The relationship between social performance and financial performance of European SRI funds

(1)

The relationship between social performance and financial

performance of European SRI funds

(2)

Preface

Before you is my thesis that I have written to finalise the MSc International Business and Management. Although it has taken a lot longer than I ever could have imagined, I am content with the result. I have experienced that writing a master thesis while working fulltime requires a lot of discipline.

It has been very interesting conducting this research on the relationship between social performance and financial performance within European social responsible investment funds (SRI funds).

(3)

Abstract

Beginning with 1980s activism intended to stop foreign investment in South Africa, there has been a rise in “socially responsible investment” (SRI) in Europe and the United States. Is there a relationship between the social behaviour of a corporation and its performance? If yes, is this relationship a positive or a negative one? These are questions that have been researched in many papers through the years.

Most prior papers, that have researched the relationship between social performance and financial performance, have treated SRI funds in a homogeneous way by comparing their financial performance with that of “normal” funds.

(4)

1. Introduction

Beginning with 1980s activism intended to stop foreign investment in South Africa, there has been a rise in “socially responsible investment” (SRI) in Europe and the United States. While there is some debate on what SRI actually is, a common definition is: “an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis” (Kurtz and DiBartolomeo, 1996). The nature of the relationship between the social behaviour of corporations and their financial performance has long been debated, yet it remains unresolved (Margolis and Walsh, 2003).

Is there a relationship between the social behaviour of a corporation and its performance? If yes, is this relationship a positive or a negative one? These are questions that have been researched in many papers through the years. The outcomes of the studies both show positive and negative relations between the social and financial performance of corporations (Margolish and Walsh, 2003; Rowley and Berman, 2000; Ullmann, 1985).

(6)

capital. The difference between “normal” investment funds and SRI funds is the fact that the investments of SRI funds are screened1 based on social criteria.

With investment funds the same discussion arises as with the firm-level discussion. Are the costs of social performance offset or exceeded by financial returns? However, with investment funds diversification also plays an important role. The investment funds are concerned with diversification, a risk management technique that mixes a wide variety of investments within a portfolio. The modern portfolio theory states that an investment portfolio bears two kinds of risk, systematic and unsystematic risk (Markowitz, 1952). Systematic risk is the risk inherent in the volatility of the entire capital market. Unsystematic risk (specific risk) is associated with the volatility of an individual security. Investors may try to assemble portfolios in a way that the specific risk of one security is offset against the specific risk of another security, which is called diversification. In the case of an efficient capital market, investors will be rewarded for the systematic risk they take. Bearing specific risk will not be rewarded because of diversification.

Concerning SRI funds the question rises if it is possible to diversify the portfolio if the fund implements strict social performance criteria? These social performance criteria exclude sectors, firms, and industries, what may lead to SRI funds being unable to adequately diversify. Without broad diversification the SRI funds will be exposed to additional risk. This additional risk will lead to a loss in the risk-adjusted returns. However, supporters of SRI funds argue that although SRI funds aren’t capable of completely diversifying their portfolio, the firms that do get through the strict social performance screening will be better managed than the average firm. The fact that these firms are better managed tends to lead to equal or higher financial returns, even on risk-adjusted basis.

1

(7)

Many researchers have compared the financial performance of SRI funds with the financial performance of other “normal” funds that do not screen their holdings based on social criteria (Rudd,a1979;bMueller,c1991;dTeper,e1992;fLuckgandhPilotte, 1993;iHamiltonjetkal.,l1993;mDiltz,n1995;oKurtzpandqDiBartolomeo,r1996;sSauer, 1997;tGuerard,u1997;vStatman,w2000). The outcomes of these comparisons between the financial performance of SRI funds and non-SRI funds are different. Some studies have found that SRI-funds can perform similarly (Hamilton,aJo,bandcStatman, 1993; Guerard,d1997;eDiltz,f1995) or even better (DiBartolomeo5andyKurtz, 1999; Statman, 2000) than non-SRI funds, which implies that the relationship between the social performance and the financial performance of companies is positive. But on the other hand, other studies have concluded that SRI-funds perform worse (Rudd, 1979; Teper, 1992) than non-SRI funds, implying that the relationship between the social and financial performance is negative.

Some researchers argue that the reason SRI funds perform as well, or even better, than unscreened investment funds can be found in the fact that the intensity of screening done by SRI funds has become less through the years (Glassman, 1999; Goetz, 1997). This would imply that through the years the SRI funds have lowered their social performance in order to keep up with the financial performance of the unscreened funds (Barnett and Salomon, 2006). Based on these assumptions the relationship between social performance and financial performance would be negative. Furthermore, the fact that SRI funds can lower their financial performance also implies that differences could occur in screening intensities between SRI funds.

(8)

(9)

2. Problem statement

The research of Barnett and Salomon (2006) was based on U.S. SRI funds. In Europe no similar research, in which SRI funds are treated in heterogeneous way, has been conducted. Therefore it would be interesting to fill this existing gap, by analyzing how variation in the intensity of social screening employed by European SRI funds affects their financial performance. After completing this research it will be possible to conclude if European SRI funds have a similar curvilinear relationship, between social performance and financial performance, as U.S. SRI funds. In my thesis I will attempt to fill this existing gap by analysing the European SRI funds in a heterogeneous way. The research will be based on the following research question:

Do European SRI funds have a similar curvilinear relationship between social performance and financial performance as U.S. SRI funds?

This research will be conducted by analyzing a panel of 193 European SRI funds. My research will be in line with the research done by Barnett and Salomon (2006), in which they analysed the relationship between screening intensity and financial performance of U.S. SRI funds.

(10)

3. Literature review

3.1 The relationship between social responsibility and financial performance on a company level

I will start this literature review by analyzing the relationship between social responsibility and financial performance on a company level. This relationship is very important for my research because of the fact that investment funds place their capital across a portfolio of investments. A large part of the fund’s capital is invested in equity of companies. This means that if the financial performance of a company changes, this will have an influence of the performance of the investment fund that has invested capital into this company.

A large amount of research has been done on the relationship between social responsibility and financial performance within corporations. Despite the large amount of research that has been done, the nature of the relationship between the socially beneficial behaviours of a corporation and its financial performance remains unresolved (Margolis and Walsh, 2003).

Some researchers’ outcomes point out a negative relationship between social and financial performance within corporations. Friedman (1970) states that social responsibility weakens a firm’s financial performance. In his view social responsible investments reduce returns to stockholders and raise the price for customers. This view is in line with Jensen (2002), who states that his theory of ‘enlightened value maximization’ utilizes much of the structure of stakeholder theory but accepts maximization of the long-run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders, and specifies long-term value maximization or value seeking as the firm's objective.

(11)

performance. Although they also found that within industry groups the financial variable most strongly correlated with corporate social responsibility is asset age, even after controlling for asset age, there is still support for a link between corporate social responsibility and financial performance.

