Portfolio Construction based on Investors’ Motivation for Socially Responsible Investing: a Comparative Study on Financial- and Social Performance

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Portfolio Construction based on Investors’ Motivation for Socially Responsible Investing: a Comparative Study on Financial- and Social Performance

Fabian Willard S3536769 MSc Finance University of Groningen Faculty of Economics and Business Supervisor: prof. dr. L.J.R. Scholtens1

Date: 12-6-2019

Abstract

This study extends the highly debated impact of Socially Responsible Investing (SRI) on both financial- and social performance. By considering investors’ motivations on SRI, it is hypothesized that differences in motivations for SRI lead to significant distinctions in terms of performance. Portfolios based on investors’ motivations for SRI are

constructed, compared and contrasted. In terms of financial performance, no significant distinctions relative to the benchmark are found. The results exhibit significant

distinctions in terms of social performance for all constructed portfolios, which are robust to different legal system samples. The portfolios based on financial and

expressive motivations for SRI yield the highest utility with equal importance of social- and financial performance. This research provides the basis for future research on the impact of motivations for SRI on performance.

Key words: socially responsible investing, corporate social responsibility, corporate financial

performance, portfolio construction, SRI motivations.

JEL classifications: G11, G41

Word count: 12,455 (excluding abstract and appendices)

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1. Introduction

The increase in awareness of environmental, social and government issues motivates both private and institutional investors to consider social responsible

investing (SRI) in their investment decisions. The question - which naturally arises – is: does the adoption of such investments in responsible firms result in excessive returns? Or are investors the ones who eventually bear the costs of being a social investor? Most studies on SRI imply that all socially responsible investors have the same motivation for SRI; make money while also doing good. However, in my opinion that is too simplistic. Chatterji et al. (2009) divides investor incentives for being a socially responsible investor in four motivations. SRI investors can be devoted to one of the following motivations: financial, deontological, consequentialist, and expressive. In this research the assumption is made that all socially responsible investors can be allocated to one single motivation for SRI2_.

In this paper one can find a comprehensive literature review of the motivations for SRI, resulting in formal ways of constructing portfolios based on the motivations for SRI. Sub-samples for most of the portfolios are composed to test the sensitivity of the constructed portfolios. Furthermore, the paper consists of a comparison with respect to the investor motivations in terms of both financial- and social performance.

With climate change being one of the hottest topics of the century it is hardly unavoidable to adopt these issues in the selection of investment portfolios. The United States Sustainable Investment Forum has found that as of the end of 2017, SRI assets account for $12.0 trillion of the $46.6 trillion dollars in total assets managed under professional management in the United States (2018). Which is a tremendous increase compared to 2005, when only one out of the ten dollars invested was considered as socially responsible. The increase in SRI follows naturally from the development in underlying theory. Friedman’s classical theory in finance (1970) states that companies should explicitly focus on maximizing the value for shareholders by maximizing profits. However, the increase in SRI assets suggests that this theory seems to be obsoleted. Elkington’s Triple Bottom Line (1999) suggests that companies should go beyond profits and commit focus on social and environmental concerns as well. Social and

environmental concerns are usually referred to as Corporate Social Responsibility (CSR), which has become a high profile public issue (Kitzmueller & Shimshack, 2012). CSR is

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Page 4 of 50 composed of three pillars: environmental, social and governance issues. The ESG-score is equal to the equally weighted average of the three pillars.

The relationship between CSR and Corporate Financial Performance (CFP) has been studied extensively. Several studies found that SRI leads to outperformance (e.g. Oikonomou et al., 2018; Derwal & Koedijk, 2009; Kempf & Osthoff, 2008). While on the other hand, there are studies that found underperformance of SRI funds (e.g. Renneboog et al., 2008; Schroder, 2007; Statman, 2006). Results have been inconclusive about the relationship between CSR and CFP, which is confirmed by Capelle-Blancard and Monjon (2011) who listed more than fifty academic papers, published between 1992 and 2011, regarding the relationship between CSR and CFP. Their findings conclude that almost all papers show that CFP of SRI funds does not differ significantly from their conventional peers. However, many studies forget to report about the importance of social

performance of SRI funds/portfolios. In this study one can expect CFP and CSP to be equally important, since some socially responsible investors are explicitly driven by social performance rather than financial performance.

