THE SOCIALLY RESPONSIBLE INVESTING FUND PERFORMANCE: EVIDENCE FROM CHINA, JAPAN AND SOUTH KOREA

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THE SOCIALLY RESPONSIBLE INVESTING FUND

PERFORMANCE: EVIDENCE FROM CHINA, JAPAN

AND SOUTH KOREA

Master thesis, Msc, Finance

University of Groningen, Faculty of Economics and Business June 26th, 2015

Student name: Gong Chen Student number: S2735687 Email: G.Chen.4@student.rug.nl

Supervisor: Auke Plantinga

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ABSTRACT

The Socially Responsible Investing industry is growing rapidly in Asian markets. This paper examines the performance of 182 SRI mutual funds in China, Japan and South Korea markets using CAPM model and Carhart four-factor model. We draw three conclusions in this paper. First, SRI funds focus on different sectors generate significantly different abnormal returns. Second, the performance of SRI funds is decreasing over time in three sample countries during the sample period. Third, SRI funds that more violate to the SRI strategies as they claimed are generating higher abnormal return.

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During the past few decades, the human race is facing more and more social and environmental problems such as pollution, global warming, nuclear contamination and drug dealing. In the meantime, growing concerns about these ethical issues drive investors to seek for a different way of investing that can satisfy their financial objective on one hand and can take the social responsibility into consideration on the other. This is the origin of Socially Responsible Investment (SRI) which can be dated back to hundreds of years ago when the Catholic Church inhibited usurious interest related to illegal lending (Ballestero, Bravo, Pérez-Gladish, Arenas-Parra, & Plà-Santamaria, 2012).

Socially Responsible Investing (SRI) is also known as ethical or sustainable investment (Renneboog, Ter Horst and Zhang, 2008). SRI funds provides an investment strategy to many investors who seek a financial return that is in line with their social morality. SRI originates mainly from environmental friendly individual investors who look for a way to make their investment correspond to their investment beliefs (Statman 2008). However , beside environment perspective, a SRI strategy can include more different elements for instance education, human rights, social healthcare and other categories (Domini, 2001). Normally SRI investors exclude the so-called “sin stocks” such as gambling, tobacco and alcohol, when they make their investment plan, while they prefer companies that are more engaged with environmental, social and governmental behaviours. The social responsible investing is even regarded as a solution to the moral crisis of capitalism since the break out of subprime crisis (Capelle Blancard and Monjon, 2012).

The modern development of SRI can be dated back to the 1960’s when there is an increasing social awareness of investors on some ethical issues (Bauer, Koedijk, and Otten, 2005). In 1990s, The strong stock market and the growing interest from institutional investors helped the SRI expand in both the US and Europe markets while in Asia market the SRI was still a relatively new concept at that time, especially in some emerging countries such as China, Malaysia, Indonesia and South Korea. Most emerging countries focused their develop priority on economic growth thus the socially responsible consideration is more or less neglected. Until recent years, the SRI has significantly expanded in Asian-Pacific markets (Managi, Okimoto, and Matsuda, 2012).

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5 US sustainable and responsible investing market has raised by 929 percent with a compound yearly increase rate of 13.1 percent since 1995 when this market was first measured (US SIF 2014). The same story is also happening in European market. The growth rate of European SRI market reaches 21.7 percent between 2011 and 2013 and the impact investing strategy is the fastest growing one (EUROSIF 2014). With the raising trend of development of SRI investment, it is interesting to put efforts in studying the performance of SRI stocks, funds and indexes.

In recent years, Social Responsible Investing in emerging markets is in its infant, compared to that in developed markets such as United States and Europe, the emerging markets have therefore experienced extraordinary expansions in SRI area within past five years. There has been a stable and remarkable evolution in Asia’s SRI market since 2011. There were 44.9 billion of assets in Asia being managed under environmental, social and governmental criteria by the end of 2013 and the growth rates annually are around 22 percent since 2011 (ASRIA 2014). There are around 500 SRI funds available in Asia markets by the year of 2013 and the largest SRI market is Malaysia (34% of the total amount ). In addition, the fastest growing market is Indonesia market. The booming increase of these two countries is attributed to the impact of Islamic investing because the Sharia principles require extra ethical screening (e.g. exclusion of alcohol industry due to religious beliefs) to conventional asset management (ASRIA 2014). However, our study mainly focus on the environmental and social perspective, the Islamic Investing funds are excluded in the data of this study.