Waddock and Graves (1997) have also attempted to address whether corporate social performance is linked to financial performance. They state that a fundamental reason for the uncertainty about the relationship between social corporate performance and financial performance is related to the fact that it is very difficult to measure social corporate performance. To deal with the measurement problems Waddock and Graves (1997) constructed an index of corporate social performance based on eight corporate social performance attributes rated consistently across the entire S&P 5002 by the firm Kinder, Lydenberg, and Domini (KLD). Size, risk, and industry were operationalised as control variables. In support of the study of Cochran and Wood (1984) they found that corporate social responsibility does depend on financial performance and that the sign of the relationship is positive.

(12)

In a later study of Greening and Turban (2000) they suggest that firms develop competitive advantages by being perceived as attractive places of employment. Their results indicate that applicants will not only be attracted to companies with a positive corporate social performance reputation, but that they will pursue jobs with such firms.

Fombrun, Gardberg, and Barnett (2000) have conducted a similar research in which they argue that no simple correlation can be established between corporate social performance and corporate financial performance. They state that activities that generate corporate social responsibility do not directly impact the company’s financial performance, but instead affect the financial value of its intangible assets. An increase in the financial value of the intangible assets can provide a firm a competitive advantage; this competitive advantage can lead to better financial performance.

Empirical tests of these opposing positions have long produced mixed results, and so have not resolved this debate (Margolis and Walsh, 2003), (McWilliams and Siegel, 2000). After conducting the literature research on the relationship between the social responsibility and financial performance on a company level I have also found that there are different views and no clear answer on this matter.

(13)

3.2 The relationship between social responsibility and financial performance on an investment fund level

Researchers have often analysed the relationship between social responsibility and financial performance by comparing the financial performance of SRI funds with that of “normal” investment funds. As I will also be researching the relationship between social responsibility and financial performance on an investment fund level, it is interesting to review this subject. Diversification plays a big role in the discussion on the relationship between social performance and financial performance on an investment fund level.

Negative relationship

As stated before in the introduction, many researchers have concluded that corporate social responsibility is costly and burdensome for firms. Critics emphasize that corporate social responsibility always leads to higher costs, giving firms a competitive disadvantage compared to other “corporate non-social responsible” firms (Friedman, 1970; Jensen, 2002). SRI funds only invest in companies that meet with the social screening criteria of the funds. This means, in the opinion of the critics that the SRI funds invest in companies that have higher costs than “normal” companies, which may result in a lower fund performance. Moreover, the fact that certain companies and industries are excluded from SRI funds has a big influence on the financial performance of a portfolio, regardless of the social aspect. This is because of the fact that investment funds that exclude certain companies are not able to diversify their portfolio optimally.

(14)

individual security. This technique is called diversification. In efficient capital markets investors are rewarded for bearing systematic risk, but because of diversification, are not rewarded for bearing specific (unsystematic) risk. If an investment fund bears specific risk, this is the result of the fact that the fund hasn’t reached the efficient frontier wherein the risk/return trade-off is optimised (Barnett and Salomon, 2006). SRI funds tend to bear more specific (unsystematic) risk because of the fact that SRI funds exclude certain firms and industries. This higher specific risk will lead to decreased risk-adjusted returns (DiBartolomeo and Kurtz, 1999).

Figure 1 clearly shows the relationship.

Figure 1

(15)

mutual fund does not need the universe of stocks to choose from to diversify its portfolio is more relevant.

Another acknowledgement that can be made is that to diversify a fund’s portfolio the stocks should be chosen randomly. In the case of SRI funds, and many other mutual funds, the portfolios are not randomly chosen. The stocks are selected very carefully, based on the different social screens that SRI funds use as selection criteria. The impact of social screens is decidedly non-random and can create uncompensated risk, even in very large portfolios (Kurtz, 1997).

Other researchers have also concluded that SRI funds are unable to diversify their portfolios optimally which leads to financial costs. In a research conducted by Teper (1992) it is concluded that portfolios of socially screened funds perform one percent less compared to diversified portfolios. The outcomes of a more recent research conducted by Geczy et al. (2003) also point out that socially screened portfolios do not perform as well as portfolios that have not been screened.

Positive relationship

Now that we have established the negative relationship, based on current literature, between the social screening of portfolios of and their financial performance, we will review the current literature on the positive relationship between SRI funds and their financial performance. Many researchers have compared the financial performance of SRI funds with that of “normal” investment funds and found that the SRI funds perform as well or even better than the “normal” mutual funds.

(16)

analysis, that SRI funds do not earn statistically significant excess returns. They also found that there is no significant difference in the performance between SRI funds and “normal” investment funds.

The current literature focuses primarily on SRI funds based in the US and therefore often uses the Domini Social Index4 (DSI) as the benchmark portfolio for socially responsible investing. For example DiBartolomeo and Kurtz (1999) state that the DSI outperformed the S&P 500 index from 1990 until 1999. Statman (2000) also reports that the DSI performed as well as the S&P 500 over the period of 1990 until 1998.

How come socially screened investment funds perform as well or even better than conventional investment funds? In the previous section we have established that SRI funds perform less than conventional funds because of the fact that SRI cannot diversify their portfolio optimally because of social screening.

However, we haven’t analysed the potential benefits coming from socially screening investments. SRI proponents argue that the fund managers of SRI funds cannot choose every stock available because of the social screening criteria that they employ. They argue that the stocks available after social screening are superior to that of the rest of the market, which will lead to higher financial returns. Alexander and Buchholz (1978) state that a socially responsible management will also possess the requisite skills to run a superior company, leading to higher financial performance than “normally” managed companies. This view is based on Moskowitz’ (1972) findings, who in his research selected 14 social responsible firms and compared the rate of return of their common stock with that of major market indices. The results show that the 14 stocks performed better than the major market indices.

The reason that socially screened investment funds perform financially better than “normal” investment funds can also be supported by the stakeholder theory. The

4

(17)

stakeholder theory suggests the better a company treats its stakeholders (anything or anybody who affects or can be affected an organisation’s actions), the better the company’s financial performance will be (Freeman, 1984). A research that confirms this relation is that of Hillman and Keim (2001). Their findings suggest that if a social activity is directly tied to primary stakeholders, then investments may benefit not only stakeholders, but also shareholder wealth.

(18)

3.3 Different outcomes on the relationship between social responsibility and financial performance

After reviewing the current literature on the relationship between social responsibility and financial performance I can conclude that there are many researches that support a positive relationship and many researches that support a negative relationship. So which relationship is it?

Margolis and Walsh (2003) have reviewed all 127 studies that have empirically researched the relationship between social responsibility and financial performance between 1972 and 2002. In 109 of the 127 studies, social performance was treated as independent variable. This means that the social performance was used to predict the financial performance. Of the 109 studies 54 have found a positive relationship between the social performance and financial performance. Seven studies found a negative relationship, 28 studies reported a non-significant relationship and 20 researches reported a mixed set of findings. Social performance was treated as a dependent variable in 22 of the 127 studies, which means that the social performance was predicted by the financial performance in these studies. Of these 22 studies 16 studies found a positive relationship between the financial performance and social performance.

