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When does it pay to be good? Screening criteria and intensity of socially responsible investment funds and their financial performance

Zwijnenberg, A.J. (2022) When does it pay to be good? Screening criteria and intensity of socially responsible investment funds and their financial performance.

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Abstract:This research aims to investigate the effect of screening intensity and screening criteria on the financial performance of socially responsible investment mutual funds. Screening intensity is the absolute number of individual criteria used in selecting investments, and screening criteria are used in the decision process for selecting investments based on specific ethical standards. The screening criteria are divided into six categories: Environment, Social, Governance, Product, and Shareholder Engagement. An Ordinary Least Square (OLS) regression is performed on a sample of 41 United States SRI mutual funds from the 1st of January 2015 till the 31st of December 2020. The main results calculate the risk-adjusted performance using the Fama-French five-factor model (2015). The results suggest that there are neither costs nor rewards to be gained when considering the number of screens used. The regressions on screening criteria show that the Environmental screen positively impacts the risk-adjusted return and that Shareholder engagement negatively affects the return. The two screening types are only significant when they are applied together. The Environmental screen’s positive impact is more effective on the financial performance than the negative impact of being an involved shareholder. Therefore, screening for both criteria positively affects the performance. Moreover, to provide rebuts results, this study provides additional results using the Capital Asset Pricing Model (CAPM), Fama-French three-factor model (1993), and Carhart four-factor model (1997) to calculate the risk-adjusted performance of SRI mutual funds. Both CAPM and Fama-French three-factor models (1993) show negative adjusted R squares, implying a very low or negligible explanation. If the Carhart four-factor model (1997) is used to calculate the risk-adjusted performance, the screening categories do not significantly impact the return of SRI funds. However, SRI funds’ age and expense ratio significantly affect the performance when using the Carhart four-factor model (1997). To conclude, retail investors who want to invest in SRI mutual funds in the United States do not have to be concerned about sacrificing their financial gain to do good. They can even gain additional financial returns controlling for the five factors of Fama-French (2015) when investing in funds that screen for the environment and are engaged shareholders.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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