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Performances of socially responsible investment and environmentally friendly funds

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Journal of the Operational Research Society

Abstract

The socially responsible investment (SRI) funds performances remain inconclusive. Hence, more studies need to be conducted to determine if SRI funds systematically underperform or outperform conventional funds. This paper has employed dynamic mean-variance model using shortage function approach to evaluate the performance of SRI and Environmentally friendly funds (EF). Unlike the traditional methods, this approach estimates fund performance considering both the return and risk at the same time. The empirical results show that SRI funds outperformed conventional funds in EU and US. In addition, the results of EU are among the top-performing categories. EF do not perform as well as SRI, but perform in manners equal or superior to conventional funds. These results show statistically significant in some cases.

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Notes

  1. Examples of such institutions in the US are the Investor Responsibility Research Center (IRRC), KLD Research and Analytics Inc. (KLD), and Interfaith Center on Corporate Responsibility (ICCR).

  2. We are not claiming that our model prefers to multi-factor model nor comparing, instead, we intend to compare the relative position of SRI and EF with other categories.

  3. Detailed explanation of DR (a subset of S G ξ(X)) can be found in Briec and Kerstens (2009).

  4. S G ξ(X)=0.05 indicates that a portfolio will be on the Markowitz efficient frontier by increasing return and decreasing risk by 5%.

  5. We examined Jensen's (1968) alpha in Tables 2, 3 and 4.

  6. As explained above, IS indicates the potential for improvement compared with the most efficient funds, that is, the fund on the Markowitz efficient frontier. Lower the IS, the funds are better in current structure. Therefore, funds with lower IS are the best funds in the periods analysed.

  7. The Kolmogorov-Smirnov test is sensitive to differences in location and skewness as well as central tendency. It is a non-parametric test that is based on the observed deviations between the cumulative distribution functions for the two samples (Siegel and Castellan, 1988).

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Acknowledgements

The authors thank anonymous referees and Kristiaan Kerstens for helpful comments. This research was funded by a Grant-in-Aid for Scientific Research from the Ministry of Education, Culture, Sports, Science and Technology. The results and conclusions of this paper do not necessary represent the views of the funding agency.

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Authors and Affiliations

  1. Tohoku University, Sendai, Japan

    Y Ito & S Managi

  2. Nomura Securities Co., Ltd, Tokyo, Japan

    A Matsuda

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  1. Y Ito
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  2. S Managi
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  3. A Matsuda
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Ito, Y., Managi, S. & Matsuda, A. Performances of socially responsible investment and environmentally friendly funds. J Oper Res Soc 64, 1583–1594 (2013). https://doi.org/10.1057/jors.2012.112

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