Performance of Socially Responsible Portfolios - Do Economic Conditions Matter?

Abstract

In a first of its kind, this paper examines the performance of various socially responsible stocks portfolios as compared to general stocks portfolios and market portfolio using return and various risk-adjusted measures over the period January 1996 - December 2013 and over different business economic conditions. Besides the conventional risk-adjusted measures, we have also used modified Sharpe ratio, double Sharpe ratio, M2 measure, alpha based on three factor Fama-French model and Famas decomposition measure. Further we have checked for the impact of economic conditions (recession or boom) on the alpha and slope coefficients. We have also examined whether single factor CAPM is sufficient to explain cross sectional variations across portfolios or we need a multi-factor model (like Fama-French three factor model). We find that despite having higher risk, socially responsible stocks portfolios generated significantly higher returns and hence outperformed other portfolios on the basis of all risk-adjusted measures as well as net selectivity returns during both recession and boom periods. The results uphold even with the use of Fama-French three factor model for estimating excess returns. The empirical results, besides augmenting the existing literature on performance evaluation, clearly indicate that investors in India have become more socially conscious as the stock market is rewarding socially responsible companies well in terms of higher returns (on risk adjusted basis). The study supports the view that socially responsible investing is boon for investors in India. Therefore, regulators, policy makers and mutual funds should construct and make available various socially responsible investment products to initiate the movement of socially responsible investing in India.

Keywords: Socially Responsible Investing, ESG Index, GREENEX Index, Famas Decomposition Measure, CAPM, Fama-French Three Factor Model

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