The Performance of Socially Responsible Funds: Does the Screening Process Matter?

• DOI: http://doi.org/10.1111/j.1468-036X.2012.00643.x
• Date: 01 June 2014
• Author: Gunther Capelle‐Blancard,Stéphanie Monjon
• Published date: 01 June 2014

European Financial Management, Vol. 20, No. 3, 2014, 494–520

doi: 10.1111/j.1468-036X.2012.00643.x

The Performance of Socially

Responsible Funds: Does the Screening

Process Matter?

Gunther Capelle-Blancard

CEPII & Universit´

e Paris 1 Panth ´

eon-Sorbonne, 106–112 bd. de l’hˆ

opital, 75647 Paris Cedex 13

France

E-mail: gunther.capelle-blancard@univ-paris1.fr

St´

ephanie Monjon

PSL∗, University Paris Dauphine (LEDa-CGEMP), CIRED and CEPII

E-mails: stephanie.monjon@dauphine.fr; monjon@centre-cired.fr

Abstract

In this study, we examine whether the financial performances of socially respon-

sible investment (SRI) mutual funds are related to the features of the screening

process. Based on a sample of French SRI funds, we find evidence that a greater

screening intensity slightly reduces financial performance (but the relationship

runs in the opposite direction when screening gets tougher). Further, we show

that only sectoral screens – such as avoiding ‘sin’ stocks – decrease financial

performance, while transversal screens – commitment to UN Global Compact

Principles, ILO/Rights at Work, etc. – have no impact. Lastly, when the quality of

the SRI selection process is proxied by the rating provided by Novethic, its impact

is not significant, while a higher strategy distinctiveness amongst SRI funds, which

also gives information on the quality of the selection process, is associated with

better financial performance.

Keywords: Socially responsible investment (SRI),sustainable and responsible

investment,ethical investment,corporate social responsibility (CSR),strategy

distinctiveness index,portfolio choice,ratings

JEL Classification: G11, Q56, C32

The authors thank John Doukas (the editor), two anonymous referees, Agn`

es B´

enassy-Qu´

er´

e,

Dominique Blanc, Patricia Crifo, Olena Havrylchyk, Samer Hobeika, Jacquelyn Humphrey,

Isabelle Laudier, Jean-Pierre Sicard, St´

ephane Voisin, as well as participants of the CSR

seminar at the Ecole Polytechnique (Business Economics Chair, Paris, 2010), the Finance

and Corporate Governance Conference (Melbourne, 2011), the Economics of Corporate

Social Responsibility Conference (Paris, 2011) and the PRI-Mistra Academic Conference

(Sigtuna, 2011) for helpful comments. We thank also Barbara Balvet, Kamel Laaradh, Beth

Morgan and Nicholas Sowelsfor research assistance. Financial support from the Institut CDC

pour la Recherche is gratefully acknowledged. Correspondence: Gunther Capelle-Blancard.

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2012 Blackwell Publishing Ltd

© 2012 John Wiley & Sons Ltd

The Performance of Socially Responsible Funds 495

1. Introduction

Socially Responsible Investment (SRI) has gained popularity in financial markets

prompting a surge of interest in the financial performance of mutual funds that claim

to follow this approach. Does the inclusion of environmental, social and governance

criteria in the investment decision-making process hurt risk-adjusted returns, or does

it lead to a ‘win-win’ strategy, a sort of double dividend? As of 2011, more than

fifty academic papers have examined this issue, all using similar methodology. They

almost unanimously show that the financial performance of SRI funds does not differ

significantly from their conventional peers, or from a benchmark index. Actually, the

absence of an overalleffect is not surprising; SRI funds are very heterogeneous (Sandberg

et al., 2009) and socially- or environmentally-friendly investments may be a source of

competitive advantage in some situations, but not in all. As emphasised by King and

Lenox (2001), the debate on the economic and financial impact of corporate social

responsibility should move away from the question ‘does it pay to be good?’to‘when

does it pay to be good?’. Among the many studies on the financial performance of SRI

funds, very few examine the issue from this angle. In this regard, the contributions of

Barnett and Salomon (2006) and Renneboog et al. (2008b) should be highlighted. These

two seminal papers have been followed by Lee et al. (2010), Renneboog et al. (2011),

Humphrey and Lee (2012), Laurel (2011) and Biehl et al. (2011).

Barnett and Salomon (2006) measure how screening intensity affects the financial

performance of SRI funds. Their results are obtained from a panel of 61 SRI funds in

the USA over the period 1972–2000. Unlike previous studies, they do not compare

the performance of SRI to non-SRI funds; instead, they focus on the SRI funds’

heterogeneity. Interestingly, they find a curvilinear relationship between screening

intensity, measured by the number of screening criteria, and financial performance.

Their main result is the following: ‘as the number of social screens used by a SRI

fund increases, financial returns decline at f irst, but then rebound as the number of

screens reaches a maximum (...), however, performance does not recover to reach the

levels achieved by those funds with one screen’. Moreover, their results suggest that

community relations screening increased financial performance, while environmental

and labor relations screening decreased it. Renneboog et al. (2008b) examine the impact

of the screening activity on risk-adjusted returns and risk loading. They show that the

number of social screens significantly reduces financial performance, while the number

of ethical screens, the number of sin screens, or the number of environmental screens

do not have any significant impact (unfortunately, they do not test for a cur vilinear

relationship). With a sample similar to that used by Barnett and Salomon (2006), that

is 61 US SRI funds, but over the period 1989–2006, Lee et al. (2010) confirm that the

number of screens negatively impacts performance, but also results in lower systematic

risk. Laurel (2011), using a sample of European SRI funds, finds no impact on returns,

but an inverted-U-shaped effect on risk. Interestingly, Humphrey and Lee (2012) find

weak evidence that screening intensity increases (instead of decreases) risk-adjusted

performance in Australia. Finally, Biehl et al. (2011) consider UK SRI funds and show

that the portfolios with the highest social ratings underperform signif icantly, whilst those

with the lowest social ratings do not.

In this study, we assess the financial performances within SRI mutual funds. In

particular, we examine whether the financial performance of these funds is related to

the characteristics of the non-financial screening process. Our study departs from the

existing literature in three ways.

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2012 Blackwell Publishing Ltd

© 2012 John Wiley & Sons Ltd