Skip to main content

The Investment Performance of Socially Responsible Investment Funds in Australia

Journal of Business Ethics volume 80, pages 181–203 (2008)Cite this article

Abstract

Interest in the notion of the possible financial sacrifice suffered by socially responsible investment (SRI) fund investors for considering ethical, social and environmental issues in their investment decisions has spawned considerable academic interest in the performance of SRI funds. Both the Australian and international research literature have yielded largely mixed results. However, several of these studies are hampered by methodological problems which can obscure the significance of reported results, such as the use of small sample sizes, inconsistencies in the time frames selected to analyse performance and different modelling frameworks used to estimate investment returns. This study attempts to redress some of these issues by investigating the returns performance of 89 ethical funds in Australia over the period 1986–2005. Using a multi-factor CAPM model [Fama, E. F., and K. R. French (1996) J. Finance 51(1), 55] (which controls for factors such as size, book-to-market value and momentum) we find that ethical funds significantly under-perform the market in Australia, particularly in the most recent 5 years of our sample period (2000–2005). Risk adjusted returns (using Jensen’s alpha) indicate that average annual underperformance is around 1.52% in the 2000–2005 period for our sample and .88% over the whole sample period. Our results contrast with many previous studies (both Australian and international), which have not found statistically significant differences in the performance of ethical funds relative to market benchmarks and/or a matched sample of conventional funds.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price includes VAT (USA)
Tax calculation will be finalised during checkout.

References

  • Ali, P. and M. Gold: 2002, ‚Analysing the Cost of Ethical Investments’, JASSA, 9–14

  • AspectHuntley Pty Ltd DataLink, Sydney, 2005/2006

  • Australian Corporations Act 2001. Cwt (http://www. asic.gov.au/asic/ASIC)

  • Australian Stock Exchange: 2005/2006, Market Comparative Analysis, Sydney (http://www.asxtra.asx.com.au)

  • Bauer, R., K. Koedijk and R. Otten: 2005, ‚International Evidence on Ethical Mutual Fund Performance and Investment Style’, Journal of Banking & Finance 29, 1751–1767

    Google Scholar 

  • Bauer, R., R. Otten and A. Rad: 2006, ‚Ethical Investing in Australia; Is There a Financial Penalty?’, Pacific-Basin Finance Journal 14, 33–48

  • Carhart, M.: 1997, ‚On Persistence in Mutual Fund Performance’, Journal of Finance 52(1), 57–82

    Google Scholar 

  • Christie A. 1990, Aggression of Test Statistics: An Evaluation of the Evidence on Contracting and Size Hypotheses: Statistics vs. Economics. Journal of Accounting and Economics 12(1–3), 15–44

    Article  Google Scholar 

  • Cooper M., B. B. Schlegelmilch: 1993, Key Issues in Ethical Investment. Business Ethics: A European Review 2(4), 213–227

    Article  Google Scholar 

  • Cowton C. 1999, Accounting and Financial Ethics: From Margin to Mainstream. Business Ethics: A European Review 8(2), 99–107

    Article  Google Scholar 

  • Cowton C. 2004, Managing Financial Performance at an Ethical Investment Fund. Accounting, Auditing & Accountability Journal 17(2), 249–275

    Article  Google Scholar 

  • Cummings L. 2000, The Financial Performance of Ethical Investment Trusts: An Australian Perspective. Journal of Business Ethics 25, 79–92

    Article  Google Scholar 

  • Damodaran A.: 2006, Damodaran on Valuation: Security Analysis for Investment and Corporate Finance, 2nd ed. New York, Wiley

    Google Scholar 

  • Deni Greene Consulting Services: 2002, Socially Responsible Investment in Australia. Ethical Investment Association

  • DiBartolomeo, D.: 1996, ‚Explaining and Controlling the Returns on Socially Screened U.S. Equity Portfolios’, in Presentation to New York Society of Security Analysts, September 10

  • Diltz, J. D.: 1995, ‚Does Social Screening Affect Portfolio Performance?’, The Journal of Investing 4, 64–69

    Google Scholar 

  • Ethical Investor: 2005, ‚Corporate Monitor Tables’, Ethical Investor Magazine, March, 23–29

  • Etzioni A. (1988), The Moral Dimension: Towards a New Economics. The Free Press, New York

    Google Scholar 

  • Fama E. F, K. R. French 1992, The Cross Section of Expected Stock Returns. Journal of Finance 47 (2), 427–465

    Article  Google Scholar 

  • Fama E. F, K. R. French 1993, Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics 33(1), 3–56

    Article  Google Scholar 

  • Fama E. F, K. R. French 1996, Multifactor Explanations of Asset Pricing Anomalies. Journal of Finance 51(1), 55–84

    Article  Google Scholar 

  • Frost, G., G. Michelson, S. Van Der Laan and N. Wailes: 2004, ‚Bringing Ethical Investment to Account. Australian Accounting Review 14(3), 2–9

  • Gallagher D., K. Martin: 2005, Size and Investment Performance: A Research Note. Abacus 41(1), 55–65

    Article  Google Scholar 

  • Greene W. 2005, Econometric Analysis, 5th ed. Englewood Cliffs: Prentice Hall

    Google Scholar 

  • Gregory A., J. Matatko R. Luther 1997, Ethical Unit Trust Financial Performance: Small Company Effects and Fund Size Effects. Journal of Business Finance and Accounting 24(5), 705–725

    Article  Google Scholar 

  • Grinblatt M., S. Titman 1989, Mutual Fund Performance: An Analysis of Quarterly PortfolioHoldings. Journal of Business 62(3), 393–416

