Socially responsible investments (SRI) has gained headway in recent years, and is a true investment belief about the role an influence of today’s pension funds in capital markets. The debate about whether SRI is part of the fiduciary duty has abated to some extent. The risk-return merits of SRI as an investment belief are still hotly debated, which was to be expected, since empirical evidence remains inconclusive. Jeroen Derwall, Jenke ter Horst and Kees Koedijk, all from Tilburg University, have recently published a paper that might shed some light on this debate. In their analysis, a segmentation of the socially responsible investing (SRI) movement by values-versus-profit orientation solves the puzzling evidence that both socially responsible and controversial stocks produce superior returns. They derive that the segment of values-driven investors, who are willing to sacrifice financial return to derive non-financial goals, is primarily served by “negative” screens that avoid controversial stocks. Consistent with values affecting stock prices, controversial stocks produce anomalously positive returns. The profit-driven segment is best served by specific “positive” screens involving environmental and social issues, which also have produced superior returns. The finding that each segment is served by a different form of SRI explains why the average SRI mutual fund, which adopts a mixture of screens, neither outperforms nor underperforms conventional peers. The conclusions highlight that different views about SRI that are observed in the literature are complementary in the short run.However, economic theory predicts that profit-generating opportunities disappear in the long run, which is supported by their empirical analysis over the period 1992-2008.
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