Socially Responsible Investment Portfolios: Does the Optimization Process Matter?
The British Accounting Review, Forthcoming
54 Pages Posted: 29 Sep 2015 Last revised: 13 Jan 2018
Date Written: January 12, 2018
This study investigates the impact of the choice of optimization technique when constructing Socially Responsible Investment (SRI) portfolios. Corporate Social Performance (CSP) scores are price sensitive information that is subject to considerable estimation risk. Therefore, uncertainty in the input parameters is greater for SRI portfolios than conventional portfolios, and this affects the selection of the appropriate optimization method. We form SRI portfolios based on six different approaches and compare their performance along the dimensions of risk, risk-return trade-off, diversification and stability. Our results for SRI portfolios contradict those of the conventional portfolio optimization literature. We find that the more “formal” optimization approaches (Black-Litterman, Markowitz and robust estimation) lead to SRI portfolios that are both less risky and have superior risk-return trade-offs than do more simplistic approaches; although they also have more unstable asset allocations and lower diversification. Our conclusions are robust to a series of tests, including the use of different estimation windows and stricter screening criteria.
Keywords: corporate social responsibility, CSR, CSP, SRI, sustainability, portfolio optimization
JEL Classification: C61, G11, M14
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