Monday, February 16, 2009

Do SRI portfolios outperform?

A review of the 2008 Moskowitz prize winning paper.

We have all listened to presentations where we hear that SRI portfolios perform just as well as conventional portfolios. You know the drill. Since it’s inception in January 2000 the Jantzi Index has matched the performance of the S&P TSX 60 over multiple time periods. And in the U.S., using the Domini 400 which is a socially responsible replica of the S&P 500 created in 1990, we have almost 20 years of data showing that SRI has no negative impact on returns. (Effective January 2009 we are seeing some underperformance from the Jantzi Index and some outperformance from the Domini Index.)

However, as socially responsible investors, we feel intuitively that companies that do well on socially responsible criteria should outperform. And indeed, studies show that on individual indicators such as governance or employee satisfaction, this outperformance is there. It makes sense to us that companies with better employee policies, including things like work life balance, should have less staff turnover, less absenteeism, a more productive workplace, all of which will contribute to a better bottom line. So, why do we only manage to hold our own, why aren’t SRI portfolios outperforming?

Meir Statman’s Moskowitz prize winning paper provides an interesting perspective on this question. Entitled “The Wages of Responsibility” and co authored by Denys Glushkov, it looks at why returns of SRI portfolios and non SRI portfolios are so similar. The goal of the paper was to “…close the gap of knowledge about returns associated with characteristics of social responsibility…”.

Using data from KLD Research and Analysis Inc. Statman and Glushkov put together portfolios for the years 1991 – 2006. They classify SRI companies by best in class industry adjusted scores and then examine whether stocks with high best in class scores outperform stocks with low best in class scores. They calculate excess returns using three different benchmarks and conclude that stocks with high social responsibility scores yield higher returns than stocks of companies with low scores. For those of you with a statistical bent a comprehensive description of their methodology is provided in the paper.

So, that leads us back to our original question. Given the above result, why aren’t SRI portfolios outperforming? It’s because of the second conclusion of the paper. Statman and Glushkov also look at ‘shunned’ stocks, those of companies involved in tobacco, alcohol, gambling, firearms, military or nuclear operations. Consistent with the results of previous studies, Statman and Glushkov find that these ‘shunned’ companies, that are screened out of SRI portfolios, have higher returns than stocks in other industries.

“The return advantage that comes to socially responsible portfolios from the tilt toward stocks of companies with high scores on socially responsible characteristics is largely offset by the return disadvantage that comes to them by the exclusion of stocks of shunned companies.”

Unfortunately, this leads the authors to suggest that socially responsible investors refrain from negative screening, something that will be unpalatable to many of us in the SRI community. However, the definitive conclusion on the return advantage provided by best in class stocks is sure to be welcomed by socially responsible investors everywhere.

For more interesting SRI research, check out

1 comment:

  1. Sucheta,

    I enjoyed this thoughtful review. Cary Krosinsky and Ron Robins have also considered the performance impact of screening in their book "Sustainable Investing." I encourage you and your readers to visit Cary's blog at, and also see the KLD Blog for more on this topic.

    Best wishes for you and SRI Monitor - keep up the good work.

    Alan Petrillo
    KLD Research & Analytics