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2. LITERATURE REVIEW

In this section, we review some early studies about SRI stocks, SRI funds and SRI indexes. These three research dimensions are firmly associated with the research topic in our study. Most of the former studies compare the performance of SRI portfolios with conventional (or non-SRI) portfolios. Some of the empirical results indicate that there are no significant differences between ethical screened funds and traditional funds. Bauer, Koedijk and Otten (2005) reviews and extends previous research on ethical mutual fund performance by examining 103 German, UK and US ethical mutual funds. They apply the Carhart (1997) four-factor model and find that SRI funds outperform conventional funds in the UK while in the US and Germany the SRI funds underperform conventional funds. Diltz (1995) estimates different investment dimensions of SRI stocks in US stock market and concludes that only military and environmental criteria screening can lead to a positive return while other screening do not have impact on the stock performance. Guerard (1997) finds out that SRI portfolio and non-SRI portfolio show no difference in the performance perspective. Hamilton, Jo and Statman (1993) and Statman (2000) compare the returns of social responsible to that of conventional US funds and to both SandP 500 and Domini Social Index (DSI). They find no evidence suggests any difference between the return of social responsible funds and that of regular funds. Bauer, Derwall and Otten (2007) examine the performance of Canadian ethical mutual funds and compare them with that of the conventional funds by using both single factor model and multi-factor model. Results from both single and multiple factor model indicate that there exists no significant difference between the ethical mutual funds and conventional funds in Canada.

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8 to the confusing results, differences in sample size, time horizon and the selection of benchmarks may also be relevant.

Besides the attentions to SRI performance, there are also numerous studies focusing on the fundamental analysis in firm level and attempt to find out the relationship between the Corporate Social Responsibility (CSR) performance and Corporate Financial Performance (CFP). These studies may provide insights for SRI performance study from another perspective. Friedman (1970) argues that the only responsibility of corporations is to maximize their profit and shareholder value. He believes that it is the government’s duty, not firms, to deal with market externalities and provide social goods (Friedman, 2007). Contrary to this point of view, some early economists and socialists maintain that firms should not only consider their shareholder value but also take their social responsibility and reflect the stakeholder’s benefit as well even if such concession may decrease shareholder value (Holme, Richard, and Watts, 1999). This idea is in line with the original intentions of SRI investors. SRI investors will probably have interested in the answer of whether a higher CSR performance leads to a higher CFP. Renneboog et al., (2008) further suggest that extra screening on unethical firms (firms related to tobacco, alcohol, gambling and weapons industries) would lead to a less diversified portfolio thus may negatively influence the adjusted return of the fund. Hence, SRI funds should be expected a weaker performance than regular funds. However, the opposition to this theory claims that Socially Responsible Investing is a favourable strategy in the long run as it would probably reduce the capital cost of a company and risks that the company may conflict with the future social, environmental and governmental regulations (e.g. El Ghoul, Guedhami, Kwok, and Mishra. 2011, Gregory, Tharyan, and Whittaker, 2014 and Henriques and Sadorsky 2010). Furthermore, Heinkel, Kraus and Zechner (2001) create an equilibrium model that estimates the impact of the exclusion of polluting firms by socially responsible investors in an efficient market (e.g. “green” investors would only hold stocks of “green” firms in this model). They state that an exclusion strategy makes polluting firms being held by less and less investors (the equilibrium model assumes the number of investors in the market are constant), this could lead to negative impacts on the stock prices of polluting firms and thus would increase their capital cost. As a result, SRI funds may generate higher return than conventional funds in a long-term perspective.

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9 Responsible Investing and explore the internal and external drivers of Social Responsible Investing in Japan. This paper discusses the mechanism of SRI in Japan and provides an outlook of its future development. Managi, Okimoto and Matsuda (2012) compare the performance of Japan MS- SRI index and Tokyo Stock Price Index and find that there is no statistical difference in the characteristics between the SRI index and conventional index.

