Socially Responsible Investment: A Comparison between the Performance of Sustainable and Traditional Stock Indexes
DOI:
https://doi.org/10.6000/1929-7092.2014.03.26Keywords:
Socially responsible investment, Sustainable stock indexes, financial returns, Long run.Abstract
The doubt about whether socially responsible investment is a viable strategy for investors seeking to maximize both social and financial returns is the central question of this paper. This is addressed by investigating whether portfolio selection based on sustainability criteria harms investor's returns, or in contrast it can be a driver of superior financial benefits. With this purpose, daily prices and returns of 4 traditional and 10 sustainable stock indexes are analyzed from 2001 to 2011 and in the peaks and downs of both bull and bear markets. One of the major results of this study is that sustainable indexes outperform traditional stock indexes in all the periods under analysis; however the differences on average returns are not statistically significant. Through unit root tests we acknowledge that returns are stationary and levels are nonstationary. The short-run relationship analysis based on Granger causality test reveals a feedback effect between traditional and sustainable stock indexes returns. In contrast, long-run relationship, based on cointegration analysis, points that most of the stock indexes are not cointegrated, suggesting that sustainable and traditional stock indexes do not have a long-run linkage and thus can diverge without bound.
References
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http://dx.doi.org/10.1007/s10551-006-0003-8
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http://dx.doi.org/10.1057/palgrave.jam.2240191
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http://dx.doi.org/10.1016/j.jenvman.2006.02.010
Derwall, J., N. Guenster, R. Bauer, and K.Koedijk. 2005. “The eco-efficiency premium puzzle.” Financial Analysts Journal 61(2):51-63.
http://dx.doi.org/10.2469/faj.v61.n2.2716
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http://dx.doi.org/10.2307/1912517
Elsayed, K. and D. Paton. 2004. “The impact of environmental performance on firm performance: static and dynamic panel data evidence.” Structural Change and Economic Dynamics 16:395-412.
http://dx.doi.org/10.1016/j.strueco.2004.04.004
Engle, R.F., and C.W.J Granger. 1987. “Co-integration and error correction. Representation, estimation and testing.” Econometrica 55:251-276.
http://dx.doi.org/10.2307/1913236
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http://dx.doi.org/10.2307/1912791
Granger, C.W.J. and P. Newbold. 1974. “Spurious regressions in econometrics.” Journal of Econometrics 2:111-120.
http://dx.doi.org/10.1016/0304-4076(74)90034-7
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http://dx.doi.org/10.1007/s10551-006-9103-8
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Johansen, S., K. Juselius. 1990. “Maximum Likelihood estimation and inference on cointegration – with applications to the demand for money.” Oxford Bulletin of Economics & Statistics 52:169-210.
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Johansen, S. 1991. “Estimation and hypothesis testing of cointegration vectors in Gaussian autoregressive models.” Econometrica 59:1551-1580.
http://dx.doi.org/10.2307/2938278
Johansen, S. 1995. Likelihood-based inference in Cointegrated Vector Autoregressive Models. Oxford University Press.
http://dx.doi.org/10.1093/0198774508.001.0001
Lombardo, R. and G. D’Orio. 2012. “Corporate and state social responsibility: a long term perspective.” Modern Economy 3: 91-99.
http://dx.doi.org/10.4236/me.2012.31013
López, M.V., A. Garcia, and L. Rodriguez. 2007.“Sustainable development and corporate performance: A study based on the Dow Jones Sustainability Index.” Journal of Business Ethics 75:285-300.
http://dx.doi.org/10.1007/s10551-006-9253-8
Louche, C. 2004. “Ethical Investment Processes and mechanisms of institutionalisation in the Netherlands 1990-2002.” PhD dissertation, Erasmus University Rotterdam.
