Investments in Socially Responsible Funds: Is Good Better than the Great?

Abstract

This paper examines the performances of Socially Responsible Investment (SRI) funds with respect to the market over a 12 year period (2005-2016) that covers the periods just prior to, during, and after the Great Recession. This study compares the performances of SRI funds based on their Morningstar® ESG (Environmental, Social, and Governance) fund portfolio ratings. Additionally, we analyze the factors associated with the performances of the SRI funds using 3 separate four year panels (2005-2008; 2009-2012; 2013-2016). We analyze the factors associated with the performances of the SRI funds over these periods. The study period is divided into three sub-periods of 48 months each in order to examine whether the time periods leading to and following the Great Recession had any significant impact on the results. We further examine the performances of the SRI funds after controlling for the Fama-French 3- and 5-factors. The preliminary findings from our study indicate that the SRI funds ranked in the middle quantiles of the ESG ratings out-performed funds in the upper and lower quantiles on a risk-adjusted basis. The results also show that SRI funds in the middle ESG rating level received the most net cash inflow, indicating investors’ preference for medium rated SRI funds.

Keywords: SRI, Investing, Risk Adjusted Return, Wealth Management, Financial Planning, Sustainability, Portfolio Management

JEL Classification: G01, G11, G14