The risk in socially responsible investing: the other side of the coin

Abstract

Purpose

The field of socially responsible investment (SRI) has become a central theme in the mutual funds industry. The risk implications associated with this investment approach are less explored. This study further investigates the real contribution to the investor offered by the SRI alternative.The aim of this paper is to throw more light on this debate.

Design/methodology/approach

Analyzing a large sample of US companies, this study investigates the tendency to generate risk when the portfolio is built, taking into account SRI. The research is based on the backtest of the real performance obtainable by adopting different investment strategies in which the red line is the selection method based on the principles of corporate social responsibility.

Findings

The investor must pay a cost that depends on the degree of rigor in the selection criteria. The risk associated with SRI is influenced by the measure adopted. SRI has a better asymmetric risk behavior than other securities. The results suggest using different selection models according to the investor’s objectives. When the objective is to maximize the average return and the remuneration risk, the SRI selection model should be negative or at least as inclusive as possible. In the event that the investor’s objective is to contain risk indices, a restrictive approach to the selection of investments is advisable.

Originality/value

Academic research has long been investigating the ability to generate profits but often neglects the levels of risk implicit in such investment approaches. The originality of this research consists in the adoption of a model based on the continuous optimization of the portfolio. This approach allows the results to be assessed by the returns actually obtained.

Citation

Burchi, A. (2019), "The risk in socially responsible investing: the other side of the coin", Journal of Risk Finance, Vol. 20 No. 1, pp. 14-38. https://doi.org/10.1108/JRF-04-2018-0067