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

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
ephanie Monjon
PSL, University Paris Dauphine (LEDa-CGEMP), CIRED and CEPII
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´
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.
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.
2012 Blackwell Publishing Ltd
© 2012 John Wiley & Sons Ltd

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