3. DATA AND METHODOLOGY

3.1 Market overview

In 2014, the Association for Sustainable & Responsible Investment in Asia (ASrIA), a leading institution aims at the development of SRI market in Asia, released its annual report of sustainable investment review. This report demonstrates that the SRI markets are growing rapidly within the Asia Pacific area. Our study is based on monthly returns of Chinese, Japanese and South Korean SRI funds. The reason to choose these three markets are explained as follows. First of all, Japan is one of the few developed country in Asia and its economy is the third largest in the world, the second largest in developed countries. Also, Japan is a leading SRI country in Asia with the most mature socially responsible investing market compare to other Asian markets. Moreover, China, the second largest economy in the world by nominal GDP and the largest economy in developing countries, shows a growing concerns on environmental and social issues, therefore Socially Responsible Investing has become an critical topic to be studied and discussed. In addition, South Korea as a member of G20 major economies, also refers to a leading status in Asian economy. Needless to say, China, Japan and South Korea are three of the most representative countries in Asia. Conducting research on these three countries may deliver both theoretical and practical implications to scholars and investors who are interested in this field.

3.2 Mutual fund data

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10 most of their assets in the equities of new energy companies which are engaged in exploring alternative energy technologies. Global Warming Prevention category contains funds that mainly invest in companies which are involved in global warming prevention activities all around the world. Low carbon industry is also targeted by these funds. Water Conservancy category collects funds that generally focus on global water resource protecting industries including public water supply, efficient utilization of water sources and water resource management. Sustainable Development category covers funds that allocate their assets in sustainable developing companies which are aiming at long-term value creation for example, companies with customer and employee friendly policies and local cultural respect policies. Social Healthcare category consists of funds that focus devote to promote social health care quality and accessibility.

Table 1

Summary statistics of SRI mutual funds

This table presents the statistical summary of Asia SRI mutual funds in China, Japan and South Korea. The first column shows the number of SRI funds in the country. The second column provides the annualized average return of these countries. The third and fourth column illustrate the standard deviation and skewness of the return of all SRI mutual funds within the country. The last column presents the Sharpe Ratio of all SRI mutual funds in these countries in percentage scale.

Sources: Thomson Reuters Datastream.

Country # of SRI Return % Standard Skewness Sharpe

mutual funds (annually) Deviation ratio %

China 4 13.96 0.81 1.02 8.46

South Korea 122 -1.01 0.53 -1.03 -12.89

Japan 56 10.74 0.66 -0.34 16.27

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11 Korea Market is far below zero because the excess return of South Korea funds are generally negative in our sample period. One explanation for the negative excess return is the impact of the continuously weak economy in South Korea in the last few years. The specific investment beliefs and investment style of South Korean SRI fund managers might be another reason. The Japanese and South Korean SRI funds have a negative skewness within the sample period while the Chinese SRI funds has a positive skewness. The returns of Chinese funds are shifted to positive tail and are therefore more likely to be positive during the sample period while Japanese and South Korean funds on the contrary. This result is consistent with the previous study indicates that the SRI funds in Asia Pacific area significantly underperform the benchmark portfolios. (Renneboog et al., 2008).

3.3 Factor benchmark

Various of benchmark series are required to assess fund performance when employing regression approach. Besides the CAPM model, we also applied the Carhart (1997) four factor model to measure the fund performance. The benchmark factors are the Fama and French (1993) three factors which include the market, size, and book-to-market ratio, and Carhart (1997) momentum factor. Additionally, we create the SRI factor to measure the SRI engagement of the funds.