The research in this thesis goes beyond sole focus on financial performance and distinguishes from other papers by including the importance of social performance, which is in line with Liang & Renneboog (2017). Including social performance is crucial, since for some of the investors’ motivations the importance of social performance exceeds that from financial performance. This is confirmed by the findings of Riedl and Smeets (2017), based on their survey they suggest that socially investors are willing to forgo financial performance if their investments are in line with their social preferences. Therefore, the objective of this thesis is to examine which investor motivation for SRI yields the most optimal portfolio in terms of both financial and social performance. The main research question is: what is the impact of differences in investors’ motivations for SRI on both social- and financial performance? The motivations for SRI are used to construct portfolios, using a dataset3_{of approximately 7,900 firms, covering roughly} 80% of the investment universe. The dataset consists of time series from 2002 up until 2018. CSR scores in the dataset are based on over 400 metrics across the three CSR pillars.

In chapter 2 one can find a comprehensive literature review regarding SRI, CSR and CFP. Furthermore, the four investor motivations for SRI are discussed which are naturally followed by the hypotheses. The methodology and the way the portfolios are constructed is discussed in chapter 3. Chapter 4 describes the data, which is used during the research. Chapter 5 presents the results. Finally, in chapter 6 one finds the

conclusions of this thesis.

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2. Literature review

In this section, the concepts of SRI, CSR and CFP are briefly discussed. Followed by empirical research regarding the performance of SRI funds. Furthermore, the four motivations for SRI are discussed and the hypotheses for the social and financial performance of the portfolios are formulated.

2.1 CSR, CFP and SRI

In this research, the performance of SRI portfolios is tested on both social and financial performance. From a company perspective, Corporate Social Responsibility (CSR) is the firm’s responsibility towards social, environmental or governance issues (Dahlsrud, 2008). Bénabou and Tirole (2006) extend this by stating that firms need to take responsibility when governments fail to counteract externalities that could harm society. Which is in line with the Triple Bottom Line (TBL), conducted by Elkington (1999). The TBL states that the focus of companies is extended beyond profits to include social and environmental concerns. The TBL follows naturally from the Classic Social Responsibility framework of Caroll (1979), which claims that firms have an economic, legal, ethical or philanthropic responsibility to their society. In terms of social

performance of SRI funds there is a lack of proof. Most studies imply by negative screening that all SRI funds are the same in terms of social performance and only take into account financial performance. However, Liang and Renneboog (2017) found that CSR ratings significantly differ for countries and legal origins.

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2.2 Financial performance of SRI funds

SRI has been a relevant subject of academic research the previous decades. However, the existence of studies on SRI based on the motivations of Chatterji et al. (2009) is very limited. The lack of use of these motivations may be explained by the crucial assumption of devoting socially responsible investors to one single motivation. Furthermore, it is hard to directly measure to which motivation an investor can be devoted to and if an investor’s motivation for SRI changes overtime. Therefore a more general review on the relationship between CSR and CFP is performed. Capelle-Blancard and Monjon (2011) have listed more than fifty academic papers on SRI fund

performance published between 1992 and 2011. Using roughly the same methodology (CAPM or multifactor model), most of the studies have found no significant difference in financial performance between SRI funds and conventional funds. However, other studies (e.g. Oikonomou, Platanakis & Sutcliffe, 2018; Derwal & Koedijk, 2009; Kempf & Osthoff, 2008) have found SRI to yield both higher return and lower exposure to risk. On the other hand, Capelle et al. (2014) specifically focused on French SRI funds and

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2.3 Investors’ motivations for SRI