The results of the extensive literature review, conducted by Margolis and Walsh (2003) clearly point out that there is a positive relation between social performance and financial performance, and very little evidence of a negative relationship. In a meta-analysis conducted by Orlitzky et al. (2003) it is also concluded that prior research indicates a positive relationship between the social performance and financial performance.

(19)

Margolis and Walsh (2003) state:

“The steady flow of research studies reflects ongoing efforts both to resolve the tension between advocates and critics of corporate social performance and to shore up the methodological and theoretical weaknesses in past studies. There have been 13 reviews of this CSP-CFP (corporate social performance and corporate financial performance) research published since 1978, nine in the past ten years alone.”

Based on these studies Margolis and Walsh (2003) state:

“The reviewers see problems of all kinds in this research. They identify sampling problems, concerns about the reliability and validity of the CSP and CFP measures, omission of controls, opportunities to test mediating mechanisms and moderating conditions, and a need for a causal theory to link CSP and CFP.”

(20)

3.4 Heterogeneity between SRI funds

In the previous sections of this literature review we have found that, although a lot of research has been done on the relationship between social performance and financial performance, there are certain problems concerning the validity of the outcomes. One of the reasons is the fact that SRI funds have been treated in a homogeneous way.

Some critics argue that the reason that SRI funds have been performing as well or even better than conventional investment funds is related to the fact that SRI funds through the years have become less “socially responsible” (Goetz, 1997). This would imply a negative relationship between social performance and financial performance.

The fact that SRI funds can become less or more “socially responsible” through time triggers a new discussion. This would mean that SRI funds can differ in their amount social responsibility implying that not all SRI funds are the same. Knowing this, it seems rather strange that practically all prior research on SRI funds has treated SRI funds homogeneously. In numerous studies the relationship between social performance and financial performance was tested by comparing financial performance of SRI funds with that of normal investment funds. By treating the SRI funds homogeneously and comparing their financial performance with that of conventional investment funds, the researchers assume that the amount of social responsibility of the SRI funds is equal, which is not the case.

(21)

(22)

3.5 Barnett and Salomon, the curvilinear relationship between social responsibility and financial performance

The research of Barnett and Salomon (2006) is an important basis for the empirical research that I will be conducting in my research. It was after reading the paper of Barnett and Salomon (2006) that I realised that similar research had not been conducted for European SRI funds. The relationship between social performance and financial performance can be analysed in a reliable way by treating SRI funds heterogeneously. In the final part of my literature review I will give an extensive review of the research of Barnett and Salomon (2006), as my empirical research will be in line with that of them.

Barnett and Salomon (2006) have conducted the first research in which SRI funds are treated heterogeneously. Instead of joining the existing debate concerning the relationship between social performance and financial performance, Barnett and Salomon (2006) advance the debate by measuring the financial-social performance link within SRI funds.

Hypotheses

Their research consists of four hypotheses. For my research the first hypothesis of Barnett and Salomon is the most important.

(23)

Figure 2 shows the relationship between screening intensity and diversification clearly.

Figure 2 (Barnett and Salomon, 2003)

However, as Barnett and Salomon (2006) state, this negative effect is offset by as the stringency of social screening intensifies. The SRI funds that screen their investments elaborately will benefit from improved selection of investment targets. Barnett and Salomon (2006) summarise their view on this curvilinear relationship clearly in the following two sentences:

“Though an SRI fund may bear more and more specific risk by choosing from an increasingly smaller pool of stocks, the pool from which it does choose becomes richer. As a fund manager dips into this increasingly rich pool, he/she is more likely to pick a stock that will provide above-average returns.”

This leads to the first hypothesis of the research of Barnett and Salomon (2006):

(24)

performance differences not only across varying levels of screening intensity, but also across the varying types of social screens that SRI funds use. Barnett and Salomon have hypothesized the following concerning the differences in type of social screens:

Hypothesis 2: SRI funds that select firms for their portfolios based on labour relations screening criteria will earn higher financial returns than those that do not.

Hypothesis 3: SRI funds that select their portfolios base don community relations screening criteria will earn higher financial returns than those that do not.

Hypothesis 4: SRI funds that select firms for their portfolios based on environmental screening criteria will earn higher financial return than those that do not.

Methodology

As I will be only focussing on the screening intensity of the European SRI funds the first hypothesis of Barnett and Salomon (2006) is most important for my paper. For this reason I will only review the methodology and results of this hypothesis.

Barnett and Salomon (2006) used the Social Investment Forum5 to collect data on the U.S. based SRI funds. The data from this source provided information on the screening strategies of 67 SRI funds. This data on the funds’ screening strategy consisted out of the number and type of social screens used. Barnett and Salomon (2006) used data from the Center For Research in Security Prices to track the financial performance of every fund. Through this source they compiled the monthly financial performance data from 1972 to 2000.

Dependent variable

As Barnett and Salomon (2006) will be testing the effect of social screening financial performance, their dependent variable is the risk-adjusted financial performance of a given SRI fund in a given month. Barnett and Salomon (2006) define the risk-adjusted

5

(25)

performance (RAP) as the average monthly return, measured as the percentage change in a fund’s market value from the beginning to the end of a given month, adjusted by the fund’s specific beta (correlation with financial market).

Independent variable

Barnett and Salomon (2006) state that previous empirical research done on the relationship between social performance and financial performance has taken a largely dichotomous approach to categorizing a SRI funds: either a fund screens for social responsibility, or it does not. As I have stated before in the literature review most researchers have compared the financial performance of SRI funds with that on “normal” funds. Barnett and Salomon (2006) state in their research that SRI funds are not homogeneous, some have more stringent screening standards than others. The following sentences give a clear representation of the view of Barnett and Salomon (2006) on the heterogeneity of SRI funds:

“Gains to highly diversified but weakly screened SRI funds may have offset performance losses in less intensively screened SRI funds. Them again, intensively screened SRI funds may have selected a stronger portfolio, thereby subsidising the poor choices of the weakly screened funds.”

(26)

Control variables

The dependent variable in the research of Barnett and Salomon (2006) is the financial performance of the funds. They will control for certain factors that could systematically affect the financial performance of the funds. The control variables in the research of Barnett and Salomon (2006) are:

- Fund’s age: count of the number of months since inception date. - Fund’s size: overall fund assets.

- Global fund: value of 1 for funds with international holdings (outside U.S.), zero otherwise (only holdings inside U.S.).

Results

Barnett and Salomon (2006) first posited risk-adjusted performance to be a linear function of screening intensity. In this specification they tested if the use of more social screens is positively or negatively related with the financial performance of the SRI funds. After testing this linear relationship Barnett and Salomon (2006) found no linear association between the screening intensity and the performance of the funds.