Table 2

Proxy and Risk Free Rate

China Japan South Korea

Market Benchmark MSCI China MSCI Japan MSCI Korea

Small Cap MSCI China Small Cap MSCI Japan Small Cap MSCI Korea Small Cap

Large Cap MSCI China Large Cap MSCI Japan Large Cap MSCI Korea Large Cap

High Book-to-market MSCI China Value MSCI Japan Value MSCI Korea Value

Low Book-to-market MSCI China Growth MSCI Japan Growth MSCI Korea Growth

Momentum MSCI China Momentum MSCI Japan Momentum MSCI Korea Momentum

SRI/ESG MSCI China ESG MSCI Japan SRI MSCI Korea ESG

Risk Free Rate 3 Month Relending Rate 3 Month Gensaki Repo Rate 91 Day Certificate of Deposit

Table 2 presents the indexes which have been used as the proxy of market, size, value, momentum and SRI factors. The data of these indexes are obtained from the MSCI database based on monthly frequency. The returns of MSCI domestic indexes of each countries are regarded as the market returns. The risk free rates of different countries are also provided in Table 2. Normally the risk free interest rate is related to the short term investment in a financial instrument backed by the government. The risk free rates are selected based on the recommendation issued by Thomson Reuters Datastream and are obtained from their database.

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12 in return between MSCI value index and MSCI growth index. Finally, we consider the momentum factor which is computed by the returns of MSCI momentum index.

3.4 Methodology

In this study, we use the style analysis approach to measure the performance of the sample funds. First we estimate the CAPM model:

R

it

– R

ft

= α

i

+ β

i

(R

mt

– R

ft

) + ε

it (1)

where

R

it is the return of one SRI fund in month t,

R

ft is the return of a local risk-free interest rate in

month t,

R

mt is the return of the local market index on month t, αi is the Jensen’s alpha as proposed by

Jensen (1968), βi is the parameter of market portfolio, and εit is the error term. The CAPM model is the

most widely used benchmark model to estimate fund performance. From this model, we can generate the Jensen’s alpha to determine the abnormal return of a fund on a single benchmark portfolio thus evaluate the outperformance level of this fund.

However, some other scholars argue that the accuracy of the single index model is questionable and that the multi-factor asset pricing is needed to analyse the fund performance and stock returns (e.g. Fama and French, 1993, 1996; Carhart, 1997). Therefore, we further run regressions on the multi-factor model which includes market, size, book-to-market, and momentum multi-factors introduced by Carhart (1997) to analyse the investment style of each SRI funds. The applied equation is:

R

it

– R

ft

= α

i

+ β

1i

(R

mt

– R

ft

) + β

2i

SMB

t

+ β

3i

HML

t

+ β

4i

MOM

t

+ ε

it

(2)

in this equation,

α

i is the adjusted return of estimated fund after the size, book-to-market value and

momentum factors are controlled. Factor

SMB

t stands for the small cap stocks minus big cap stocks

which is used to control the effect of stock size. Factor

HML

t stands for the high book-to-market

stocks minus low book-to-market stocks to control the value premium effect. The last factor

MOM

t

stands for the effect of momentum effects. This equation can better interpret the alpha return generated by the skill of the fund manager and can help analyse the investment style of the manager.

Finally, in order to capture the SRI style, we run regressions on CAPM model between SRI index and market benchmark index, and then collect the residual of the regression. We use the residual to represent the influence of SRI factor. We add the SRI factor to the model can help us determine the extent to which a SRI fund engage in the SRI. We run the regression five-factor model:

R

it

– R

ft

= α

i

+ β

1i

(R

mt

– R

ft

) + β

2i

SMB

t

+ β

3i

HML

t

+ β

4i

MOM

t

+ β

5i

SRI + ε

it

(3)

Where

α

i is the five-factor risk adjusted return of SRI mutual funds,

β

4i estimates the effect of the SRI

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4. STATISTICAL RESULT

4.1 CAPM model

The first model that we use to estimate the performance of SRI mutual funds is CAPM model. Table 3 presents the results of the equation (1) base on our samples. The R2 measures the fitness of the regression. From table 3, we can jump to the conclusions that different investment category generate totally different Jensen’s alpha. This result indicates that the sectors focused by different SRI funds can have a crucial impact on the fund performance.

