SRI

Are SRI strategies (still) able to outperform the market?
Numerous investment managers are offering responsible investment products nowadays, claiming that a focus on SRI equity at least doesn’t harm financial performance, or that the strategy is even able to outperform non-SRI peers.

However, some questions remain: Were the strong stock returns actually caused by the companies’ responsibility standards, or by other underlyings or sources of risk that happen to be correlated with CSR factors? And if the causality assumption is true, why was the importance of CSR factors overlooked by the market in the past? Gabriel A Huppé’s paper “Alpha’s Tale: The Economic Value of CSR” (Source) tries to answer these questions.

Here is a summary of his results:

Causality vs. correlation with other performance drivers
CSR leaders (CSR+) produced significant 4.32% annualized alpha between 1992 and 2005, and negative, insignificant alpha afterwards, while CSR laggards (CSR-) produced negligible alpha during all periods.

Improved market efficiency
The author also identifies a learning process, as the analyst forecast error declines over the analyzed period.

Implications
The market’s improved pricing of CSR information will make it more difficult, if not impossible in the future to outperform with a long-only or long/short equity strategy based merely on CSR criteria. The paper suggests that in the future, SRI strategies will move away from security selection towards new approaches to asset allocation, like impact investing and a more important focus on corporate engagement.

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