Skip to main content
SpringerLink
Log in

Does it Really Hurt to be Responsible?

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

Prior literature on socially responsible investment has contended that excluding “sin stocks” from a portfolio (negative screening) will reduce performance and increase risk. Further, incorporating stocks of firms with positive social responsibility scores (positive screening) will improve performance and reduce risk. We simulate portfolios designed to mimic typical equity mutual funds’ holdings and investigate these propositions. We remove the potentially confounding influences of differences in manager skill, transaction costs and fees, and conduct a clean experiment on the effect of positive and negative portfolio screening. We find no difference in the return or risk of screened and unscreened portfolios. We conclude that a typical socially responsible fund will neither gain nor lose from screening its portfolio.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Subscribe and save

Springer+ Basic
$34.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or eBook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

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

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. The majority of funds also currently screen for firms which are involved in Sudan (US SIF 2012). We include involvement in Sudan as one criterion in our “human rights” screen.

  2. See http://ussif.org/resources/mfpc/screening.cfm for a list of which screens SRI funds use—date accessed 27 July 2011.

  3. http://ussif.org/resources/mfpc/index.cfm?mf_type=BL&order—date accessed 8 April 2010.

  4. Specifically, US SIF identifies the following potential positive screens: environment (comprising climate/clean technology, pollution/toxics and other), social (comprising community development, diversity/equal employment, human rights and labour relations) and corporate governance (comprising board issues and executive pay).

  5. Note that we need to make an assumption about when a portfolio manager would add or delete a stock from the portfolio when the underlying index changes. We assume that deletions to the index are held in the fund until the end of the month and additions are added at the beginning of the following month. This results in our unscreened universe not necessarily comprising exactly 500 stocks in any given month.

  6. We are unable to test the effect of specific screens due to insufficient numbers of firms available for each screen. For example, there are less than 30 stocks with positive governance scores for half of the years in our sample (in 1 year only 13 stocks have a positive governance score).

  7. This sample period also has the advantage of allowing us to avoid using KLD’s 2010 ratings. In 2009, MSCI acquired RiskMetrics, which had previously acquired KLD and there are noticeable differences in the “strengths” and “weaknesses” criteria between 2009 and 2010.

  8. Results not displayed, available upon request.

  9. It must be noted that the majority of the alphas on our bootstrapped portfolios are insignificant, so it may not be appropriate to use these alphas to calculate differences between the screened and unscreened portfolios. Consequently, we also examine the alphas and replace any insignificant alpha with zero before taking differences. In each case, the upper and lower critical values become zero because the vast majority of the differences are zero. This result still upholds our findings of no difference between screened and unscreened portfolios’ alphas. We thank an anonymous referee for raising this point.

  10. We thank an anonymous referee for this suggestion.

  11. We note that positive screening is more likely to be an overlay on an existing diversified portfolio. Our results show that a purely positively screened portfolio is not undiversified. Therefore, we do not expect that adding a positively screened portfolio to an existing diversified portfolio will result in any significant loss of diversification.

  12. The industry returns data are from Kenneth French’s data library, as is the file which matches SIC and Fama–French industry classification codes. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html—date accessed 12 December 2011. We are grateful to Kenneth French for making these data available.

  13. We thank an anonymous referee for this suggestion.

References

  • Adler, T., & Kritzman, M. (2008). The cost of socially responsible investing. Journal of Portfolio Management, 35(1), 52–56.

    Article  Google Scholar 

  • Barnett, M. L., & Salomon, R. M. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27(11), 1101–1122.

    Article  Google Scholar 

  • Bauer, R., Koediji, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 29(7), 1751–1767.

    Article  Google Scholar 

  • Bello, Z. Y. (2005). Socially responsible investing and portfolio diversification. Journal of Financial Research, 28(1), 41–57.

    Article  Google Scholar 

  • Benson, K. L., Brailsford, T. J., & Humphrey, J. E. (2006). Do socially responsible fund managers really invest differently? Journal of Business Ethics, 65(4), 337–357.

    Article  Google Scholar 

  • Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(1), 57–82.

    Article  Google Scholar 

  • Cornell, B., & Shapiro, A. C. (1987). Corporate stakeholders and corporate finance. Financial Management, 16(1), 5–14.

    Article  Google Scholar 

  • Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), 621–640.