King, A., and M. Lenox. 2001. “Does it really pay to be green? An empirical study of firm environmental and financial performance.” Journal of Industrial Ecology 5(1): 105-116.
http://dx.doi.org/10.1162/108819801753358526
Kwaitowski, D., P. Phillips, P. Schmidt, and Y. Shin. 1992. “Testing the null hypothesis of stationarity against the null hypothesis of a unit root.” Journal of Econometrics 54:159-78.
http://dx.doi.org/10.1016/0304-4076(92)90104-Y
KPMG. 2011.“Sustainable Insight: articulating the value of sustainability to mainstream investors.” http://www.csreurope. org/data/files/For_news/Sustainable_Insight_Jan_2011_2.pdf
Machado, M.R.M.A.V. Machado, and L.J. Corrar. 2009. “Managerial Sustainability Index (ISE) Performance of São Paulo Stock Exchange.” Revista Universo Contábil 5(2):24-38.
http://dx.doi.org/10.4270/ruc.2009211
Maddala, G. S. and I.-M. Kim. 2000. “Unit roots, cointegration and structural change.” United Kingdom: Cambridge University Press.
Opler, T.C. and J. Sokobin. 1995. “Does coordinated institutional activism work? An analysis of the activities of the Council of Institutional Investors.” Working paper, Ohio State University.
Orlitzky, M., F.L. Schmidt, and S.L. Rynes. 2003. “Corporate social and financial performance: A meta-analysis.“ Organization Studies 24(3): 403-441.
http://dx.doi.org/10.1177/0170840603024003910
Phillips, P.C.B. 1986. “Understanding spurious regressions in econometrics.” Journal of Econometrics 33: 311-340.
http://dx.doi.org/10.1016/0304-4076(86)90001-1
Schröder, M. 2004. “The performance of socially responsible investments: Investment funds and indices.” Financial Markets and Portfolio Management 18(2):122-142.
http://dx.doi.org/10.1007/s11408-004-0202-1
Shank, T. M., D.K. Manullang, and R.P. Hill. 2005. “Is it better to be naughty or nice?” Journal of Investing 14(3):82-87.
http://dx.doi.org/10.3905/joi.2005.580553
Social Investment Forum – SIF.2010.“Report on Socially Responsible Investing Trends in the United States 2010.”http://www.socialinvest.org/resources/pubs/trends/documents/2010TrendsES.pdf
Statman, M. 2000. “Socially responsible mutual funds.” Financial Analysts Journal 56(3):30-39.
http://dx.doi.org/10.2469/faj.v56.n3.2358
Statman, M. 2006. “Socially responsible indexes: Composition, performance, and tracking error.” The Journal of Portfolio Management 32(3):100-109.
http://dx.doi.org/10.3905/jpm.2006.628411
Statman, M. and d. Glushkov.2008.“The wages of social responsibility.” http://www.socialinvest.org/resources/ research/documents/2008WinningPrize-Moskowitz.pdf
Stenström, H. C. and J.J. Thorell. 2007. “Evaluating the Performance of Socially Responsible Investment Funds: A Holding Data Analysis.” MScin Finance, Stockholm School of Economics.
Velde, E., W. Vermeir. and F. Corten. 2005. “Corporate social responsibility and financial performance.” Corporate Governance 5(3):129-138.
http://dx.doi.org/10.1108/14720700510604760
Ziegler, A., M. Schröder, and K. Rennings. 2007. “The Effect of environmental and social performance on the stock performance of European corporations.” Environmental and Resource Economics 37:661- 680.
http://dx.doi.org/10.1007/s10640-007-9082-y
http://dx.doi.org/10.3905/joi.2000.319381
Bauer, R., R. Otten, and A. Rad. 2006. “Ethical investing in Australia: Is there a financial penalty?”. Pacific-Basin Finance Journal 14(1):33-48.
http://dx.doi.org/10.1016/j.pacfin.2004.12.004
Benson, K.L., T.J. Brailsford, and J. E. Humphrey. 2006. “Do socially responsible fund managers really invest differently?” Journal of Business Ethics 65(4):337-357.
http://dx.doi.org/10.1007/s10551-006-0003-8
Box, G. E. P., and G.M. Jenkins. 1970. “Time Series Analysis: Forecasting and Control. San Francisco: Holden Day.
