How Negative Screening According to Christian Principles Influence Stock Returns

Socially responsible investing (SRI) has grown to represent approximately one quarter of all managed assets in the world. Given this scale, it is important to understand the financial implications when financial planners offer an SRI product to a client. One of the biggest questions to ask is: does adding non-financial criteria to the investment process help or hurt risk-adjusted returns? While most academic studies in the past have compared all SRI funds to unrestricted funds, this has been problematic because of the heterogeneous nature of SRI funds. This study will narrow the focus to Evangelical, Charismatic and Pentecostal Christians (approximately 870 million people in the world). This sample group has the potential to request a portfolio that includes a negative screen for certain moral criteria consistent with fundamental Biblical principles. If these Christian investors were to restrict their portfolios (i.e., engage in negative screening) according to fundamental Biblical principles, would the resulting restricted portfolio have risk-adjusted returns that are significantly different than an unrestricted portfolio? Modern portfolio theory (MPT) argues for an underperformance hypothesis, since restricting an investment universe because of individual preferences will necessarily reduce diversification efficiencies. Stakeholder theory has the potential to argue for an outperformance hypothesis, since Christians believe that screening out certain corporate behaviors will lead to a portfolio that avoids companies that will have higher costs, lower revenue, and decreased human capital because of their un-Biblical behavior.  This study will test 7 moral criteria that are consistent with fundamental Biblical principles: abortion, alcohol, entertainment, gambling, LGBTQ lobbying, human rights, and tobacco. The mapping of the 7 criteria to the investable universe has been conducted by the screening service, eValueator. eValueator carefully proscribes to fundamental Biblical principles within each moral criterion. Each Biblical principle will be tested using the Carhart 4 factor model to determine the potential cost, or benefit, when using each ethical negative screen. This study will also test whether risk-adjusted returns have a curvilinear relationship relative to screening intensity (which has been shown in other SRI studies of ethical screens). In addition, this study will test whether results are significantly different before-and-after the global financial crisis of 2008. This will be an important study for financial planners as more and more clients seek to incorporate their Christian values into their investment portfolios. Full transparency of potential costs and benefits is greatly needed for the financial planner to be able to discern the best solution for their client.