In Chinese market, the Jensen’s alpha of entire samples is 10.13% annually and it is significant at 10% level. Chinese SRI funds have a prominent performance during our sample period. However, there is a great gap between the returns of the Green Energy fund and that of Sustainable Development funds. With a similar exposure towards the market (0.30 and 0.40), the abnormal return of Green Energy fund is 3.00% annually and it is insignificant. While Sustainable Development funds generate 12.51% annually abnormal return and it is significant at 10% level. This huge difference might partly be explained by the professional skills of different managers. Another explanation is the industry effects. Sustainable development is one of the basic national strategy since 1992 when China issued the “Ten Strategic Policies for Environment and Development” (Zhang and Wen, 2008). This topic has been frequently mentioned on all kinds of medias around China since then. According to a individual buying behaviour study, people tend to buy the stocks that grab their attentions (Barber and Odean, 2008). There might be some causal effects between the high abnormal return of Sustainable development funds and the issuance of Sustainable Development national strategy.

In South Korean market, Jensen’s alpha of the full sample is negative. The annual abnormal return of South Korean SRI funds is -3.14% and it is significant at 1% level. This result is consistent with the result from Table 1 which shows that South Korea has a negative Sharpe Ratio. Jensen’s alphas of Environment Protection funds, Green Energy funds and Sustainable Development funds are negative and are significant. Environment Protection funds present a 10.09% annual loss and has the worst performance within six investment categories.

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14 Table 3

Statistical Result of CAPM model

This table presents the result of equation (1) for the time period from 2011-03 to 2015-03. The result is estimated by the pooled OLS regression for each country and investment category.

Rit – Rft = αi + βi (Rmt – R ft) + εit

where Rit is the return of SRI fund, Rft is the risk-free interest rate for each country and Rmt is the benchmark index

return of the relevant country. All α in this table are annualized.

* Significant at the 10% level. ** Significant at the 5% level. *** Significant at the 1% level.

Country Theme α MKT R2 China 10.13* 0.37*** 0.10 Environment Protection Green Energy 3.00 0.30* 0.08

Global Warming Prevention

Water Conservancy Sustainable Development 12.51* 0.40*** 0.11 Social Healthcare South Korea -3.14*** 0.47*** 0.18 Environment Protection -10.09*** 0.66*** 0.24 Green Energy -4.98*** 0.41*** 0.22

Global Warming Prevention -0.63 0.49*** 0.22

Water Conservancy 1.77 0.26*** 0.10 Sustainable Development -4.29*** 0.60*** 0.28 Social Healthcare 1.80 0.02** 0.11 Japan 1.26 0.70*** 0.42 Environment Protection -6.64*** 0.70*** 0.36 Green Energy -1.79 0.60*** 0.47

Global Warming Prevention 2.75 0.79*** 0.48

Water Conservancy 7.48*** 0.57*** 0.37

Sustainable Development 0.91 0.94*** 0.81

Social Healthcare 21.14*** 0.14** 0.17

According to the information provided by “OCED health data”, the life expectancy at birth of Japanese has reached 83.2 years by the year of 2012 which is the highest in the world. However their health spending is just 10.3% of the total GDP.

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15 determinant for the high abnormal return of Social Healthcare funds. We also discover that the Environment Protection funds have significant negative returns in both Japan and South Korea markets.

As we can see from the Table 3, the beta of all investment categories are significant while the correlation levels are different. Some fund portfolios have a very low exposure to benchmark index. For example, the beta of Social Healthcare funds in South Korean market is 0.02 and significant at 5% level. Meaningfully, the market exposure of Japanese Social Healthcare funds is also the lowest compare to five other categories. This lead to the conclusion that the Social Healthcare funds are less sensitive to market portfolio. The Social Healthcare funds in Japanese market generate high abnormal returns on one hand and have low exposure to market risk on the other. They are funds with the best performance in our samples.

4.2 Carhart four-factor model

The statistical result of OLS regression on the equation (2) is shown on the Table 4. Only Chinese SRI funds have significantly positive adjusted return. South Korean SRI funds still have negative risk-adjusted returns whereas the risk-risk-adjusted returns of Japanese SRI funds remain insignificant. This result remains unchanged compare to the result of CAPM model.

