A few weeks ago I was asked to give a talk on a paper I wrote almost ten years ago, "No Effect, or No Net Effect?" which reviewed the SRI performance literature up to that time. The point of the piece was that neither proponents nor opponents of social investment could fully explain the performance we'd seen, which was about in line with the market. Critics said there'd be a cost, and there wasn't. Proponents said there'd be an benefit, and there wasn't. A lot has changed since then, but I think that basic fact still stands.
Over the years I've written three reviews like this. Most of the studies mentioned are listed at sristudies.org, with the notes I took when I reviewed them. Here are citations for the reviews along with some links and comments:
Kurtz, Lloyd. "No Effect, or No Net Effect? Studies on Socially Responsible Investing." The Journal of Investing, Winter 1997.
This was my first effort, and in 1997 not many studies had been done yet - this gave me some latitude to talk about theoretical issues. A copy of this article is available online here. It was summarized by H. Kent Baker for CFA Digest - he did a good job, and a copy of his writeup is available here.
Kurtz, Lloyd. " 'Mr. Markowitz, Meet Mr. Moskowitz' - A Review of Studies on Socially Responsible Investing." The Investment Research Guide to Socially Responsible Investing, The Colloquium on Socially Responsible Investing, 1998.
The publication of The Investment Research Guide to Socially Responsible Investing gave me an opportunity to update the original Journal of Investing piece, and to re-frame the basic issues raised by financial theory. I feel this piece gives the clearest account of the duelling hypotheses of efficient market theorists and those who believe social factors improve performance. It is available online here.
A lot has changed since those two reviews were written. The research flow has gone from a trickle to a deluge, with dozens of new studies each year. And, perhaps more importantly, the theoretical landscape has really changed.
Social investors used to have one clear opponent, those who believed in what we might call "strict CAPM". This was nice because the debate was more-or-less bi-directional and could focus on a few key questions. Today the debate is more complex - strict CAPM seems to have lost adherents, while Fama/French, Arbitrage Pricing Theory, Behavioral Finance, and even extreme skepticism have gained ground. So conversations about SRI tend to be as much about the prior beliefs of the participants as the risks and benefits of applying social constraints. My latest review reflects this, managing to be both longer and less coherent than its predecessors:
Kurtz, Lloyd. "Answers to Four Questions." The Journal of Investing, Fall 2005.
The one advantage of this piece (available here, but subscription only, sorry) is that it is pretty up-to-date, and touches on most of the important studies that have been done since 2000.
But something very odd came out of this review. Most of the studies in the areas of environment, employee relations, and governance seem to show positive results. I don't know quite what to make of this. The folks at Calvert think social screens help returns, and cite my tables in support of this idea.
But, as I say in the paper, I'm only partially converted. Those tables are provocative, but when I look at actual SRI portfolios, I see performance that is similar to the market over time. This suggests one of two things: Maybe we're seeing a publication effect - only studies with positive results are getting into print. Or maybe the effects are really there, but social investors aren't capturing them.
To get a definitive answer on that, someone with a lot of time and talent would have to do a meta-analysis of the SRI literature similar to the one Marc Orlitzky did with the corporate social responsibility literature. Orlitzky found a weak but positive effect, and, importantly, showed that the publication effect would have to be enormous to alter his conclusions (hundreds or thousands of negative studies would have to have been ignored).
So, without evidence I'm free to offer an opinion: maybe both effects are in play. Certainly it's easier to get a positive study published than a negative one, so the positive results are probably overstated. But I think it's plausible that you can get an investment advantage from looking at environment, employee relations, and governance because all of these things logically connect with fundamentals. Moreover, none of them is a focus of mainstream investment research.
If I'm right about that, social investment managers should significantly outperform their competitors. So why haven't they?