Chong, J., M. Her, and G.M. Phillips. 2006. “To sin or not to sin? Now that’s the question.” Journal of Asset Management 6(6): 406-417.
http://dx.doi.org/10.1057/palgrave.jam.2240191
Cortez, M. C., F. Silva, and N. Areal. 2009. “The performance of European socially responsible funds.”http://www.ifk-cfs.de/fileadmin/downloads/events/conferences/2008-Asset_Cortez_Silva_Areal.pdf
Curran, M.M. and D.Moran. 2007. “Impact of the FTSE4 Good Index on firm price: an event study.” Journal of Environmental Management 82:529-537.
http://dx.doi.org/10.1016/j.jenvman.2006.02.010
Derwall, J., N. Guenster, R. Bauer, and K.Koedijk. 2005. “The eco-efficiency premium puzzle.” Financial Analysts Journal 61(2):51-63.
http://dx.doi.org/10.2469/faj.v61.n2.2716
Dickey, D.A., and W:A Fuller. 1981. “Likelihood Ratio Statistics for autoregressive Time Series with a Unit Root.” Econometrica 49:1057-1072.
http://dx.doi.org/10.2307/1912517
Elsayed, K. and D. Paton. 2004. “The impact of environmental performance on firm performance: static and dynamic panel data evidence.” Structural Change and Economic Dynamics 16:395-412.
http://dx.doi.org/10.1016/j.strueco.2004.04.004
Engle, R.F., and C.W.J Granger. 1987. “Co-integration and error correction. Representation, estimation and testing.” Econometrica 55:251-276.
http://dx.doi.org/10.2307/1913236
European Sustainable Investment Forum –Eurosif.2010.“European SRI Study 2010.” http://www.eurosif.org/research/eurosif-sri-study/2010
European Sustainable Investment Forum –Eurosif.2008.“High Net Worth Individuals (HNWI) and Sustainable Investment 2008.” http://www.eurosif.org/research/hnwi-a-sustainable-investment/2008
Fama, E., and K. French, 1992. “The cross section of expected stock returns.” Journal of Finance 47(2): 427-465.
http://dx.doi.org/10.1111/j.1540-6261.1992.tb04398.x
Gompers, P., J. Ishii, and A. Metrick.2003.“Corporate governance and equity prices.” The Quarterly Journal of Economics 118(1):107-155.
http://dx.doi.org/10.1162/00335530360535162
Granger, C.W.J. 1969. “Investigating causal relations by econometric models and cross-spectral methods.“ Econometrica 37:424-438.
http://dx.doi.org/10.2307/1912791
Granger, C.W.J. and P. Newbold. 1974. “Spurious regressions in econometrics.” Journal of Econometrics 2:111-120.
http://dx.doi.org/10.1016/0304-4076(74)90034-7
Hair, J. F., W.C. Black, B. J. Babin, and R.E. Anderson. 2009. Multivariate data analysis (7th ed.). Upper Saddle River, NJ: Prentice Hall.
Hill, R. P., T. Ainscough, T. Shank, and M. Manullang. 2006. “Corporate Social Responsibility and Socially Responsible Investing: A Global Perspective”. Journal of Business Ethics 70:165-174.
http://dx.doi.org/10.1007/s10551-006-9103-8
Hong, H. and M. Kacperczyk. 2009. ”The Price of Sin: The Effects of Social Norms on Markets.” http://pages.stern.nyu.edu/ ~sternfin/mkacperc/public_html/sin.pdf
Hume, S. R. and A. Larkin. 2008. “The Performance of Socially Responsible Investing.” http://www.crrconference.org/ downloads/humelarkin.pdf
Johansen, S., K. Juselius. 1990. “Maximum Likelihood estimation and inference on cointegration – with applications to the demand for money.” Oxford Bulletin of Economics & Statistics 52:169-210.
http://dx.doi.org/10.1111/j.1468-0084.1990.mp52002003.x
Johansen, S. 1991. “Estimation and hypothesis testing of cointegration vectors in Gaussian autoregressive models.” Econometrica 59:1551-1580.
http://dx.doi.org/10.2307/2938278
Johansen, S. 1995. Likelihood-based inference in Cointegrated Vector Autoregressive Models. Oxford University Press.
http://dx.doi.org/10.1093/0198774508.001.0001
Lombardo, R. and G. D’Orio. 2012. “Corporate and state social responsibility: a long term perspective.” Modern Economy 3: 91-99.
http://dx.doi.org/10.4236/me.2012.31013
López, M.V., A. Garcia, and L. Rodriguez. 2007.“Sustainable development and corporate performance: A study based on the Dow Jones Sustainability Index.” Journal of Business Ethics 75:285-300.
http://dx.doi.org/10.1007/s10551-006-9253-8
Louche, C. 2004. “Ethical Investment Processes and mechanisms of institutionalisation in the Netherlands 1990-2002.” PhD dissertation, Erasmus University Rotterdam.
