eThesis - Kauppakorkeakoulun sähköiset gradut

Academic research on socially responsible investing (SRI) has up to date more or less neglected the differences between SRI investment strategies and screening criteria, pooling all SRI funds in to a single unit of observation. Whereas recent evidence indicate that SRI investors can be categorized into subgroups according to their preferences towards returns versus responsibility, literature has not yet attempted to classify funds based on this orientation.

The purpose of the study is classify SRI funds according to their responsibility-orientation and thus shed new light on the return versus responsibility-driven fund selection process of SRI investors. The study contributes to existing literature by constructing a measure of responsibility-orientation in SRI funds employing shareholder activism metrics and classifying funds accordingly. Ultimately, I study whether the relative strength of the degree of responsibility-orientation in funds attracts the more responsibility-orientated clientele by quantifying the flow-performance relationship.

The dataset includes data on 96 US-based socially responsible investment funds with observations spanning from 1991 to 2012 collected from the CRSP database. In addition, 3657 proxy voting decisions made by the funds has been collected manually from SEC filings. To test the hypotheses regarding the flow-performance relationship, several fixed effect OLS regressions are estimated.

The results of this paper suggest that there are clear differences between SRI funds in their responsibility-orientation, as measured by shareholder activism variables. I find strong support with regard to investors in responsibility-orientated SRI funds deriving a stronger SRI utility from their larger SRI utility attribute and thus having higher flow-performance sensitivity towards past positive returns. Consequently, the benefits of higher flow-performance sensitivity in regions of gains identified in literature seem to accrue to the most responsibility-driven SRI funds. The findings with regard to predicted lower flow-performance sensitivity in the region of losses are mixed and provides for further research.

Responsibility-driven SRI investors seem to choose the funds with the strongest responsibility-orientation. "Green wash" i.e. operating with an SRI label but not actively promoting the selected SRI strategy appears to attract more return-concerned investors, who do not revise their investment in the fund upwards as readily as responsibility-orientated investors. For SRI fund managers, there are practical consequences towards communicating and executing the selected SRI strategy consistently instead of focusing on the screens employed. In addition, the ability to identify and target investor subgroups in order to cater for their preferences has remarkable consequences on the ability to attract and retain investments.