Canadian Study challenges SRI underperformance myth

The first academic study of social investment returns in Canada disputes the conventional wisdom that socially responsible investment underperforms conventional investment.

The study, entitled Socially Responsible Investing: Better for Your Soul or Your Bottom Line?, was carried out by Paul Asmundson and Stephen Foerster of the Ivey School of Business at the University of Western Ontario. An article on the study was recently published in the Winter 2001 edition of Canadian Investment Review.

The study looked at the financial returns of socially-screened mutual funds invested in Canadian equities with five- and 10-year performance histories. This performance was then compared with returns from the appropriate benchmark, the Toronto Stock Exchange 300 index.

Funds with 10-year returns were Ethical Growth and Investors Summa. Funds with five-year returns were Ethical Growth, Investors Summa, Desjardins Environment and Clean Environment Equity.

The analysis included mean excess returns (fund returns versus the benchmark) as well as two measures of risk-adjusted returns (Sharpe ratio and Jensen’s alpha).

The study found that the fund returns underperformed the benchmark but that this underperformance was not statistically significant. Moreover, the funds slightly outperformed in terms of the Jensen’s alpha and were almost identical to the benchmark in terms of the Sharpe ratio.

"The results suggest that those who engage in SRI through investing in Canadian SRI mutual funds, on average, are neither giving up anything nor gaining anything in terms of financial returns," Asmundson and Foerster wrote.

However, the study found that social and environmental screens may actually decrease risk exposure, although such a conclusion depends on the extent to which the funds are fully invested in equities.

"At this relatively early stage, it appears that investing for the soul may not hurt the bottom line, particularly when risk exposure is taken into account."