Socially Responsible Investments: Does it Pay to be Responsible?

Antonios Bourgias & Evangelos Spanos

Student thesis: Master thesis


In the last 40 years, a gradual increase has been marked in the number of investors who do not solely focus on profitable investments, but also consider a set of non-pecuniary parameters to evaluate the corporate social performance of the selected firms, thus leading to the development of responsible investments. The growing popularity of responsible investments has attracted the attention of portfolio managers, who applied several screening approaches to channel responsible portfolios through the market. Automatically, two crucial questions have arisen, namely whether responsible portfolios can generate abnormal risk-adjusted returns and, at the same time, fulfill the socially responsible requirements, or if irresponsible portfolios that consist of stocks that responsible investors would not consider could perform even better in terms of abnormal returns. The current thesis aims at providing an answer to the forementioned questions by constructing responsible portfolios, employing negative and best-in-class screening approaches. Consequently, the stocks that were excluded by the responsible investors due to socially controversial activities or because of their poor corporate social performance will comprise the irresponsible portfolios. After forming the portfolios with stocks from the 600 largest European companies over the period 2008- 2017, we have employed the CAPM, the three-factor Fama & French (1993), and the four-factor Carhart (1997) models to examine the existence of abnormal returns. The empirical analysis indicates a significant underperformance of the responsible portfolio with socially accepted stocks, against the irresponsible portfolio of stocks that are perceived as controversial by a large number of investors. On the other hand, when using the ESG scores to rank the stocks of the investment universe in top and low performers and construct the responsible and irresponsible portfolios respectively, we did not manage to find any significant differences in their performance. As a result, we cannot prove that portfolios with responsible characteristics generate higher risk-adjusted returns than the irresponsible portfolios. Nevertheless, responsible investors will continue to invest in stocks that meet their morals, regardless of the return on investments. The mainstreaming of SRI has improved the gathering of information related to the corporate social performance, and due to this fact, the stock prices reflect all the information about CSR practices which lead to future cash flows. Eventually, the results of this thesis question whether profit-driven responsible investors can fulfill their expectations by investing in high-CSR-rated portfolios of stocks.

EducationsMSc in Finance and Investments, (Graduate Programme) Final ThesisMSc in International Business, (Graduate Programme) Final Thesis
Publication date2019
Number of pages92
SupervisorsLinda Sandris Larsen