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

See all articles by Ioannis Oikonomou

Ioannis Oikonomou

University of Reading - ICMA Centre

Emmanouil Platanakis

University of Bath - School of Management

Charles Sutcliffe

University of Reading - ICMA Centre

Date Written: January 12, 2018

Abstract

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

Suggested Citation

Oikonomou, Ioannis and Platanakis, Emmanouil and Sutcliffe, Charles M., Socially Responsible Investment Portfolios: Does the Optimization Process Matter? (January 12, 2018). The British Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2666661 or http://dx.doi.org/10.2139/ssrn.2666661

Ioannis Oikonomou (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Emmanouil Platanakis

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Charles M. Sutcliffe

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
244
rank
123,121
Abstract Views
1,679
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information