AfteratestingbtheclineardrelationshipeBarnett and Salomon (2006) addedja squared screeninglintensitymterm.nConsistentpwithqtheirrexpectations,stheytfoundua

negativewandbsignificantbcoefficientbforbscreeningbintensitybandbabpositivebandb

significantbcoefficientbforbitsbquadratic.bThisbresultbimpliesbabcurvilinear,b non-monotonicbrelationshipbbetweenbscreeningbintensitybandbfundbperformance,bthusb

supportingbHypothesisb1bofbBarnett and Salomon (2006). Theb risk-adjustedbperformancebdeclinesbatbfirstbasbscreeningbintensitybincreases,breachingb

abminimumbatb7bscreens,bbutbthenbincreasesbcontinuouslybuntilbitbreachesbtheb

(27)

Figure 3 (Barnett and Salomon, 2003

(28)

Empirical analysis

After reviewing the current literature on the relationship between social performance and financial performance I will now start the empirical part of my research. Through empirical research I will answer the following research question:

4. Methodology

4.1 Data

The necessary data for my research will consist of: • List of European SRI funds

• Data on the screening strategy of European SRI funds • Financial data of the European SRI funds

European SRI funds and screening strategy

I have used the database of the European Social Investment Forum (Eurosif) to gather a list of all European SRI funds, and data on the screening strategies of all European SRI funds.

“The organisation Eurosif was created in 2001 to serve as an umbrella association to cover socially responsible investment issues at the European level. The approach to SRI has specific national characteristics linked to the particularities of the structure of financial markets and the legislative and cultural environments of each country. Eurosif takes these factors into account and addresses SRI issues with the European scope in mind”. (http://www.eurosif.org)

(29)

with basic information regarding SRI fund selection criteria. The fund’s financial information is sourced from Morningstar Europe, a leading provider of fund performance and risk data. The financial data is updated on a daily basis.

The database contains 300 European SRI funds. In this empirical research I will only analyse the European SRI funds that exist five years or longer (based on the inception dates provided by the database). The reason for this is that younger funds will not be able to give a reliable view on their financial performance. This leaves 193 European SRI funds. A list with the names of the 193 European SRI funds can be found in appendix 1.

(30)

Negative screens Positive screens

1 Firearms 1 Innovative and beneficial

products and services for the environment

2 Weapons and military contracting 2 Innovative and beneficial products and services for the quality of life

3 Nuclear energy 3 Responsible management of

relations with customers

4 Tobacco 4 Environmental protection

5 Gambling 5 Responsible management of

employees

6 Human rights violations 6 Human rights protection

(measures to prevent and control human rights violations) & supply chain

7 Labour right violations 7 Promotion of economic and social development of local communities

8 Oppressive regimes 8 Corporate Governance

9 Pornography 9 Fund investing according to the

Islamic religion principles

10 Alcohol 10 Fund investing according to the

Christian religion principles 11 Animal testing

12 Factory farming 13 Furs

14 Excessive environmental impact and natural resources consumption 15 Genetically modified organism 16 Products dangerous to

health/environment

Table 1 (based on the database of http://www.eurosif.org)

Financial data of the European SRI funds

Now that I have compiled the list of European SRI funds and their screening criteria it is time to focus on the financial data of the funds. To gather the financial data of the European SRI funds I will make use of a Bloomberg terminal6.

6

(31)

To gather financial data through the Bloomberg terminal I will need the Bloomberg code of every European SRI fund. After looking up the Bloomberg code of each fund I was able to use to use a Bloomberg terminal to collect the financial data of the European SRI funds. The Bloomberg code of every fund can also be found in appendix 1.

(32)

4.2 Statistical method

In this research I will empirically analyse if European SRI funds have a similar curvilinear relationship between social performance and financial performance as U.S. SRI funds. To be able to answer my research question I hall have to complete the following steps:

• Filter out the performance differences based on asset allocation8.

• Test if there is a curvilinear relationship between the screening intensity (social performance) and the “real” financial performance of every fund.

4.2.1 Filtering out the performance differences based on asset allocation

To filter out the influences of the different asset classes I make use of the asset class factor model of Sharpe (1992) which states that it is widely agreed that asset allocation accounts for a large part of the variability in the return on a typical investor’s portfolio. This means that the asset allocation of every European SRI fund will account for a large part of the variability in their financial performance. Once the asset classes have been defined it is important to determine the exposure of each asset class of the funds’ portfolio to movements in their returns. Sharpe (1992) states that once a procedure for measuring exposures to variations in returns of asset classes is in place, it is possible to determine how effectively individual fund managers have performed their functions and the extent to which value has been added through active management. To accomplish this I will make use of the asset class factor model of Sharpe (1992).

Linear factor models are used often in investment analysis. Equation (1) is a generic representation (Sharpe, 1992)

[

i i in n

]

i

i b F b F b F e

R~ = ₁~₁ + ₂~₂ +...+ ~ +~ (1)

(33)

i

R represents the return on SRI fund i, F represents the value of factor 1, _i₁ F the _i₂

value of factor 2, F the value of the n’th (last) factor and _in e the “non-factor” _i

component of the return on i. The values of the factors are unknown before-the-fact,

as indicated by the tildes. The remaining values (b through _i₁ b ) represent the _in

sensitivities of R to factors _i F through _i₁ F . _in

Sharpe (1992) states that a key assumption makes a model of this sort more than simply an exercise in data description: the non-factor return for one asset is assumed to be uncorrelated with that of every other. This means that the factors are the only sources of correlation among the returns of the SRI funds.

Sharpe (1992) states:

“An asset class factor model can be considered a special case of the generic type. In such a model each factor represents the return on an asset class and the sensitivities (b_ij values) are required to sum to 1 (100%).”

In effect, the return of an European SRI fund is represented as the return on a portfolio (shown by the sum of the terms in the bracketed expression) invested in the n asset

classes plus a residual component (e ). _i

Sharpe (1992) stated:

(34)

4.2.2 Evaluating the asset class factor model Sharpe (1992) states:

“The usefulness of an asset class factor model depends on the asset classes chosen for its implementation. While not strictly necessary, it is desirable that such asset classes be )1 mutually exclusive, 2) exhaustive and 3) have returns that differ.”

“Pragmatically, each should represent a market-capitalization weighted portfolio of securities; no security should be included in more than one asset class; as many securities as possible should be included in the chosen asset class; and the asset class returns should either have low correlations with one another or, in cases in which correlations are high, different standard variations.”

Asset classes

Based on the theory of Sharpe (1992) it is desirable that the asset classes used are mutually exclusive, exhaustive and have returns that differ. I have selected the asset classes based on these three criteria. I will be making use of five asset classes.

Asset class 1: Bills

This asset class is based on cash equivalents with less than 1 month to maturity Index: Euribor 1 month

Asset class 2: Long-term Government Bonds

This asset class is based on long-term government bonds Index: JP Morgan Global Government Bond EMU

Asset class 3: Large-capitalization growth stocks

This asset class is based on stocks in the MSCI Total Return Net Growth Europe index with low book-to-price ratios.

