Socially Responsible Investing During Market Uncertainty

Abstract

The popularity of socially responsible investing (SRI) has grown essentially during the past two years, which can be defined as an investment style that takes into account social, environmental and corporate governance criteria. These criterions are added to stock selection process through different strategies of SRI that usually include either positive or negative screening.

Earlier research has mostly concentrated on the simple performance comparison between SRI and conventional investing. Only a few have focused on the comparison in different market states. This study examines the return differences between SRI and conventional investing during different states of market uncertainty measured by volatility index (VIX). According to the theory of finance, SRI should suffer from lack of diversification due to a limited stock universe, which should lead to lower risk- adjusted returns.

The data sample consists of eight different time-series that include S&P 500 reflecting the market benchmark, VIX measuring the state of uncertainty and six SRI indices using different strategies in their stock selection process. Time period under research starts from January 2004 and ends in December 2014. Several risk-adjusted performance measures, subgroup analysis and multi-factor models are used to evaluate the return differences.

Results show that SRI can compete with conventional investing in terms of risk- adjusted performance measures. According to subgroup analysis, there are statistically significant differences in returns when the subgroups are formed based on the magnitude of VIX’s daily change. Alphas obtained from multi-factor models were in favor of SRI during highest levels and biggest declines of VIX.