The beta of Social Healthcare funds for both South Korea and Japan market are still the lowest compare to other categories. This confirms our previous finding from CAPM model. The beta of Chinese market is significant in the CAPM model while it is insignificant when applying Carhart factor model. Furthermore, all Chinese SRI funds tilt heavily to the momentum factor in Carhart four-factor model. Previous study examines the stock return of Chinese stock market and finds statistically significant intermediate-term momentum profits (Kang, Liu, and Ni, 2002). This study might provide evidence to answer why Chinese funds tend to tilt heavily on momentum. In fact, Chinese stock market is different from other stock markets especially in legal regulations. Additionally, most individual investors in Chinese stock market lack of basic investing knowledge. Sometimes they behave like noise traders, looking for speculation opportunities in the market (Kang, Liu, and Ni, 2002).

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16 Table 4

Statistical Result of Carhart 4-factor model

Rit – Rft = αi + β1i (Rmt – R ft) + β2i SMBt + β3i HMLt + β4i MOMt + εit

where the Rit is the return of SRI fund, Rft is the risk-free interest rate for each country and Rmt is the benchmark index return of

the relevant country. SMB is the risk control variable for size, HML is the risk control variable for the book-to-market ratio and MOM is the risk control variable for the momentum. All α in this table are annualized.

Country Theme α MKT SMB HML MOM R2

China 7.62** 0.00 -0.02 0.14 0.88*** 0.59

Environment Protection

Green Energy 1.44 -0.05 -0.08 0.63*** 0.91*** 0.70

Water Conservancy Sustainable Development 9.68** 0.01 0.00 -0.02 0.87*** 0.59 Social Healthcare South Korea -3.19*** 0.65*** 0.24*** 0.02 -0.08*** 0.23 Environment Protection -10.39*** 0.87*** 0.35*** 0.06 -0.06 0.31 Green Energy -4.71*** 0.52*** 0.15*** 0.07 -0.04 0.26

Global Warming Prevention 1.66 0.70*** 0.10** 0.17*** -0.16*** 0.29

Water Conservancy 2.76** 0.29*** -0.01 0.11*** -0.02 0.12 Sustainable Development -4.99*** 0.87*** 0.40*** -0.03* -0.11*** 0.41 Social Healthcare 1.50 -0.01** -0.06 -0.08 0.00 0.15 Japan 1.00 0.76*** -0.20*** -0.41*** -0.10* 0.44 Environment Protection -6.7*** 0.67*** -0.38*** -0.52*** -0.03 0.39 Green Energy -1.64 0.72*** -0.21* -0.39** -0.18 0.49

Global Warming Prevention 1.62 1.05*** -0.41** -1.10*** -0.36** 0.57

Water Conservancy 6.25* 0.92*** -0.14 -0.84*** -0.41** 0.42

Sustainable Development 1.27 0.77*** -0.18*** 0.00 0.15*** 0.81

Social Healthcare 19.84*** 0.56** 0.43** -0.14 -0.39* 0.39

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17 Contrary to South Korean SRI funds, most Japanese SRI funds have significant negative loading on both the SMB and HML factors. Japanese SRI funds are generally invested in large cap growth stocks. In other words, Japanese SRI funds tilt more towards growth companies. This finding is accordance to previous studies which suggest Domini Social Index is more sensitive to growth-oriented stocks. This is the main reason why Domini Social Index to outperform S&P 500 Index (Luck and Pilotte, 1993). The traditional high valued industries such as chemistry, oil and heavy industry are always excluded by the SRI funds, hence SRI funds are sometimes more sensitive to growth stocks (Guerard, 1997). Again, when we look at the adjusted return, we find that the Social Healthcare funds, which generate the highest abnormal returns, is the only category that tilt towards small cap stocks. Water Conservancy funds , the other category that has a significant positive alpha, also show relatively lower tilt to growth stocks since its loading on HML factor is very small and insignificant. This finding supports the argument in the literature that small cap stocks tend to outperform large cap stocks (Chan & Lakonishok, 2004).

4.3 SRI factor

In this part we add the SRI factor into the Carhart four-factor model and run the OLS regression on the equation (3). The result is presented in the Table 5. The loading on SRI factor can help explain to what extent a certain fund is in line with the SRI strategy. Three countries demonstrate a various result in SRI engagement.