(35)

Asset class 4: Large-capitalization value stocks

This asset class is based on stocks in the MSCI Total Return Net Value Europe index with high book-to-price ratios.

Index: MSCI Total Return Net Value Europe

Asset class 5: Small-capitalization stocks

This asset class is based on stocks in the MSCI Total Return Net Small Cap Europe index with a relatively small capitalization.

Index: MSCI Total Return Net Small Cap Europe

4.2.3 Goodness of fit

Factor models can be evaluated by the on the basis of their ability to explain the returns of the assets in question. A useful metric is the “goodness of fit” which can be explained by the proportion of variance by the selected asset classes.

I will estimate a model with restrictions on the coefficients by using quadratic

programming9. This can cause that R is not between 2 0 and 1 anymore. However in

practice R is also used to measure the efficacy of a return based style analysis and 2

we will follow this practice (Sharpe, 1992).

The traditional definition looks like this:

(36)

If the model doesn’t fit at all then Var

( )

ε

)_t is at maximum equal to Var

(

R_tfund

)

and

therefore R has a minimum of 2 0.

The right side of the equation equals 1 minus the amount of variation that can not be

“explained” by the asset classes. TheR of every European SRI fund can be found in 2

appendix three. R values 0% - 30% are coloured red, 30% - 75% yellow, and 75% - 2

100% are coloured green. I have experimented with multiple asset classes and the

(37)

4.2.4 Determining fund exposures

Now that I have reviewed the asset class factor model of Sharpe (1992) is time to explain how I will use this model to determine the funds’ exposure to the different asset classes

In this research the returns of the European SRI funds will be used to infer the typical exposures to the different asset classes. As stated before I will be using the asset class factor model based on research conducted by Sharpe (1992). After I have calculated the funds’ exposure to the different asset classes the “real” performance of the funds will be filtered out.

This is the equation (1) that I will be used to determine the funds’ exposure to the different asset classes.

t t t t t t fund t SI SI SI SI SI R =

α

+

β

₁* ₁_, +

β

₂* ₂_, +

β

₃* ₃_, +

β

₄* ₄_, +

β

₅* ₅_, +

ε

fund t

R Monthly return of the fund

α

Intercept of the regression equation otherwise stated, the excess return of the

fund after correction for the style index returns

i

β

The sensitivity of Rfund to SI _i

∑

= = = ≤ ≤ 5 1 1 5 ,..., 2 , 1 : 1 0 i i i

β

i SI Style index

(38)

I have gathered the monthly return data, over a period of five years, of every European SRI fund and the comparable returns of the five style indexes (asset classes). I have gathered this data by using the same Bloomberg terminal as stated before.

After this I employed a multiple regression analysis with the fund returns as the dependent variable and the asset class returns as the independent variables. The resulting slope coefficients can be interpreted as the funds’ historic exposures to the asset class returns. The objective of this analysis is to select a set of coefficients that

minimizes the “unexplained” variation in returns (variance of

ε

_t), subject to the stated

constraints. An equivalently goal was to maximize the associated value of _{R , subject}2

to the stated constraints. For this analysis, the presence of inequality constraints

(0≤

β

_i ≤1:i=1,2,...,5) required the use of a quadratic programming algorithm.

(39)

4.2.5 Financial performance VS screening intensity

Now that I have gathered all the necessary data in the previous part of my thesis I can conduct the analysis that will lead to the answer of my research question.

After determining the exposure to the five asset classes and filtering out the “real” performance of every European SRI fund it will be possible to analyse if the relationship between the funds’ financial performance and social performance is curvilinear. As stated before the social performance of every European SRI fund will be measured by the amount of screening criteria used by every fund.

Appendix 4 contains a table with the filtered financial performance (C) and the number of screening criteria applied by every European SRI fund. Based on this data I will conduct a curvilinear-regression analysis to test if the European SRI funds have the same curvilinear relationship between social performance (# of screening criteria) and financial performance. The financial performance of the SRI funds will be treated as dependent variable and the number of screening criteria as independent variable.

The next pages will show the SPSS output for this analysis.

(40)

Curve Fit and Curvilinear Regression (Quadratic Function)

Model Description MOD_2 Perfor Quadratic Criteria Included Fonds ,0001 Model Name 1 Dependent Variable 1 Equation Independent Variable Constant

Variable Whose Values Label Observations in Plots

Tolerance for Entering Terms in Equations

Case Processing Summary

194 1 0 0 Total Cases Excluded Casesa Forecasted Cases Newly Created Cases

N

Cases with a missing value in any variable are excluded from the analysis. a.

Variable Processing Summary

22 193

1 0

170 0

0 0

1 1

Number of Positive Values

Number of Zeros

Number of Negative Values

User-Missing System-Missing Number of Missing Values Perfor Dependent Criteria Independent Variables

Model Summary and Parameter Estimates Dependent Variable: Perfor

(41)

(42)

5. Results

The results of the curvilinear-regression analysis show that there is no significant relationship between the dependent variable, financial performance, and independent variable, the screening intensity (social performance) of the European SRI funds.

022 . 0 2 = R

A value of 0.022 forR is relatively low. This implies that only 2% of the variation in 2

performance can be explained by the screening intensity of the European SRI funds.

Probability (p-value) = 0.122

The lower the p-value, the higher the significance will be between the financial performance and the social performance of the European SRI funds. To prove the statistical significance between the financial performance and the social performance I will make use of a p-value of 0.05.

a p=0.122>0.05=

Based on a p-value of 0.122 it is clear that there is no significant curvilinear relationship between the financial performance and the social performance of the European SRI funds.

Outliers

(43)

Curve Fit and Curvilinear Regression (Quadratic Function)

without 3 outliers

[DataSet0] Model Description MOD_3 Perfor Quadratic Criteria Included Fonds ,0001 Model Name 1 Dependent Variable 1 Equation Independent Variable Constant

Variable Whose Values Label Observations in Plots

Tolerance for Entering Terms in Equations

Case Processing Summary

190 0 0 0 Total Cases Excluded Casesa Forecasted Cases Newly Created Cases

N

Cases with a missing value in any variable are excluded from the analysis. a.

Variable Processing Summary

19 190

Number of Positive Values

Perfor Dependent

(44)

Model Summary and Parameter Estimates Dependent Variable: Perfor

,025 2,392 2 187 ,094 -,202 -,019 ,001 Equation Quadratic R Square F df1 df2 Sig. Model Summary Constant b1 b2 Parameter Estimates

The independent variable is Criteria.

(45)

Without outliers: 025 . 0 2 = R

Without the 3 outliers the value of R is still very low. Only 2,5% of the of the 2

variation in performance can be explained by the screening intensity of the European SRI funds.

