The Many Faces of Socially Responsible Investing - Does the Screening Mechanism Affect the Risk and Return of Mutual Funds?

Abstract

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.

Keywords: Socially responsible investing, ethical investing, mutual funds

JEL Classification: G11, M14