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«Sustainable Investment Amsterdam, 31 August 2010 Commissioned by Duisenberg School of Finance and Holland Financial Centre Sustainable Investment ...»

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Barnett & Salomon (2006) find that when the number of social screens increases, the fund’s annual return deteriorates at first, but then improves as the number of screens reaches a ‘maximum’ of 12 (in other words, there is a curvilinear relationship between screening and fund performance). Their advice is for “managers [to] either wholeheartedly commit to broadly screening socially irresponsible firms from their funds, or [to] exclude very few firms such that The portfolio comprising companies with a good working environment earned an annual alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks.

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they do not interfere with their ability to diversify” (Barnett & Salomon, 2006, p. 1119).

Furthermore, they suggest that the type of social screens has influence on the financial performance: community relations screening gives higher performance, while environmental and labor relations screening (excluding firms with a record of poor environmental performance and poor labor relations practices, respectively) result in lower performance.

Heinkel et al. (2009) conclude that if fund managers adopt negative screens, polluting firms are present in fewer investment portfolios, which reduces risk-sharing opportunities among investors.

Fees and Fund Management Gil-Bazo et al. (2010) analysed a sample of SRI funds over the period of 1997-2005 and

investigated two aspects potentially influencing the performance of SRI funds:

• fund management: the impact of fund management companies has not been investigated very broadly. It might be the case that funds that are managed by companies that are specialized in managing SRI funds, generate higher performance than general companies;

• fees: in previous research the difference in performance between SRI funds and non-SRI funds was attributed to the differences in SRI funds’ ability to generate risk-adjusted returns. However, this may have also been caused by differences in fees.31 In their panel data of US equity funds (1997-2005) they find that fund management had a significant impact on fund performance. By comparing SRI funds from specialized management companies with general companies, Gil-Bazo et al. (2010) show that funds of specialized companies outperform the general companies funds: specialized companies funds outperform conventional funds by more than 2.6% per year, while general SRI companies underperform conventional funds.

They also conclude that investors in SRI funds earn a premium in terms of higher risk-adjusted performance, compared to conventional funds. This is the case both before and after fees are deducted from funds return (fees do not play a (statistically significant) role in influencing SRI fund performance). Furthermore, there is no evidence that SRI funds charge higher fees.

Other authors that investigated the effect of fees on the performance of SRI funds are Bauer et al. (2005) and Renneboog et al. (2008a). Bauer et al. (2005) show that the difference in performance between return after fees are subtracted and return before fees are subtracted does not matter for the difference in performance, if any, between SRI and conventional funds. Hence, they reach the same conclusion as Gil-Bazo et al. (2010) in the sense that fees do not (significantly) influence fund performance, although they do conclude that SRI funds in the United States and United Kingdom charge higher management fees than their counterparts.

Renneboog et al. (2008a) show that fund management fees decrease the risk-adjusted return of both SRI and non-SRI funds. According to their comparison between SRI and conventional Management fees are used to cover operating expenses including managerial compensation as well as part of the marketing expenses (called the 12B1 fee in the US), while load fees include front-end fees (share subscription fees) and back-end fees (share redemption fees) and are mainly used to pay for trading costs (Renneboog et al., 2008a).

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funds, differences in management fees are one of the reasons for underperformance compared to conventional portfolios.

3.5 Conclusion Socially Responsible Investment (SRI) concerns sustainability at the investment, fund or portfolio level and involves screening the sustainability of companies before investing in them. From a finance perspective, there are principally three reasons why investors incorporate sustainability information in their investment decisions: because they hope to improve financial performance, because they want to comply to legislation or voluntary standards, and because it provides more information about a company.

Empirical research on the economic rationale for socially responsible investment generally focuses on the question whether SRI funds provide better returns than conventional funds.

Mutual fund studies discussed in this chapter do not offer an unequivocal answer. In general, these studies conclude that SRI funds do not perform better or worse than conventional funds as most research offers statistically insignificant results. This supports the hypothesis that investing in SRI funds enhances sustainability without necessarily negatively affecting the return on investments. This conclusion is strengthened when focusing on mutual fund studies that are based on multifactor models. These studies use more sophisticated econometric models to incorporate non-quantifiable aspects and indicate that portfolios selected based on ‘environmental, social and governance’-related variables even outperform portfolios that score low on these variables.





In conclusion, although they do not provide unambiguous evidence of outperformance, empirical results do indicate that sustainable investments at least perform as well as conventional investments.

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