Probability (p-value) = 0.094

Without the three outliers the significance has decreased from 0.122 to 0.094. This increase in significance still isn’t enough to prove a curvilinear relationship between the social performance and the financial performance of the European SRI funds.

a p=0.094>0.05=

(46)

6. Conclusion

My research is in line with the research that has been conducted by Barnett and Salomon (2006), in which they found a curvilinear relationship between the screening intensity (social performance) and the financial performance of U.S. SRI funds.

The research question arises by combining the modern portfolio theory and the stakeholder theory. The modern portfolio implies that SRI funds that have weak social responsibility standards will have more potential investments to choose from, thereby increasing their chances to achieve ample diversification and because of this increasing financial performance. The stakeholder theory implies that an increase in an SRI fund’s social responsibility will lead to having less potential investments to choose from which will lead to a lower financial performance. However, this negative effect will be offset as the stringency of social screening intensifies. The SRI funds that screen their investments elaborately will benefit from improved selection of investment targets. This implies that SRI funds that have a low screening intensity will have a relatively high financial performance and SRI funds that have a high screening intensity will also have a relatively high financial performance, leading to a curvilinear relationship.

(47)

7. Future research

Use of panel data

The presence of panel data on the number of screening criteria used by every European SRI fund might be able to lead to more accurate results. The database of Eurosif only states the amount of screening criteria used by every European SRI fund at this moment. Analysing the changes through time in screening criteria of every European SRI fund, and the relationship with its financial performance could lead to interesting outcomes.

Extension of style-model

Extending the style model by adding more style indices (asset classes) could lead to a higher “goodness of fit”, which could lead to a more accurate representation of the “real” performance of the European SRI funds.

Control variables (age, total assets)

For future research it would be interesting to use the age and the total assets of every European SRI fund as control variables to analyse their influence on the financial performance of every European SRI. Using these control variables could lead to clearer outcomes on the relationship between social performance and financial performance.

Weighting of screening criteria

(48)

8. References

Alexander G, Buchholz R. 1978. Corporate Social Responsibility and Stock Market

Performance. The Academy of Management Journal, Vol. 21, No. 3 (Sep., 1978):

479-486

Barnett M, Salomon R. 2006. Beyond dichotomy: The curvilinear relationship

between social responsibility and financial performance. Strategic Management

Journal, Nov2006, Vol. 27.

Campbell J, Lettau M, Malkiel B, and Xu Y. 2001. Have Individual Stocks Become

More Volatile? An Empirical Exploration of Idiosyncratic Risk. The Journal of

Finance, Vol. 56, No. 1 (Feb., 2001): 1-43.

Cochran P, Wood R. 1984. Corporate social responsibility and financial performance.

Academy of Management Journal 27(1): 42-56.

DiBartolomeo D, Kurtz L. 1999. Managing risk exposures of socially screened portfolios. Northfield Information Services working paper.

Diltz JD. 1995. The private cost of socially responsible investing. Applied Financial

Economics 5: 69–77.

Fisher L, Lorie J. 1970. Some studies of the variability of returns on investments in

common stocks. Journal of Business 43(2): 99–134.

Fombrun CJ, Gardberg NA, Barnett ML. 2000. Opportunity platforms and safety nets:

corporate citizenship and reputational risk. Business and Society Review 105(1): 85

106.

Freeman R. 1984. StrategicManagement: A Stakeholder Approach. Pitman: Boston,

(49)

Friedman M. 1970. The social responsibility of business is to increase its profits. New York Times Magazine 13 September: 122–126.

Geczy C, Stambaugh R, Levin D. 2003. Investing in socially responsible mutual funds. Wharton School of Business working paper.

Glassman JK. 1999. Letting your conscience be your investment guide. Houston

Chronicle 8 February: 4.

Goetz T. 1997. Dealing with the devil. Village Voice 19 August: 43–44.

Greening D, Turban D. 2000. Corporate social performance as a competitive

advantage in attracting a quality workforce. Business and Society 39(3): 254–280.

Guerard JB Jr. 1997. Is there a cost to being socially responsible in investing? Journal

of Investing 6(2): 11–18.

Hamilton S, Jo H, Statman M. 1993. Doing well while doing good? The investment

performance of socially responsible mutual funds. Financial Analysts Journal,

November–December: 62–66.

Hillman A, Keim G. 2001. Shareholder value, stakeholder management, and social

issues: what’s the bottom line? Strategic Management Journal 22(2): 125–139.

Jensen M. 2002. Value maximization, stakeholder theory, and the corporate objective

(50)

Luck C, Pilotte N. 1993. Domini Social Index performance. Journal of Investing 2:

60–62.

Margolis J, Walsh J. 2003. Misery loves company: rethinking social initiatives by

business. Administrative Science Quarterly 48: 268–305.

Markowitz H. 1952. Portfolio selection. Journal of Finance 7(1): 77–91.

McWilliams A, Siegel D. 2000. Corporate social responsibility and financial

performance: correlation or misspecification? Strategic Management Journal 21(5):

603–609.

Moskowitz M. 1972. Choosing socially responsible stocks. Business and Society

Review 10: 71–75.

Mueller S. 1991. The opportunity cost of discipleship: ethical mutual funds and their

returns. Sociological Analysis 52: 111–124.

Orlitzky M, Schmidt F, Rynes S. 2003. Corporate social and financial performance: a

meta-analysis. Organization Studies 24: 403–441.

Rowley T, Berman S. 2000. A brand new brand of corporate social performance.

Business and Society 39(4): 397–418.

Rudd A. 1979. Divestment of South African equities: how risky? Journal of Portfolio

Management 5(3): 5.

Sauer D. 1997. The impact of social-responsibility screens on investment

performance: evidence from the Domini 400 Social Index and Domini Equity mutual

funds. Review of Financial Economics 6(2): 137–149.

(51)

Sharpe W. 1992. Asset allocation: management style and performance measurement.

Journal of portfolio management: 7-19.

Statman M. 2000. Socially responsible mutual funds. Financial Analysts Journal

May/June: 30–39.

Teper J. 1992. Evaluating the cost of socially responsible investing. In The Social

Investment Almanac (1st edn): 340–349.

Turban D, Greening D. 1997. Corporate Social Performance and Organizational

Attractiveness to Prospective Employees. The Academy of Management Journal, Vol.

40, No. 3: 658-672

Ullmann A. 1985. Data in search of a theory: a critical examination of the relationship

among social performance, social disclosure, and economic performance. Academy of

Management Review 10: 450–477.