Chinese SRI funds shows an insignificant loading on SRI factor. It indicates the same result for two categories under Chinese market. There is no evidence suggests that the sample Chinese SRI funds have engaged in socially responsible investing. Momentum is still the only factor with significant loading.

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18 Table 5

Statistical Result of 5-factor model

Rit – Rft = αi + β1i (Rmt – R ft) + β2i SMBt + β3i HMLt + β4i MOMt + β5i SRIt + εit

where the Rit is the return of SRI fund, Rft is the risk-free interest rate for each country and Rmt is the benchmark index return of the

relevant country. SMB is the risk control variable for size, HML is the risk control variable for the book-to-market ratio and MOM is the risk control variable for the momentum. SRI is the control variable for the SRI factor. All α in this table are annualized.

Country Theme α MKT SMB HML MOM SRI R2

China 7.21* 0.01 0.01 0.17 0.87*** 0.18 0.59

Environment Protection

Green Energy 1.64 -0.05 -0.09 0.62** 0.91*** -0.09 0.71

Water Conservancy Sustainable Development 9.07** 0.03 0.04 0.02 0.86*** 0.27 0.59 Social Healthcare South Korea -3.29*** 0.64*** 0.28*** 0.04** -0.06*** -0.11*** 0.23 Environment Protection -10.40*** 0.87*** 0.36*** 0.07 -0.06 -0.01 0.31 Green Energy -4.72*** 0.52*** 0.16*** 0.07 -0.04 -0.02 0.26

Global Warming Prevention 1.41 0.68*** 0.20*** 0.22*** -0.12** -0.29*** 0.32

Water Conservancy 2.57** 0.27*** 0.07** 0.15*** 0.01 -0.23*** 0.14 Sustainable Development -5.05*** 0.86*** 0.42*** -0.02 -0.10*** -0.06** 0.41 Social Healthcare 1.30 -0.03** 0.02 -0.04 0.03 -0.24*** 0.21 Japan 1.00 0.87*** -0.14*** -0.42*** -0.18*** 1.09*** 0.45 Environment Protection -6.65*** 0.85*** -0.27*** -0.53*** -0.16 1.79*** 0.41 Green Energy -1.60 0.86*** -0.13 -0.40*** -0.28** 1.33*** 0.51

Global Warming Prevention 1.71 1.35*** -0.24* -1.12*** -0.57*** 2.95*** 0.63

Water Conservancy 6.31* 1.13*** -0.01 -0.85*** -0.56*** 2.07*** 0.46

Sustainable Development 1.26 0.75*** -1.97*** 0.00 0.17*** -0.21 0.81

Social Healthcare 19.83*** 0.52** 0.40** -0.14 -0.35 -0.41 0.41

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19 SRI factor. In general, Japan SRI funds show a positive tilt to the SRI factor. The loading to SRI factor is 1.09 and significant at the 1% level. The result of Japanese market seems relatively "normal" compares to that of China and South Korea. The more developed and mature Socially Responsible Investing market in Japan might be one explanation for this situation.

4.4 Performance in two time period

Since the SRI funds market is growing fast during this years, it is also interesting to see if there is any difference between the past and the present. In this section we estimate the performance of SRI funds in two time period. The first period is from 2011-03 to 2013-02 and the second period is from 2013-03 to 2015-02. The statistical result is presented on the Table 6. The second column of Table 6 is the risk-adjusted return of the first period and the third column is the risk-risk-adjusted return of the second period. There is no significant change in both the risk-adjusted return and the loading on SRI factor in Chinese SRI funds. Statistical results of two time period are insignificant. From the number we find a sharply decrease in risk-adjusted return for Green Energy funds in Chinese market. However, the loading on SRI factor, although it is insignificant in both period, has slightly increased in the second period. During the first period, the loading on SRI factor is -0.24 while in the second period this number raises to 0.56. This might be a signal indicating that Chinese SRI funds have become more engaged in Socially Responsible Investing along with the development of the SRI market.

South Korean SRI funds have better performance in recent two years compare to the previous years. In 2011-2013 the risk adjusted return of South Korea is -6.81 and significant at 1% level while in the second period the risk-adjusted return is insignificant. The level of loss has reduced significantly in the second period. There is a upward trend in risk-adjusted return in our sample period. However, change in the loading on SRI factor is not as obvious as the change in risk-adjusted return in South Korean market.

