Research finds SRI screens have “negligible” impact on investment performance

New study is the latest contribution to the debate

New research has found that the impact of ‘traditional’ socially responsible investing (SRI) screens on investment performance is negligible.

“Managers using the KLD400 Social Index Fund as an investment universe have had neither headwinds nor tailwinds,” researchers say in a new paper.

The Long-Term Performance of a Social Investment Universe has been put together by Lloyd Kurtz of the Haas School of Business and Dan diBartolomeo of Northfield Information Systems.

Kurtz and diBartolomeo analysed the index over an 18-year period and found that differences between the index’s returns and those of the S&P 500 Index are “fully explained” by conventional investment factors. Their research appears on the FSinsight finance and sustainability platform. The KLD index was launched by pioneering environmental, social and governance firm KLD in 1990 as the Domini 400 Social Index and is now known as the MSCI KLD 400 Social Index following KLD’s ultimate acquisition by MSCI.

The researchers found that unexplained returns are not statistically different from zero. This means it is beneficial for those motivated by social values as it suggests that the risk exposures created by social screens can be managed through careful portfolio construction.
Conversely, they say the results are less encouraging for investors seeking a performance advantage via social or environmental factors.“The analysis suggests that, for this universe at least, market valuations already correctly incorporate this information,” the pair state.
They add that an “an alpha-seeking” social investor must be disappointed that a purpose-built social index has no observable alpha over a long time period – and that the field is getting crowded.
The new study follows research on the impact of SRI and/or ESG on investment performance from the likes of Deutsche Bank and Fitch Ratings. They come as a study from Harvard Business School and the London School of Business last year found a financial premium for ‘high sustainability’ companies.
Earlier this month Deutsche issued a comprehensive survey of academic research and found that environmental, social and governance factors correlate with superior risk-adjusted returns.
And ratings agency Fitch has entered the debate on the performance of SRI. The key message is that SRI criteria are no substitute for solid fund management processes.

“SRI is no protection to poor or average investment processes and Fitch highlights that SRI in itself has not improved the average risk/return profile of a European equity fund in the recent past,” the firm says.
It said that even taking into account the financial crisis of 2008, downside protection is not statistically proven. By contrast, European SRI bond funds have delivered better returns with lower risk in the past three years.