Revisiting the SRI performance debate: A new way of defining and classifying mutual funds

The practice of socially responsible investing (SRI) has become increasingly popular over the last decade, as more and more investors are aware of environmental, social and governance (ESG) issues. Originally going back to religious organizations’ moral investment principles, the decisive breakthrough for SRI was the worldwide boycott against the racist system of apartheid in South Africa. Following more recent developments like global warming, SRI moved from a niche to a mainstream investment strategy. Along the lines of these developments, the concept of SRI has further evolved, from pure negative screening of the investment universe to a combined strategy of positive and negative screening, complemented by shareholder activism and engagement. About one out of every nine dollars under professional U.S. asset management is now invested in the SRI universe. Between 1995 and 2012, SRI assets under professional management rose by 486%, hence outgrowing conventional assets, which rose by 376% over the same period. A similar observation is made for the European market, with the combined investments in SRI strategies outgrowing the conventional alternative. In this paper, we revisit earlier socially responsible investing (SRI) mutual fund performance research by controlling for classification bias and introducing heterogeneity in the extent to which mutual funds can be socially responsible. Instead of drawing from the classical SRI vs. non-SRI definition of funds, we implement a robust process-oriented social responsibility sorting tool, which yields a complete sorting of funds in five categories, taking into account intra- and inter-group heterogeneity among both SRI and conventional funds. Overcoming the naive dichotomous distinction between SRI-marketed and conventional funds, we confirm most earlier research and find that differences in the fund’s approach towards investing with respect to a broad definition of SRI do not impact its risk-adjusted financial performance. From our analysis using a more sophisticated definition and classification of mutual funds we can conclude that there are no financial motives in favor, nor against investing in a socially responsible way. Hence, the SRI decision should be based on extra-financial grounds.