The Price of Ethics: Evidence from Socially Responsible Mutual Funds
ECGI - Finance Working Paper No. 168/2007
TILEC Discussion Paper No. 2007-012
CentER Discussion Paper Series No. 2007-29
51 Pages Posted: 10 May 2007 Last revised: 23 Dec 2019
Date Written: May 1, 2007
Abstract
This paper estimates the price of ethics by studying the risk-return relation in socially responsible investment (SRI) funds. Consistent with investors paying a price for ethics, SRI funds in many European and Asia-Pacific countries strongly underperform domestic benchmark portfolios by about 5% per annum, although UK and US SRI funds do not significantly underperform their benchmarks. The underperformance of SRI funds does not seem to be driven by the loadings on an ethical risk factor. SRI funds do not suffer a cost of reduced selectivity nor do SRI funds managers time the market. There is mixed evidence of a smart money effect: SRI investors are unable to identify the funds that will outperform in the future, whereas they show some fund-selection ability in identifying ethical funds that will perform poorly. The screening activities of SRI funds have a significant impact on funds' riskadjusted returns and loadings on risk factors: corporate governance and social screens generate better risk-adjusted returns whereas other screens (e.g. environmental ones) yield significantly lower returns.
Keywords: ethics, mutual funds, socially responsible investing, investment screens, smart money, risk loadings
JEL Classification: G12, G34, A13, Z13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
International Evidence on Ethical Mutual Fund Performance and Investment Style
By Rogér Otten, Rob Bauer, ...
-
International Evidence on Ethical Mutual Fund Performance and Investment Style
By Rob Bauer, Kees C. G. Koedijk, ...
-
Investing in Socially Responsible Mutual Funds
By Christopher Geczy, Robert F. Stambaugh, ...
-
The Eco-Efficiency Premium Puzzle
By Jeroen Derwall, Rob Bauer, ...
-
Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices
By Alex Edmans
-
Corporate Social Performance and Stock Returns: UK Evidence from Disaggregate Measures
By Stephen J. Brammer, Chris Brooks, ...