The Dark Enemy of Responsible Mutual Funds: Does the Vice Fund Offer More Financial Virtue?

Abstract:     
Research Question/Issue: We pursue the first in depth analysis of the financial attractiveness of responsible funds’ opposite, the Vice Fund, which penalizes instead of rewards corporate environmental, social, or governance (ESG) performance. While responsible investment’s financial attractiveness has been found to be comparable with conventional, ESG indifferent investment, an abnormally strong financial appeal of the Vice Fund would be highly problematic for the responsible investment profession’s mainstreaming potential.

Research Findings/Insights: Despite the financial potential of the Vice Fund’s underlying sin stocks has recently been indicated, we find the Vice Fund’s abnormal return to be statistically indistinguishable from zero. Worse, the Vice Fund managers possess significantly value destructing directional trading and crisis management skills. Our findings are robust to common (time varying) control factors and alternative benchmarks.

Theoretical/Academic Implications: Our results provide the missing empirical evidence to not reject the hypothesis that responsible investment products are financially as attractive as both alternatives, conventional and vicious investments. This implies that responsible investment likely offers investors non-financial utility at no costs. As recent theory suggests that growth of responsible investment can provide economic incentives for corporate ESG performance enhancing projects, even if these have negative net present values, our results matter for theories of corporate governance and corporate social responsibility.

Practitioner/Policy Implications: The responsible investment profession appears to have a strong growth potential. Hence, managers can expect investors to increasingly demand advanced corporate ESG performance. Policy makers could utilise this process to embed ESG criteria in markets.

Number of Pages in PDF File: 41

Keywords: Corporate Governance, Business Ethics, Corporate Social Responsibility, Financial Performance, Socially Responsible Investment

JEL Classification: A13, D62, G11, L60, L70, M14, Z13

working papers series