Waddock SA, Graves SB. 1997. The corporate social performance–Financial

(52)

9. Appendices

9.1 Appendix 1

Name Fund BB-code

# of criteria

Inception date

1 3 Banken Nachhaltigkeitsfonds T (t) 3BKOEKG AV 1 01/10/2001

2 Aberdeen Ethical World Fund A Acc MUREWAA LN 12 01/05/1999

3 ABN AMRO Sustainable Global Equity A Acc AASREQA LX 13 12/03/2001

4 AEGON Ethical Corporate Bond Fund A Acc SCOUSRA LN 14 28/04/2000

5 AEGON Ethical Equity A Retl Acc NAV SCEETHA LN 14 17/04/1989

6 AGF Euro Actions (C) AGFEUAC FP 9 01/06/1998

7 AGF Valeurs Durables R (C) AGFOPID FP 10 02/07/1991

8 Altervision Balance Europe C Acc ALV2835 BB 8 13/11/1998

9 ASN Aandelenfonds ASNA NA 6 20/04/1993

10 ASN Milieu & Waterfonds ASNMILA NA 6 02/07/2001

11 ASN Mixfonds ABFF NA 6 12/10/1990

12 Athena World Equity Acc ATHRWEC BB 8 25/04/2000

13 Aureo Finanza Etica Acc AURPIAN IM 18 16/09/2002

14 AXA Ethical Fund R Acc AXASLEI LN 12 05/05/1998

15 AXA Euro Valeurs Responsables (C) AXAEUNC FP 2 25/07/1996

16 AXA Framlington Health Acc FRAHEAI LN 5 03/04/1987

17 B1 Ethical Index Euro Inc B1ET IM 14 08/01/2003

18 Banco Etisk Global Utd BANETIS SS 7 30/12/1998

19 Banco Hjälp BANHJAL SS 6 29/09/1995

20 Banco Humanfonden BANHUMA SS 7 28/06/1990

21 Banco Ideell Miljö BANIDEE SS 7 15/01/1990

22 Banco Samaritfonden BANSAMA SS 7 21/02/1994

23 Banco Svensk Miljö SVEMILJ SS 1 30/09/1994

24 Bnl per Telethon Acc BNLTELE IM 16 15/11/2000

25 BNP Paribas Etheis (D) BNPETHE FP 1 15/05/2002

(53)

# of criteria

32 CAAM Activaleurs Durables C/D ATOUTVL FP 8 01/09/2000 33 Carnegie Worldwide Ethic Acc CARETHI LX 3 27/12/2000

34 Choix Solidaire (C) ECOQUTR FP 7 01/03/2000

35 CIS Sustainable Leaders Trust Inc CISENVI LN 12 29/05/1998 36 CM-CIC Valeurs Ethiques (C) CMVALTH FP 7 16/06/2000 37 Cortal MultiSicav Avenir + (C) CORMAPL FP 9 27/04/1998 38 Dexia Eqs L Sust World C Acc DEXLWWC LX 19 01/08/2000 39 Dexia Ethique Gest Divers C (C) DEXDIVC FP 19 03/04/2000 40 Dexia Ethique Gest Oblig C (C) DEXETHO FP 19 22/03/2000

41 Dexia Sust EMU C Acc BAC6238 BB 19 09/06/2000

42 Dexia Sust Euro Bal High C Acc STI2826 BB 19 03/11/1998 43 Dexia Sust Euro Bal Low C Acc BAC2359 BB 19 01/04/1996 44 Dexia Sust Euro Bal Medium C Acc BAC2360 BB 19 01/04/1996

45 Dexia Sust Europe C Acc BAC6167 BB 19 03/04/2000

46 Dexia Sust North America C Acc BAC6220 BB 19 12/05/2000

47 Dexia Sust Pacific C Acc BAC6413 BB 19 15/09/2000

48 Dr. Hoeller PRIME VALUES Div Eurp (t) GPVAKTE AV 7 01/06/2001 49 Dr. Hoeller PRIME VALUES Income EUR (t) PRIVALD AV 7 28/12/1995 50 Ducato Etico Flex Civita Acc DUCCIVI IM 7 04/06/2001

51 Ducato Etico Geo Acc DUCAMBI IM 8 04/06/2001

(54)

Name Fund BB-code # of criteria Inception date 68 EuroSociétale (C) SICEURS FP 3 16/04/1999

69 Faim et Développement Equilibre (C) BTPFDEQ FP 9 02/11/2000

70 Fair Invest Balanced T Acc FAIRBLA AV 5 13/05/2002

71 Family Charities Ethical Trust Acc FAMUCEI LN 9 30/09/1999 72 FCP Habitat et Humanisme C/D EPSOLPL FP 7 18/02/1994 73 Federal Actions Ethiques P C/D FEDETHI FP 3 30/06/2000 74 Foncaixa Priv. F. Activo Ético FI Acc FONDOET SM 5 09/04/1999 75 Fondo Solidario Pro-Unicef FI Acc FNSOLIP SM 3 16/06/1999 76 Fonds für Orden und Ökumene INVESCO Acc ORDOEKI GR 19 04/04/2000

77

Fortis L Fund Equity Socially Responsible Europe

Acc INT4674 LX 3 15/03/2002

78 Fortis L Fund Strategy Balanced SRI Europe Acc FOBLEUR LX 1 01/06/1998 79 Fortis L Fund Strategy Growth SRI Europe Acc FORSGEI LX 1 01/06/1998 80 Fortis L Fund Strategy Stability SRI Europe Acc FORSSEI LX 1 01/06/1998

81 Gerling Select 21 Acc GERLG21 GR 9 21/01/2000

82 Gestielle Etico Azionario GESETAZ IM 13 02/09/2002

83 Gestielle Etico Obbligazionario GESETOB IM 2 02/09/2002 84 GreenEffects NAI-Wertefonds Acc GEFINVL ID 17 04/10/2000

85 Halifax Ethical C Inc HAETHCI LN 3 16/09/2002

86 Henderson Global Care Growth Fund Inc NPIGLCI LN 20 08/01/1991 87 Henderson Global Care Managed Fund X NPIGCMI LN 13 14/10/1998 88 Henderson Global Care UK Income Inc NPIGLBI LN 19 07/03/1995 89 HSBC Développement Durable A C/D SELVINGT FP 4 29/12/1995

91 HYPO Global Value T (t) SWSAUU1 AV 11 15/03/1991

92 ING (L) Invest Sustainable Growth X Acc INGLSGC LX 17 10/07/2000 93 ING Duurzaam Rendement Fonds Inc INGDURE NA 19 03/03/2000 94 Insight Inv Evergreen Retail Acc CMEVGIA LN 12 13/03/2000 95 INVESCO Umwelt-u.Nachhaltigkeits-Fds Acc FGTUMWT GR 12 18/10/1990 96 JPM Global Socially Responsible A (dist) - USD FLEMGSC LX 9 30/09/2002

97

Julius Baer Multipartner - SAM Sustainable Leaders

B Acc SAMINDX LX 4 29/10/1999

98

Julius Baer Multipartner - SAM Sustainable Water B

Acc JBSAMSW LX 6 28/09/2001

(55)

# of criteria

101 KBC Click Ethiclick 1 Acc KBCCET1 BB 4 07/08/2000

102 KBC Click Solidarity 1 - Kom Op Tegen Kanker Inc KBCSOL3 BB 11 06/04/2001 103 KBC ECO Fund Sustainable Euroland Acc KBEEEUC BB 4 29/12/2001

