Research Review | 2.20.2012 | Socially Responsible Investing

Do Socially Responsible Investment Indexes Outperform Conventional Indexes?
Shunsuke Managi (Tohoku University), et al. | Feb 2012
The question of whether more socially responsible (SR) firms outperform or underperform other conventional firms has been debated in the economic literature. In this study, using the socially responsible investment (SRI) indexes and conventional stock indexes in the US, the UK, and Japan, first and second moments of firm performance distributions are estimated based on the Markov switching model. We find two distinct regimes (bear and bull) in the SRI markets as well as the stock markets for all three countries. These regimes occur with the same timing in both types of market. No statistical difference in means and volatilities generated from the SRI indexes and conventional indexes in either region was found. Furthermore, we find strong co-movements between the two indexes in both regimes.

The Many Faces of Socially Responsible Investing – Does the Screening Mechanism Affect the Risk and Return of Mutual Funds?
Jacquelyn Humphrey and David Tan (Australian National University) | Aug 2011
We investigate whether positive or negative screening impacts the performance and risk of socially responsible mutual funds. We mimic the characteristics of mutual funds and bootstrap firm returns to form portfolios which reflect actual mutual fund holdings. We find positive screening results in increased returns, but also increased total risk and beta. We do not find support for the conjecture that positively screened firms have lower unsystematic risk. Return results from negative screening are not as clear, but we do find that increasing the number of stocks excluded from a portfolio may impede the ability to fully diversify.
Green Investment and Related Disclosures Decisions
Patrick Martin and Donald Moser (University of Pittsburgh) | Dec 2011
We use experimental markets to examine whether preferences for societal benefits lead managers to invest in unprofitable green projects, what information they disclose regarding such investments, and how investors react to those disclosures. We find that managers who are also shareholders in their company make green investments even when they know this reduces shareholder value, thereby decreasing their own and other current shareholders’ payoffs. Moreover, managers voluntarily disclose to potential investors that they have made such unprofitable green investments and tend to focus their disclosures on the societal benefits of their green investment rather than on the cost to the company. Finally, potential investors’ bids for the company reward managers and other current shareholders more when managers disclose their green investments than when they do not, and this result is stronger when managers’ disclosures focus on the societal benefits of their investment rather than on the cost to the company. These results are consistent with both managers and potential investors trading off personal wealth for societal benefits and help explain why, given the current voluntary reporting environment, company managers often focus their disclosures of environmental investments on the benefits to society and to the company rather than on the cost to the company. In addition to these specific results, our study demonstrates the benefits of using experiments to study important corporate social responsibility issues that are difficult to address using archival data.
The Performance of Socially Responsible Investment: A review of scholarly studies published 2008‐2010
Emma Sjöström (Stockholm School of Economics) | Oct 2011
This report explores whether socially responsible investment (SRI) generates higher, lower or similar risk adjusted financial return compared with conventional investment. 21 academic studies are reviewed. Seven studies conclude that SRI have similar performance relative to their conventional peers. Five studies report that SRI outperforms conventional investment. Three studies find that SRI generates inferior performance relative to its conventional peers. Finally, six studies report mixed results. We can conclude that results point in all different directions, and that there is no clear link between SRI and financial performance. Our results implicates that it would be unwise to make general statements about the performance of SRI based on only one or a few studies.
Trends in the Literature on Socially Responsible Investment: Looking for the Keys Under the Lamppost
Gunther Capelle-Blancard and Stéphanie Monjon (Université Paris) | Oct 2011
In this paper, we use online search engines and archive collections to examine the popularity of socially responsible investing (SRI) in newspapers and academic journals. A simple content analysis suggests that most of the papers on SRI focus on financial performance. This profusion of research is somewhat puzzling as most of the studies used roughly the same methodology and obtained very similar results. So, why so many studies on SRI financial performance? We argue that the academic literature on SRI is mostly data-driven: the famous “Looking for the Keys Under the Lamppost” syndrome. The question of the financial performance of the SRI funds is certainly relevant, but maybe too much attention has been paid to this issue, whereas more research is needed on a conceptual and theoretical ground, in particular the aspirations of SRI investors, the relationship between regulation and SRI, as well as the assessment of extra-financial performances.
Financial Constraints on Corporate Goodness
Harrison Hong (Princeton University), et al. | Jan 2011
We model the firm’s optimal choice of capital and goodness subject to financial constraints. Managers and shareholders derive benefits over profits and social responsibility. Goodness is costly and its marginal benefit is finite; as a result, less-constrained firms spend more on goodness. We verify that less-constrained firms do indeed have higher social responsibility scores. Our empirical analysis addresses identification issues that have long plagued the corporate social responsibility literature, establishing the causality of this relationship using a natural experiment. During the technology bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness scores also temporarily increased relative to their previously unconstrained peers. This convergence applies to all components of the goodness scores such as community and employee relations and environmental responsibility but not governance.
Are Red or Blue Companies More Likely to go Green? Politics and Corporate Social Responsibility
Alberta Di Giuli (ISCTE Business School) and Leonard Kostovetsky (University of Rochester) | March 2011
We use political variables to examine how personal preferences of firm stakeholders for socially responsible behavior affect corporate social responsibility (CSR). We find that firms with Democratic CEOs, founders, and directors are more socially responsible, as reflected in higher KLD scores (firm CSR ratings provided by Kinder, Lydenberg, and Domini), than firms with Republican corporate stakeholders. On average, firms with a Democratic CEO have KLD scores that are 0.15 standard deviations higher than firms with a Republican CEO. Firms headquartered in states that lean Democratic are also more socially-responsible than firms in Republican states. Specifically, firms in deep-“blue” states like California have, on average, KLD scores that are 0.22 standard deviations higher than firms in deep-“red” states such as Louisiana. Our tests control for important firm characteristics such as size and financial constraints, CEO characteristics such as the CEO‟s age and gender, and industry effects. We investigate, and find little evidence in favor of, alternative explanations such as reverse causality (CSR leading to more donations to Democrats) and selection (responsible firms hiring more Democratic CEOs or choosing headquarters in Democratic states). The recent growth in the popularity of CSR and socially-responsible investing (SRI) suggests that our results are relevant for corporate finance and asset pricing.