The Wages of Social Responsibility

TLDR

Typical socially responsible investors tilt portfolios toward companies with high social‑responsibility scores and avoid those linked to tobacco, alcohol, gambling, firearms, and military or nuclear operations. The study finds that while tilting toward high‑social‑responsibility stocks yields an advantage, excluding shunned companies imposes a disadvantage that largely offsets this benefit, so investors can achieve both performance and ethical goals by tilting without shunning.

Abstract

Typical socially responsible investors tilt their portfolios toward stocks of companies with high scores on social responsibility characteristics and shun stocks of companies associated with tobacco, alcohol, gambling, firearms, and military or nuclear operations. Analyzing 1992–2007 returns of stocks rated on social responsibility, this study found that this tilt gave such investors an advantage over conventional investors. The study also found that shunning resulted in a disadvantage for such investors relative to conventional investors. The advantage from tilting toward stocks of companies with high social responsibility scores is largely offset by the disadvantage from the exclusion of stocks of shunned companies. Socially responsible investors can thus do both well and good by adopting the best-in-class method in constructing their portfolios: tilting toward stocks of companies with high scores on social responsibility characteristics but refraining from shunning stocks of any company.