Table 1 provides summary statistics for the funds. We see that there is not a big difference in average return between the socially responsible and conventional portfolios. The ESG portfolio has a higher average return than the environmental portfolio. This may in part be explained by the fact that ESG funds are slightly older than environmental funds, but most importantly they are much larger. The average size of the ESG funds is approximately three times larger than the environmental. The conventional portfolios also differ in average return which suggests size and age effects on returns. The differences in average size and age between the SRI and conventional portfolios is small, which minimizes the age and size effects on returns. Lastly, we see that a larger fraction of conventional funds are inactive compared to the SRI funds. The ratios are approximately the same as for the whole population.
Table 1: Summary statistics
Variable Obs Mean Std. Dev. Min Max Nb. of funds Average Size Average Age Inactive
SRI portfolio 121 0.624 4.725 -12.521 12.155 288 259 297 497 153.5 4.5 %
Conventional portfolio 121 0.615 4.745 -12.625 12.374 576 253 612 191 153.5 9.9 % Difference portfolio 121 0.010 0.293 -0.927 0.620
ESG portfolio 121 0.635 4.724 -12.353 12.228 260 277 946 178 157.2 3.8 %
Conventional portfolio 121 0.624 4.742 -12.619 12.364 520 271 588 422 157.2 9.8 % Difference portfolio 121 0.011 0.281 -0.993 0.597
Environmental portfolio 121 0.477 4.864 -14.510 11.391 25 92 650 041 120.6 8.0 % Conventional portfolio 121 0.505 4.793 -12.541 12.471 50 93 137 625 120.8 12.0 % Difference portfolio 121 0.010 0.908 -2.726 2.483
Note: Table 1 reports summary statistics for the pooled SRI portfolio, ESG portfolio and environmental portfolio, and their respective matched conventional portfolio and difference portfolio. Mean, standard deviation, minimum and maximum for gross return. Average age is measured in months, gross return and size is measured in USD. Inactive is the percentage of inactive funds in the portfolio at the end of the sample period.
As we can see from figure 1, the gross return of the difference portfolio varies around zero. There is not a big difference in gross returns between the SRI and the conventional portfolio. We cannot see whether the SRI portfolio underperforms or outperforms the conventional portfolio.
Figure 1: Gross return
−10010Gross return
2010 2012 2014 2016 2018 2020
Date
Ethical portfolio Conventional portfolio Difference portfolio
Note: Figure 1 shows monthly gross returns of the SRI, conventional and difference portfolios between 2010 and 2020.
Figure 2 looks almost identical to figure 1. This is reasonable as ESG funds constitute a majority of SRI funds in Europe.
Figure 2: Gross return of ESG portfolio
−10010Gross return
2010 2012 2014 2016 2018 2020
Date
ESG portfolio Conventional portfolio Difference portfolio
Note: Figure 2 shows monthly gross returns of the ESG, conventional and difference portfolios between 2010 and 2020.
Figure 3 shows the gross return of the environmental portfolio and its matched conventional portfolio and the difference portfolio. There seems to be a larger difference in performance between environmental funds and conventional funds than ESG funds. It also appears that environmental funds underperformed conventional funds at the begin of the sample period, but started catching up and perhapse even outperforming during the last years. I will investigate this further in the robustness tests by looking at sub-periods.
Figure 3: Gross return of Environmental portfolio
−20−10010Gross return
2010 2012 2014 2016 2018 2020
Date
Environmental portfolio Conventional portfolio Difference portfolio
Note: Figure 3 shows monthly gross returns of the environmental, conventional and difference portfolios between 2010 and 2020.
7 Empirical Results
All of the results are estimated using OLS with Newey-West standard errors with four lags to correct for serial correlation and heteroskedasticity. This section begins with a description of the investment strategies and performance of the socially responsible and conventional portfolios. By using the difference portfolio, I investigate whether performance and investment strategies differ between the portfolios. Next, I investigate the performance and investment strategies of the ESG and environmental portfolios. Lastly, I perform five robustness tests by using net returns, other models, different benchmarks, different time periods, and ethical rating.
7.1 Main Findings
Table 2 presents the results of applying the Carhart four factor model to the pooled socially responsible, conventional and difference portfolios. Both the SRI and conventional portfolios are more volatile than the market as the market coefficients are positive and statistically significant. The coefficient on SMB is positive and statistically significant for both portfolios, which means that they are more exposed to small stocks than big stocks.
