Abstract
Prior studies, which analyse the performance of socially responsible investments (SRIs) compared to conventional funds, have thus far ignored the assessment of risk. In response to this identified lack of research, we make a major attempt to fill the void by investigating whether daily returns of Australian equity socially responsible investment funds have different tail risk exposure in the return distribution compared to matched conventional equity funds. The Australian funds management industry provides a natural setting within which to study the risk exposure of SRI funds. The Australian funds management industry has one of the largest and fastest growing funds management sectors in the world. This growth is underpinned by Australia’s government-mandated retirement scheme. In addition, Australia is the first country to introduce regulations that require issuers of financial products and financial advisors to disclose and advise on ethical, social, and governance (ESG) considerations. Using a sample of 26 funds spanning the period 1998–2013, we establish several new findings. First, in assessing tail risk exposure we observe no evidence of significant difference in riskiness amongst socially responsible investment compared to that of conventional funds with similar investment styles. Second, when comparing two downside risk measures across socially responsible and matched conventional funds, namely Value-at-Risk and expected shortfall, we find that return distributions amongst Australian funds do not exhibit particularly heavy tails. Taken together, we show that investors do not pay a penalty (in terms of higher risk) to invest ethically.
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Notes
- 1.
We use three different estimates of VaR and ES. The three estimates are based on (a) the historical distribution of returns, (b) the assumption that returns follow a Gaussian distribution, and (c) extreme value theory (hereafter EVT). EVT has gained popularity in the risk management literature over the last twenty years. EVT provides a formal framework with which to study the tail behaviour of distributions. A rich and detailed summary of EVT and applications to risk management can be found in McNeil et al. (2005). It is generally accepted that EVT methods fit higher quantiles better than competing approaches, especially where heavy-tailed data are involved. The historical approach, however, makes less assumptions about the distribution of returns and the Gaussian approach is easy to implement. The appropriate model thus needs to be chosen by backtesting methods such as those developed by Christoffersen (1998) and Berkowitz and O’Brien (2002).
- 2.
The Perpetual Wholesale Ethical SRI Fund is the top-performing fund in 2012 (39.70% return). According to Mercer’s latest investment return figures, the average equities fund manager achieved 20.30%.
- 3.
Lynch (2009).
- 4.
The SIF is a US membership association dedicated to advancing the concept, practice, and growth of SRI.
- 5.
In Australasia, the majority of SRI funds employ the ESG factor approach as noted by the O’Connor (2013).
- 6.
Table 12.7 summarises some of the key SRI studies dating back to 2000.
- 7.
- 8.
- 9.
The figures and tables for other confidence levels are available upon request.
- 10.
An example of a QQ plot demonstrating the tail distribution for the fund, AMP FLI-AMP Sustainable Future Australian Shares is presented in appendix Fig. 12.2. For interested readers, a full copy of all QQ plots is available upon request.
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Acknowledgements
The authors acknowledge support in the form of a grant from the Australian Centre for Financial Studies (ACFS). The authors would like to thank Philip Gray (Monash University, Melbourne) for helpful comments and for providing monthly returns to Fama and French-style Australian asset pricing factors (SMB, HML, and UMD) essential for the fund-matching process. E. Mackie would like to acknowledge the support and hospitality from Monash University, Melbourne, and Petrobras, Brazil.
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Mackie, E., Palit, I., Veeraraghavan, M., Watson, J. (2018). Is Socially Responsible Investing More Risky? Australian Evidence. In: Gal, G., Akisik, O., Wooldridge, W. (eds) Sustainability and Social Responsibility: Regulation and Reporting. Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application. Springer, Singapore. https://doi.org/10.1007/978-981-10-4502-8_12
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