King, A., and M. Lenox. 2001. “Does it really pay to be green? An empirical study of firm environmental and financial performance.” Journal of Industrial Ecology 5(1): 105-116.
http://dx.doi.org/10.1162/108819801753358526
Kwaitowski, D., P. Phillips, P. Schmidt, and Y. Shin. 1992. “Testing the null hypothesis of stationarity against the null hypothesis of a unit root.” Journal of Econometrics 54:159-78.
http://dx.doi.org/10.1016/0304-4076(92)90104-Y
KPMG. 2011.“Sustainable Insight: articulating the value of sustainability to mainstream investors.” http://www.csreurope. org/data/files/For_news/Sustainable_Insight_Jan_2011_2.pdf
Machado, M.R.M.A.V. Machado, and L.J. Corrar. 2009. “Managerial Sustainability Index (ISE) Performance of São Paulo Stock Exchange.” Revista Universo Contábil 5(2):24-38.
http://dx.doi.org/10.4270/ruc.2009211
Maddala, G. S. and I.-M. Kim. 2000. “Unit roots, cointegration and structural change.” United Kingdom: Cambridge University Press.
Opler, T.C. and J. Sokobin. 1995. “Does coordinated institutional activism work? An analysis of the activities of the Council of Institutional Investors.” Working paper, Ohio State University.
Orlitzky, M., F.L. Schmidt, and S.L. Rynes. 2003. “Corporate social and financial performance: A meta-analysis.“ Organization Studies 24(3): 403-441.
http://dx.doi.org/10.1177/0170840603024003910
Phillips, P.C.B. 1986. “Understanding spurious regressions in econometrics.” Journal of Econometrics 33: 311-340.
http://dx.doi.org/10.1016/0304-4076(86)90001-1
Schröder, M. 2004. “The performance of socially responsible investments: Investment funds and indices.” Financial Markets and Portfolio Management 18(2):122-142.
http://dx.doi.org/10.1007/s11408-004-0202-1
Shank, T. M., D.K. Manullang, and R.P. Hill. 2005. “Is it better to be naughty or nice?” Journal of Investing 14(3):82-87.
http://dx.doi.org/10.3905/joi.2005.580553
Social Investment Forum – SIF.2010.“Report on Socially Responsible Investing Trends in the United States 2010.”http://www.socialinvest.org/resources/pubs/trends/documents/2010TrendsES.pdf
Statman, M. 2000. “Socially responsible mutual funds.” Financial Analysts Journal 56(3):30-39.
http://dx.doi.org/10.2469/faj.v56.n3.2358
Statman, M. 2006. “Socially responsible indexes: Composition, performance, and tracking error.” The Journal of Portfolio Management 32(3):100-109.
http://dx.doi.org/10.3905/jpm.2006.628411
Statman, M. and d. Glushkov.2008.“The wages of social responsibility.” http://www.socialinvest.org/resources/ research/documents/2008WinningPrize-Moskowitz.pdf
Stenström, H. C. and J.J. Thorell. 2007. “Evaluating the Performance of Socially Responsible Investment Funds: A Holding Data Analysis.” MScin Finance, Stockholm School of Economics.
Velde, E., W. Vermeir. and F. Corten. 2005. “Corporate social responsibility and financial performance.” Corporate Governance 5(3):129-138.
http://dx.doi.org/10.1108/14720700510604760
Ziegler, A., M. Schröder, and K. Rennings. 2007. “The Effect of environmental and social performance on the stock performance of European corporations.” Environmental and Resource Economics 37:661- 680.
http://dx.doi.org/10.1007/s10640-007-9082-y
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Published
2014-09-23
How to Cite
Curto, J. D., & Vital, C. (2014). Socially Responsible Investment: A Comparison between the Performance of Sustainable and Traditional Stock Indexes. Journal of Reviews on Global Economics, 3, 349–363. https://doi.org/10.6000/1929-7092.2014.03.26
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