Social Responsible Investment: The Myth of Abnormal Returns: Investigating Financial Implications of Ethical vs. Conventional Investments using SRI Screens and ESG Index

Falak Amjad & Bianca Franziska Jonas

Student thesis: Master thesis


Socially Responsible Investment (SRI) is a heated debate in the investment industry for decades due to inconclusive evidence on financial performance of SRI funds relative to conventional funds. We perform a firm-level study based on self-composed portfolios to investigate the impact of ‘ethicalness’ on firm’s financial performance measured by Sharpe ratio and Jensen’s alpha derived from CAPM and Carhart four-factor model. We use a two-step process using negative SRI screens and ESG Index to create portfolios. We use a strict criteria of ESG scores for firms to qualify in the Ethical portfolio group. We find that more responsible firms (Ethical Portfolio) generate significantly higher alphas in the sample period from 2008 – 2015, relative to less responsible firms (Control Portfolio). Furthermore, we find no difference in market riskiness between the two portfolios. Additionally, we create segregated Environment, Social and Governance portfolios and find that all pillars of ESG index drive higher financial performance expect the Environment pillar. Lastly we test our results for robustness with respect to time and ethical criteria. We find that our findings are sensitive to time as the Global Financial Crisis has worse impact on more responsible firms relative to less responsible firms. Last but not the least, we find that at low level of ethical criteria, Ethical firms underperform the Control firms, but as soon as the ethical criteria reaches an optimum point, ethical firms always outperform the control firms. This generally proves that improving ethical standards from low rank comes with a financial sacrifice

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages119
SupervisorsSteffen Brenner