The risk in socially responsible investing: the other side of the coin

Abstract

Purpose The field of socially responsible investment (SRI) has become a central theme in the mutual funds industry. The risk implications associated with this investment approach are less explored. This study further investigates the real contribution to the investor offered by the SRI alternative.The aim of this paper is to throw more light on this debate. Design/methodology/approach Analyzing a large sample of US companies, this study investigates the tendency to generate risk when the portfolio is built, taking into account SRI. The research is based on the backtest of the real performance obtainable by adopting different investment strategies in which the red line is the selection method based on the principles of corporate social responsibility. Findings The investor must pay a cost that depends on the degree of rigor in the selection criteria. The risk associated with SRI is influenced by the measure adopted. SRI has a better asymmetric risk behavior than other securities. The results suggest using different selection models according to the investor’s objectives. When the objective is to maximize the average return and the remuneration risk, the SRI selection model should be negative or at least as inclusive as possible. In the event that the investor’s objective is to contain risk indices, a restrictive approach to the selection of investments is advisable. Originality/value Academic research has long been investigating the ability to generate profits but often neglects the levels of risk implicit in such investment approaches. The originality of this research consists in the adoption of a model based on the continuous optimization of the portfolio. This approach allows the results to be assessed by the returns actually obtained.

Who Knocks on the Door of Portfolio Performance Heaven: Sinner or Saint Investors?

“…First, we found just a few of ETFs with long inception dates, which led us to limit the sample and so were not able to analyze different periods of time. Second, we did not perform statistical significance tests to the different results such as those suggested by Burchi [71] or Herzel et al [57] due to the high volume of performance measures that would make their exhibition cumbersome.…”

Short- and long-term effects of responsible investment growth on equity returns

“…On the other hand, the demand for stocks should be driven by investors' preferences. While the common investor trades-off risk and return to maximize his derived utility, SRI investors gain additional utility from taking ownership in sustainable firms and not holding least sustainable ones (Riedl and Smeets, 2017;Burchi, 2019). Hence, the peculiar preferences of SRI investors should distort the demand of stocks contingent upon sustainability performance.…”

The Resilience of the Socially Responsible Investment Networks

“…In line with such finding, Becchetti et al (2018) find that firms registering lower ESG scores are more exposed to the risk of facing future litigation with the stakeholders, namely the stakeholder risk. Burchi (2019) analyzes the impact on portfolio risk of different ESG related selection criteria. Lins et al (2017) show that during the 2008-2009 financial crisis, firms with a high social capital had stock returns that were four to seven percentage points higher than firms with low social capital.…”