Journal of Business Ethics, Springer, vol. 120(3), pages 335-362, March.
    10. Hélène Pasquini-Descomps & Frédéric Teulon, 2014. "What is the perception of corporate social responsibility for fund managers in Switzerland?," Working Papers 2014-097, Department of Research, Ipag Business School.
    11. Hooi Hooi Lean & Duc Khuong Nguyen, 2014. "Policy uncertainty and performance characteristics of sustainable investments across regions around the global financial crisis," Working Papers 2014-295, Department of Research, Ipag Business School.
    12. Janusz Brzeszczynski & Graham McIntosh, 2012. "Performance of Portfolios Composed of British SRI Stocks," CFI Discussion Papers 1204, Centre for Finance and Investment, Heriot Watt University.
    13. Philip Baird & Pinar Geylani & Jeffrey Roberts, 2012. "Corporate Social and Financial Performance Re-Examined: Industry Effects in a Linear Mixed Model Analysis," Journal of Business Ethics, Springer, vol. 109(3), pages 367-388, September.
    14. Leite, Paulo & Cortez, Maria Céu, 2014. "Style and performance of international socially responsible funds in Europe," Research in International Business and Finance, Elsevier, vol. 30(C), pages 248-267.
    15. Oberndorfer, Ulrich & Schmidt, Peter & Wagner, Marcus & Ziegler, Andreas, 2013. "Does the stock market value the inclusion in a sustainability stock index? An event study analysis for German firms," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 497-509.
    16. Durand, Robert B. & Koh, SzeKee & Limkriangkrai, Manapon, 2013. "Saints versus Sinners. Does morality matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 166-183.
    17. Ulrich Oberndorfer & Marcus Wagner & Andreas Ziegler, 2011. "Does the Stock Market Value the Inclusion in a Sustainability Stock Index? An Event Study Analysis for German Firms," MAGKS Papers on Economics 201130, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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