The Research
To better understand the likely impact of adopting an ethical screening process we undertook a review of the already significant body of research on the subject. Our review focused on a total of <61> research papers covering 3,000 SRI-screened Funds across a period of nearly 50 years.
The research found that ethically screened portfolios tend to underperform (/perform differently from) unconstrained mandates. Of the research papers reviewed XX% found evidence of underperformance while X% found evidence of SRI mandates outperforming.
Of the research papers that provided a measure of difference in returns the average cost was found to be 0.73%XX. Adjusting for outliers and including reports that found no material difference in results we find the apparent drag reduced to 0.37% per annum.
<INSERT TABLE HERE>
%positive ./.years // av funds modeled // size difference
%neg
%neutral
Our review also identified many inconsistencies. Given the breadth of this review some variability in methods was to be expected, however we note there was a general lack of consensus as to how one should rate a company's ethical profile, as well as some differences in performance comparison methodology. We do find this was especially apparent in reviews focused on shorter investment horizons. Periods where SRI outperform (such as in market crises) are overrepresented in the research. We must account for this time-period bias when analysing the results.
We also found that research comparing actual performance of actual ethically-screened Funds (unit trusts, mainly) reported much worse results than justified by the exclusion of particular sectors. Part but not all of this can be attributed to the higher fees charged by screened portfolios. In other words, investment managers appear to have little luck in picking which of the companies available for investment offer the highest prospective return.
We also make the observation that the relatively few research papers that find SRI methods enhance return tend to be cited much more often than the papers indicating that SRI reduces returns. This is, of course, not surprising given that many of the research reviews citing these positive references are by product manufacturers who themselves market SRI Funds. This point is only mentioned as the bias toward these positive reviews does tend to <proliferate> within the media, and may cause the casual observer to believe that SRI is a reliable method for increasing returns.
Other key findings included:
To better understand the likely impact of adopting an ethical screening process we undertook a review of the already significant body of research on the subject. Our review focused on a total of <61> research papers covering 3,000 SRI-screened Funds across a period of nearly 50 years.
The research found that ethically screened portfolios tend to underperform (/perform differently from) unconstrained mandates. Of the research papers reviewed XX% found evidence of underperformance while X% found evidence of SRI mandates outperforming.
Of the research papers that provided a measure of difference in returns the average cost was found to be 0.73%XX. Adjusting for outliers and including reports that found no material difference in results we find the apparent drag reduced to 0.37% per annum.
<INSERT TABLE HERE>
%positive ./.years // av funds modeled // size difference
%neg
%neutral
Our review also identified many inconsistencies. Given the breadth of this review some variability in methods was to be expected, however we note there was a general lack of consensus as to how one should rate a company's ethical profile, as well as some differences in performance comparison methodology. We do find this was especially apparent in reviews focused on shorter investment horizons. Periods where SRI outperform (such as in market crises) are overrepresented in the research. We must account for this time-period bias when analysing the results.
We also found that research comparing actual performance of actual ethically-screened Funds (unit trusts, mainly) reported much worse results than justified by the exclusion of particular sectors. Part but not all of this can be attributed to the higher fees charged by screened portfolios. In other words, investment managers appear to have little luck in picking which of the companies available for investment offer the highest prospective return.
We also make the observation that the relatively few research papers that find SRI methods enhance return tend to be cited much more often than the papers indicating that SRI reduces returns. This is, of course, not surprising given that many of the research reviews citing these positive references are by product manufacturers who themselves market SRI Funds. This point is only mentioned as the bias toward these positive reviews does tend to <proliferate> within the media, and may cause the casual observer to believe that SRI is a reliable method for increasing returns.
Other key findings included:
- ADD:
- **Negative skew
- FF
- F
- F
- F
- F
- Implementing an ethical screen (SRI) can and should be expected to reduce equity market investment returns by between <<0.10% and 0.20% per annum, over the long term. Against The Jack Brockhoff Foundation’s existing portfolio, this is equivalent to a reduction in gross returns of between <<<$64534 and $etew53> per annum.
- Approximately $17,000 per annum (0.X%) of this is attributable to implementation, management and compliance costs.
- Between $37,000 and $87,000 per annum (0.XX% = 0.XX%) can be attributed to opportunity costs (reducing the number and breadth of eligible securities)
- The <strictness> of the SRI-screening parameters and process has a direct bearing on the costs incurred. The stricter the requirements the higher the cost. The ethical screen proposed by The Foundation is toward the lowest-cost end of the scale.
- While the evidence suggests that SRI reduces returns over the long run, SRI portfolios tend to exhibit lower overall volatility and outperform their market benchmark in times of market crisis.
- Research shows that in periods of crisis companies with the lowest SRI rating (those with the poorest business practices/behavior/industry) perform the worst; therefore investment managers or strategies that avoid these companies will be likely to outperform.