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20 Table 6

Statistical Result of sub period

This table presents the result of equation (3) for two time period, 2011-03 to 2013-02 and 2013-03 to 2015-02. The result is estimated by the OLS regression for each country and investment category.

Rit – Rft = αi + β1i (Rmt – R ft) + β2i SMBt + β3i HMLt + β4i MOMt + β5i SRIt + εit

where the Rit is the return of SRI fund, Rft is the risk-free interest rate for each country and Rmt is the benchmark index

return of the relevant country. SMB is the risk control variable for size, HML is the risk control variable for the book-to-market ratio and MOM is the risk control variable for the momentum. SRI is the control variable for the SRI factor. All α in this table are annualized.

Country Theme α SRI

2011-2013 2013-2015 2011-2013 2013-2015

China 4.67 2.02 -0.24 0.56

Environment protection

Green Energy 0.41 -5.42 -0.16 0.62

Water Conservancy Sustainable Development 6.09 4.51 -0.27 0.54 Social Healthcare South Korea -6.81*** -0.57 -0.10*** -0.15*** Environment Prevention -16.02*** -5.26** 0.12 -0.11 Green Energy -8.6*** -0.28 -0.11 0.00

Global Warming Prevention -2.27 4.67 -0.15 -0.48***

Water Conservancy 2.57 1.10 -0.22*** -0.36*** Sustainable Development -9.51*** -1.41** -0.21*** 0.05** Social Healthcare -0.67 2.01 0.37*** -0.73*** Japan 4.62*** 0.44 1.42*** 0.25 Environment Protection -0.13 -9.11 2.20*** 0.82 Green Energy 2.90 -3.42 1.87*** 0.46

Global Warming Prevention 4.33 2.74 2.99*** 2.11***

Water Conservancy 12.70 1.26*** 2.46*** 1.46*

Sustainable Development 2.03*** 2.71 0.07 1.00***

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5. CONCLUSION

The Socially Responsible Investing funds markets in Asia have experienced dramatic growth in the past few years. This paper aims at exploring the SRI fund performance in its fast growing period by applying CAPM model and Carhart four-factor model. Our sample includes 182 SRI mutual funds from China, Japan and South Korea fund markets.

This paper mainly comes up with three conclusions. Firstly, different countries and investment categories of SRI funds have different risk adjusted returns and investment styles. The performance of SRI funds in China, Japan and South Korea are various from many perspectives. Chinese SRI funds are not exposed to socially responsible stocks in the market, they tilt heavily to momentum factor. Chinese SRI funds, however, are becoming more and more engaged in Socially Responsible Investing. South Korean fund performance is not very remarkable in generating return. They have a negative average annual return during the sample period. Their assets tilt more to small cap stocks but show no preference on value factor. However, their investment seems not in line with the SRI strategy as they claimed. As the categories tilt more to value stocks have a higher risk-adjusted return, value investing strategy might be favourable in South Korean SRI market. Japanese SRI funds present a regular performance with positive risk-adjusted returns and positive loadings to SRI factor. Their assets tilt more to large cap growth stocks. Secondly, our finding suggest that the risk-adjusted returns of the SRI funds are decreasing during the sample period in three countries. Finally, we also discover that, in Japanese and South Korean market, the more a fund violates the SRI strategy, the higher abnormal return it can generate.

This paper contributes to the literature on Socially Responsible Investing in several ways. As previous studies are mainly focus on United States and European countries, our study put emphasis on Asian markets which lack of attention. This study, to our knowledge, is the first one that shed light on this question base on Chinese and South Korean market. Moreover, previous studies estimate SRI fund performance by considering all kinds of SRI funds as a whole. In this study, SRI funds are separated into six categories. By adding this process, we are able to measure the performance of SRI funds focusing on different sectors.

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THE SOCIALLY RESPONSIBLE INVESTING FUND PERFORMANCE: EVIDENCE FROM CHINA, JAPAN AND SOUTH KOREA