Does Socially Responsible Investing Outperform Conventional Investing? A Cross-Country Perspective

Abstract

Given the growing significance of socially responsible investing (SRI), the study aims to empirically examine the financial performance of socially responsible indices of India, China, the United States (US), and the United Kingdom (UK) vis-à-vis their respective market benchmark indices. The study uses various risk-adjusted performance measures such as Sharpe ratio, Jensen alpha, Treynor ratio, Information ratio, Modified Sharpe ratio, Sortino ratio, and Omega ratio to analyze the performance of SRI indices. The period of analysis extends from January 2018 to December 2021. The study performs various sub-period analyses including a crisis period analysis to assess the impact of the COVID-19 (coronavirus disease) crisis on the performance of select indices. Statistical tests such as the paired t-test and Levene’s F test are applied to examine the homogeneity of means and variances of sample indices. Robustness checks involve calculating performance metrics across varying sample sizes using a growing window procedure. The results highlight the outperformance of SRI indices over market benchmarks in India, the US, and the UK, suggesting that investors do not have to forgo financial performance to address their environmental, social, and governance (ESG) concerns. There is no statistically significant outcome observed for SRI performance in China. Empirical evidence from the crisis period analysis indicates that SRI can offer investors a hedge against market volatility. Overall, the findings suggest that there is no homogenous or universal outcome of SRI but rather varies depending on geographic region, study period, current market conditions, and extent of SRI adoption.