As mentioned earlier, small stocks are riskier and tend to have higher returns. The third factor, HML tells us whether the portfolio is more growth- or value-oriented. The coefficient on HML is negative and significant for both portfolios, which means that they are more growth-oriented. The coefficient on momentum is positive but not statistically significant.
Lastly, the four factor alphas, which measure risk-adjusted return are not statistically significant. This implies that neither of the portfolios outperform or underperform the market.
The difference portfolio is used to examine differences in performance and investment style. First, the four-factor alpha is negative but not statistically significant. This implies that there is not a statistically significant difference in risk-adjusted returns between the socially responsible and conventional portfolios.
Only two of the factors are significant; SMB and HML. Since the sign is negative on the SMB coefficient, it can be interpreted as the SRI portfolio being more exposed to large stocks than the conventional portfolio. The HML coefficient is negative as well, which
means that the SRI portfolio is more growth-oriented than the conventional portfolio. The SMB and HML coefficients are statistically significant at a 1 percent significance level.
There is no difference in volatility to the market or exposure to momentum stocks.
Table 2: Results from Carhart Four Factor Model using the pooled SRI portfolio.
(1) (2) (3)
Note: Table 2 reports the regression results of the pooled SRI portfolio and its matched conventional portfolio and difference portfolio. The results are estimated using OLS with Newey West standard errors with four lags to correct heteroskedasticity and serial correlation. The market factor is equal to the MSCI Europe benchmark minus the risk free rate from the Fama French website. Alpha is the risk-adjusted return.
The results from the SRI subgroups are presented in table 3 below. The results for the ESG subgroup are similar to the ones in table 2. The difference in performance between the ESG and conventional portfolios is not statistically significant. The ESG portfolio is more exposed to large stocks and more growth-oriented than the conventional portfolio.
Both the SMB and HML factor coefficients are significant at a 1 percent level. There is no statistically significant difference in market sensitivity or exposure to momentum stocks.
The alpha is negative but not statistically significant, which implies that there is not a statistically significant difference in performance between the portfolios.
Next, we look at the environmental subgroup. The market and SMB coefficients are statisti-cally significant for both the environmental and conventional portfolio. The environmental and conventional portfolios are more volatile than the market, and they are more exposed to small stocks than large stocks. The HML factor is only significant for the environmental portfolio, and the negative sign implies that the portfolio is more exposed to growth stocks.
From the difference portfolio, we see that there is only a statistically significant difference in the HML factor. The factor coefficient is significant at a 1 percent significance level.
The environmental portfolio is more exposed to growth stocks. The four factor alpha is negative but not statistically significant, which means that there is no difference in risk-adjusted performance between the environmental and conventional portfolios. The explanatory power of the model is quite low for the environmental difference portfolio. As we will see later in the robustness tests, this is due to the factor coefficients and alpha changing over time.
Table 3: Results from Carhart using the SRI subgroups.
ESG Environmental
Variables ESG Conventional Difference Environmental Conventional Difference
Market 1.037*** 1.035*** -0.001 1.052*** 1.025*** 0.014
(0.008) (0.009) (0.004) (0.020) (0.010) (0.025)
SMB 0.278*** 0.369*** -0.085*** 0.442*** 0.359*** 0.081
(0.029) (0.032) (0.013) (0.053) (0.036) (0.058)
HML -0.096*** -0.042** -0.067*** -0.079* 0.006 -0.106***
(0.019) (0.019) (0.010) (0.042) (0.026) (0.039)
MOM 0.010 0.025 -0.015 -0.009 -0.013 -0.002
(0.017) (0.016) (0.009) (0.031) (0.029) (0.035)
Constant 0.028 0.002 -0.020 -0.143 -0.060 -0.080
(0.031) (0.034) (0.018) (0.093) (0.054) (0.118)
Obs. 121 121 121 121 121 121
Adj. R2 0.994 0.994 0.493 0.971 0.989 0.0457
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Note: Table 3 reports the regression results of the ethical subgroups using the Carhart four factor model. The results are estimated using OLS with Newey West standard errors with four lags to correct heteroskedasticity and serial correlation.
The market factor is equal to the MSCI Europe benchmark minus the risk free rate from the Fama French website.