104 KBC ECO Fund World Acc KBE2028 BB 4 04/05/1992

105 KBC ECO Fund Alternative Energy Acc KBEALTE BB 17 31/10/2000

106 KBC ECO Fund Water Inc KBEWATR BB 16 08/12/2000

107 KCD-Union Nachhaltig Aktien (a) KCDAKTI GR 11 01/03/2001 108 KCD-Union Nachhaltig RENTEN (a) KCDRENT GR 11 01/03/2001 109 KEPLER Ethik Aktienfonds A Inc KEPETKT AV 15 01/07/2002 110 KEPLER Ethik Rentenfonds T Acc K07FUND AV 13 05/05/2003 111 KEPLER Sustainability Aktienfonds A Inc KEPSAKT AV 9 28/10/2000 112 LBPAM Actions Developpement Durable (C) POETHIC FP 3 05/11/2001

113 LBPAM Voie Lactée 1 (C) VOILAC1 FP 2 10/09/1997

114 Libertés & Solidarité C/D PLIBSOL FP 4 24/07/2001 115 LIGA-Pax-CattolicoUnion Inc LIGPCAT LX 1 22/11/2002 116 LODH Invest Alto RI Global Equity Fund P A Acc LOMQUGA LX 4 08/12/1997 117 Macif Croissance Durable (C) MACROIC FP 4 18/06/1999 118 Macif Croissance Durable et Solidaire (C) MADUSOL FP 5 26/04/2002 119 Macif Croissance Durable Europe (C) MACRODC FP 4 09/01/2001 120 MAM Actions Environnement (C) MEESAEN FP 1 24/11/2000

121 MAM Actions Ethique (C) MEESAET FP 7 02/07/1998

122 Meridio Green Balance Acc DABMGBC LX 5 04/12/2000

123 MG Croissance Durable Europe (C) MACMGEC FP 4 09/01/2001 124 MG Obligations Développement Durable (C) MACMGOC FP 5 24/10/1994

125 MI-FONDS (LUX)-ECO B Acc JBPECOA LX 11 29/06/1999

(56)

# of criteria

134 Norwich Sustainable Future Managed 1 Inc NUSFMG1 LN 15 19/02/2001 135 Norwich Sustainable Future UK Growth 1 Acc NUSFUGI LN 15 19/02/2001 136 Norwich UK Ethical Fund A Acc NORUKE1 LN 15 28/02/2003

137 Nouvelle Stratégie 50 (C) NVSTR50 FP 4 22/04/1983

138 Objectif Ethique Socialement Responsable C/D LOBETHQ FP 3 01/06/2001

139 Orange SeNSe Fund OSENS NA 5 14/10/2002

140 PF(LUX)-European Sustainable Eqs P Acc PTFSEEP LX 14 30/09/2002 141 Pictet(CH)-Ethos Swiss Sustainable Eq P Inc PICSEQS SW 14 08/09/1999

142

Pioneer Funds - Global Sustainable Equity Class E

EUR Non-Distributing EFGLENV LX 11 28/06/2000

143 Postbank Duurzaam Aandelenfonds POSDUAN NA 19 27/03/2001 144 Postbank Dynamik-Vision Acc PBKDVIS LX 4 16/06/2001 145 Prudential Ethical Trust Acc SCAETHA LN 10 05/04/1999 146 Raiffeisen Futura Global Bond A Inc VRFGLBD SW 15 08/06/2001 147 Raiffeisen Futura Global Stock A Inc VRFGLST SW 15 08/06/2001 148 Raiffeisen Futura Swiss Franc Bond A Inc VRFSWBD SW 15 08/06/2001 149 Raiffeisen Futura Swiss Stock A Inc VRFSWST SW 15 08/06/2001 150 Raiffeisen-Ethik-Aktien A StO Inc RAIETAA AV 5 13/05/2002 151 Rathbone Ethical Bond Fund Acc RATETBI LN 22 07/05/2002

152 Robeco DuurzaamAandelen RGDUAAF NA 11 09/02/1999

153 s EthikAktien T Acc ETHIKAA AV 8 02/05/2002

154 Santander Dividendo Solidario FI Acc BCHSOLI SM 4 03/06/1999 155 Sarasin Euro Mid-Caps Expansion Durable (C) EUMCEDU FP 12 25/08/2000 156 Sarasin Europe Expansion Dur C/D EXPEXDU FP 12 01/07/1999 157 Sarasin New Energy Fund EUR Acc SARENER LX 5 01/12/2000 158 Sarasin OekoSar Portfolio Inc SAROEKI LX 14 16/02/1994 159 Sarasin Sustainable Bond EUR Inc SARSUSE LX 14 06/01/2003 160 Sarasin Sustainable Equity - Global Inc SARVALS LX 14 01/06/1999 161 Sarasin-FairInvest-Bond-Universal-Fonds (a) SARFBDU GR 13 02/12/2002 162 Sarasin-FairInvest-Universal-Fds I (a) SARFAIR GR 13 30/03/2001 163 Scottish Widows Environmental Investor A Acc TSBENVA LN 8 29/06/1989 164 Scottish Widows Ethical Fd A Acc SWETHAA LN 10 29/06/1987

165 SEB Cancerfonden SEBCANC SS 4 04/01/1999

166 SEB Etisk Globalfond SEBETGL SS 7 21/10/1991

(57)

# of criteria

169 SEB ÖkoLux Acc LUXOEKO LX 14 19/02/1999

170 SEB ÖkoRent Inc LUXIOEI LX 15 28/11/1990

171 SEB Östersjöfond/WWF Utd SEBOWWF SS 4 01/02/1999

172 SGAM Invest Europe Développement Durable (C) SGEUETH FP 17 15/05/2000

173 Skandia Idéer För Livet SKAAIDL SS 4 17/10/1995

174 SNS Duurzaam Aandelenfonds SNSBECA NA 12 02/11/1998

175 Sovereign Ethical Inc SOVETHI LN 9 23/05/1989

176 SPP Aktieindexfond Global Sustainability SPPAKGS SS 9 25/05/2000 177 Standard Life UK Ethical R Acc STLUKEA LN 16 13/02/1998 178 SUPERIOR 1 - Ethik Renten Inc SUPR1FD AV 15 08/05/1989

179 SUPERIOR 3 - Ethik Inc SUPR3FD AV 15 18/11/1991

180 SUPERIOR 4 - Aktien Inc SUP4AKT AV 15 01/08/1997

181 SWIP Global SRI E Acc SWGEEE1 LN 11 23/07/2002

182 SWIP Pan-European SRI Equity E Acc SWPESAA LN 11 31/08/2001 183 Swisscanto (CH) EF Green Invest A Inc SWCGREE SW 11 09/11/1998

184

Swisscanto (LU) Portfolio Fund Green Invest

Balanced A Inc SWGRBAL LX 11 30/11/2001

185

Swisscanto (LU) Portfolio Fund Green Invest Equity

B Acc SWGREQU LX 11 30/11/2001

The relationship between social performance and financial performance of European SRI funds