    Article  Google Scholar 

  • Guerard J. B. 1997, Is There a Cost to Being Socially Responsible in Investing? Journal of Investing 6(2), 11–18

    Article  Google Scholar 

  • Gujarati D. N. (2003), Basic Econometrics. New York: McGraw Hill

    Google Scholar 

  • Haigh, M. and J. Hazelton: 2004, ‚Financial Markets: A Tool for Social Responsibility?’, Journal of Business Ethics 52(1), June (II), 59–71

    Google Scholar 

  • Hamilton, S., H. Jo and M. Statman: 1993, ‚Doing Well While Doing Good? The Investment Performance of Socially Responsible Mutual Funds. Financial Analysts Journal November–December, 62–66

  • Jegadeesh N., S. Titman 1993, Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance 48(1), 65–91

    Article  Google Scholar 

  • Jensen M. 1968, The Performance of Mutual Funds in the Period 1945–1964. Journal of Finance, 23(2), 389–416

    Article  Google Scholar 

  • Jones, S., G. Frost, J. Loftus, S. van der Laan: 2005, Sustainability Reporting – Practices, Performance and Potential, July (CPA Australia, Melbourne)

  • Jones, S., G. Frost, J. Loftus and S. Van Der Laan: 2007, ‚An Empirical Examination of the Market Returns, Financial Performance and Credit Risk Characteristics of Entities Engaged in Sustainability Disclosure’, The Australian Accounting Review 17(1), 78–87

  • Kreander N., R. H. Gray, D. M. Power, C. D. Sinclair 2005, Evaluating the Performance of Ethical and Non-Ethical Funds: A Matched Pair Analysis. Journal of Business Finance and Accounting, 32(7), 1465–1493

    Article  Google Scholar 

  • Kurtz L. 1997, No Effect, or No Net Effect? Studies on Socially Responsible Investing. Journal of Investing, 6(4), 37–49

    Article  Google Scholar 

  • Lewis A., C. Mackenzie 2000, Morals, Money, Ethical Investing and Economic Psychology. Human Relations, 53(2), 179–191

    Google Scholar 

  • Luther, R. J. and J. Matatko: 1994, ‚Ethical Investment: An Assessment of the Financial Performance of Socially Constrained Unit Trusts’, University of Exeter Discussion Paper in Accountancy, 9016

  • Luther R, J. J. Matatko, C. Corner 1992, The Investment Performance of U.K. ‚Ethical’ Unit Trusts. Accounting, Auditing and Accountability Journal 5(1), 57–71

    Google Scholar 

  • Mallin C., B. Saadouni, R. Briston 1995, The Financial Performance of Ethical Investment Trusts. Journal of Business Finance and Accounting 22(4), 483–496

    Article  Google Scholar 

  • McCann L., A. Solomon, J. F. Solomon: 2003, Explaining the Growth of U.K. Socially Responsible Investment. Journal of General Management 28(4), 15–36

    Google Scholar 

  • Sauer D. A. 1997, The Impact of Social-Responsibiity Screens on Investment Performance: Evidence from the Domini 400 Social Index and Domini Equity Mutual Fund. Review of Financial Economics, 6(2), 137–149

    Article  Google Scholar 

  • Schueth S. 2003, Socially Responsible Investing in the United States. Journal of Business Ethics 43, 184–194

    Article  Google Scholar 

  • Sethi S. P. 2005, Investing in Socially Responsible Companies is a Must for Public Pension Funds – Because There is no Better Alternative. Journal of Business Ethics, 56, 99–129

    Article  Google Scholar 

  • Sharpe, W. F.: 1994, ‚The Sharpe Ratio’, The Journal of Portfolio Management, Fall, 49–68

  • Statman, M.: 2000, ‚Socially Responsible Mutual Funds’, Financial Analysts Journal 56(3), 30–39

  • Tippet J. 2001, Performance of Australia’s Ethical Funds. The Australian Economic Review 34(2), 170–178

    Article  Google Scholar 

  • Thomson Financial Pty Ltd, 2006: One Banker and Worldscope Databases, Sydney

Download references

Author information

Authors and Affiliations

  1. Accounting, University of Sydney, Cnr Codrington and Rose St, Darlington, Sydney, NSW, 2006, Australia

    Stewart Jones, Sandra van der Laan, Geoff Frost & Janice Loftus

Authors
  1. Stewart Jones
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sandra van der Laan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Geoff Frost
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Janice Loftus
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Stewart Jones.

Additional information

Stewart Jones is a Professor of Accounting with the University of Sydney, appointed in 2001. His research interests embrace credit risk modelling, capital markets research, standard setting and accounting theory.

Sandra van der Laan is a lecturer in the Discipline of Accounting at the University of Sydney. Her research focuses on accounting as a social discourse and accounting as a mechanism to discharge a broad range of corporate accountabilities.

Geoff Frost is an Associate Professor of Accounting at the University of Sydney. His research interests include corporate social responsibility and ethical investment.

Janice Loftus is a senior lecturer in accounting at the University of Sydney. Her current research interests include financial accounting and corporate social responsibility reporting.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Jones, S., van der Laan, S., Frost, G. et al. The Investment Performance of Socially Responsible Investment Funds in Australia. J Bus Ethics 80, 181–203 (2008). https://doi.org/10.1007/s10551-007-9412-6

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-007-9412-6

Keywords

  • investment performance
  • SRI funds
  • capital asset pricing model