    Article  Google Scholar 

  • Fabozzi, F. J., Ma, K. C., & Oliphant, B. J. (2008). Sin stock returns. Journal of Portfolio Management, 35(1), 82–94.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (1997). Industry cost of equity. Journal of Financial Economics, 43(2), 153–193.

    Article  Google Scholar 

  • Filbeck, G., Gorman, R., & Zhao, X. (2009). The best corporate citizens: Are they good for their shareholders? Financial Review, 44(2), 239–262.

    Article  Google Scholar 

  • Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Returns and risk in socially responsible investment. Journal of Banking & Finance, 32(12), 2646–2654.

    Article  Google Scholar 

  • Goldreyer, E., & Diltz, D. (1999). The performance of socially responsible mutual funds: Incorporating sociopolitical information in portfolio selection. Managerial Finance, 25(1), 23–36.

    Article  Google Scholar 

  • Hong, H. G., & Kacperczyk, M. T. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93(1), 15–36.

    Article  Google Scholar 

  • Hong, H. G., & Kostovetsky, L. (2011). Red and blue investing: Values and finance. Journal of Financial Economics, 103(1), 1–19.

    Article  Google Scholar 

  • Humphrey, J. E., & Lee, D. D. (2011). Australian socially responsible funds—Performance, risk and screening intensity. Journal of Business Ethics, 102(4), 519–535.

    Article  Google Scholar 

  • Jegourel, Y., & Maveyraud, S. (2010). A reassessment of the European SRI Funds “underperformance”: Does the intensity of extra-financial negative screening matter? Economics Bulletin, 30(1), 913–923.

    Google Scholar 

  • Lado, A. A., & Wilson, M. C. (1994). Human resource systems and sustained competitive advantage: A competency-based perspective. Academy of Management Review, 19(4), 699–727.

    Google Scholar 

  • Lee, D. D., Humphrey, J. E., Benson, K. L., & Ahn, J. Y. K. (2010). Socially responsible investment fund performance: The impact of screening intensity. Accounting & Finance, 50(2), 351–370.

    Article  Google Scholar 

  • Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91.

    Google Scholar 

  • Renneboog, L., ter Horst, J., & Zhang, C. (2008). The price of ethics and stakeholder governance: The performance of socially responsible mutual funds. Journal of Corporate Finance, 14(3), 302–322.

    Article  Google Scholar 

  • Schröder, M. (2007). Is there a difference? The performance characteristics of SRI Equity indices. Journal of Business Finance and Accounting, 34(1–2), 331–348.

    Article  Google Scholar 

  • Statman, M. (2000). Socially responsible mutual funds. Financial Analysts Journal, 56(3), 30–39.

    Article  Google Scholar 

  • Statman, M. (2004). The diversification puzzle. Financial Analysts Journal, 60(4), 44–53.

    Article  Google Scholar 

  • Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65(4), 33–46.

    Article  Google Scholar 

  • Turban, D. B., & Greening, D. W. (1997). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.

    Article  Google Scholar 

  • US SIF. (2012). Report on sustainable and responsible investing trends in the United States 2012. Washington, DC: US SIF.

Download references

Acknowledgments

The authors thank Doug Foster, Lars Hassel, Steven Roberts, Paul Tan, Garry Twite, Geoff Warren, seminar participants at the Australian National University, Ecole Polytechnique, the University of Sydney Business School’s research forum on dynamics of investing responsibly and two anonymous referees for helpful comments. We thank Candice Tan for proofreading the manuscript. We also thank Chen Cheng, Kunjal Mehra, Yaokan Shen, Theingi Oo and Ying Xia for research assistance. We acknowledge the College of Business and Economics at the Australian National University for research funding.

Author information

Authors and Affiliations

  1. Research School of Finance, Actuarial Studies and Applied Statistics, Australian National University, Level 4, College of Business and Economics Building 26C, Canberra, ACT, 0200, Australia

    Jacquelyn E. Humphrey & David T. Tan

  2. School of Aviation, The University of New South Wales, Old Main Building, Second Floor, Sydney, NSW, 2052, Australia

    David T. Tan

Authors
  1. Jacquelyn E. Humphrey
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. David T. Tan
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jacquelyn E. Humphrey.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Humphrey, J.E., Tan, D.T. Does it Really Hurt to be Responsible?. J Bus Ethics 122, 375–386 (2014). https://doi.org/10.1007/s10551-013-1741-z

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-013-1741-z

Keywords

Search

Navigation