The impact of socially responsible investing on financial returns
LE3 .A278 2018
Bachelor of Business Administration
As socially responsible investing continues to become more prominent, it has become a popular topic in the finance literature. Corporate Social Responsibility (CSR) is a measure of how a firm performs in terms of social, environmental and governance areas. This study looks at the effect that CSR has on financial returns in two ways. First, this is done through regression analysis by creating a CSR variable and testing its significance in the Fama-French 5 Factor Model and the Carhart 4 Factor Model. The CSR variable was shown to be positive and significant, indicating that over the test period (2007-2017), higher CSR scores are associated with lower financial returns. The regression analysis is inconsistent with Friede, Busch, & Bassen (Friede,G., Busch, T.,& Bassen, A., 2015) meta-analysis of the subject which finds that 56.7% of studies found a positive relationship between CSR and financial performance. This could be due to differences in methodology, samples and geographic locations. The second method used to test the impact of CSR on financial returns involves creating portfolios that control for both size and CSR scores. These findings are consistent with the regression analysis. They show that after controlling for size, portfolios comprised of stocks in the top quartile of CSR underperform compared to the bottom quartile. This is measured by raw return, risk-adjusted return (Sharpe ratio) and standard deviation. In terms of raw return and risk-adjusted return, high CSR is associated with significantly lower performance. Our findings show that a slight decrease in standard deviationis found, when comparing high CSR portfolios to low CSR portfolios. Our portfolio approach is consistent with the majority of studies that find a non-positive relationship between CSR and financial performance in portfolios. This study concludes that on an individual and portfolio level, highly rated CSR stocks hurt financial returns even after controlling for factors such as year, size, and book-to-market ratio.
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