Contrary to the previously mentioned studies, this study extends the existing literature by going beyond the relationship between SRI and CFP. Portfolios are constructed for each set of investors’ motivations by Chatterji et al. (2009) and are compared on both financial and social performance. Chatterji et al. (2009) divides investors motivation for SRI in four groups. The first motivation is financially; financial motivated socially responsible investors believe that superior environmental

performance lead to superior financial performance. Prior studies have examined how CSR can benefit companies by attracting socially responsible consumers (Bagnoli and Watts, 2003), reducing the threat of regulation (Maxwell et al., 2000), improving their reputations with consumers (Lev et al., 2006), and reducing concern from activists and nongovernmental organizations (Baron, 2001; Lyon and Maxwell, 2006). Investors who are financially driven exhibit the beliefs that prior social performance is a reliable indicator for future financial performance of companies. They strongly believe in the positive relationship between CSR and financial performance. However, referring back to the empirical papers on the relationship between CSR and financial performance, neither a positive nor a negative relationship is expected to arise from the financially motivated portfolio (e.g. Capelle-Blancard and Monjon, 2014). From a psychological perspective, a financial investor is the reflection of egoism. Egoism suggests that the behavior of investors is solely driven by self-interest, which is in line with Markowitz’ Modern Portfolio Theory’s (1952) assumption of homogeneous mean-variance

optimization of investors. The optimized portfolio should appeal to an alpha-seeking investor who expects outperformance of SRI portfolios.

Since the literature regarding the relationship between SRI portfolios and financial performance is quite inconclusive but lean towards no statistical distinction (e.g. Capelle-Blancard and Monjon, 2014), the portfolios of financially motivated are expected not to outperform the entire investment universe. In terms of personal expectations, I would expect financially motivated portfolios to not outperform the entire investment universe since otherwise all investors would decide to be a financially motivated socially responsible investor. Based on the above findings, I constructed the following financially driven hypothesis:

𝐻1𝑎: Financially motivated portfolios show neither statistical under- nor outperformance compared to the entire investment universe.

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Page 8 of 50 In terms of social performance, the way the financial portfolios are constructed is likely to result in significant outperformance in terms of ESG variables for each

financially motivated portfolio. Therefore the hypothesis is as follows:

𝐻_1𝑏: Financially motivated portfolios show significant ESG-score outperformance compared to the entire investment universe.

The second motivation is deontological; deontological motivated socially responsible investors are investors who do not wish to profit from unethical or

undesirable actions. Rosen et al. (1991) concluded that the average socially responsible investor is an activist who wants to be affiliated with cause-related groups.

Deontological investors take into account the trade-off between returns and social empathy. However, companies seeking investments from SRI should not be thinking that social responsible investors accept lower returns. The allocation of such a portfolio is conducted by negative screening (e.g. exclusion of industries such as tobacco, alcohol, and gambling). Most of the previous academic literature (e.g. Chong et al., 2006; Jo et al., 2010; Trinks et al., 2017) regarding negative screening have found that there exists a negative relationship between negative screening and portfolio performance. Funds consisting of sin stocks outperform the markets as well as the negative screened SRI portfolios. Renneboog et al. (2008) found that the main reason why SRI investors may be willing to pay a price for social responsibility is based on aversion to corporate behavior, which is deemed unethical. This in line with the deontological motivation of not wishing to profit from undesirable actions. Barnet and Salomon (2006) have done research to the optimal number of companies in a SRI portfolio and screening criteria. They have found a non-linear relation between screening intensity and portfolio

performance in which very few screening criteria and very many screening criteria lead to the highest risk-adjusted return.

From a psychological perspective, according to Alexander and Moore (2016), deontologists argue that each action has a moral quality of itself that is independent of its outcomes but is instead guided by a principled system of values, rights and duties. Prior research on negative screening based on academic literature is somewhat

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Page 9 of 50 financial performance have a negative relationship that may revert if the screening intensity increases. The performance of sin stocks portfolios has been a relevant research topic in the past; Fabozzi et al. (2008) found that sin stocks portfolios

outperform the market receiving a monthly abnormal return of 1.64%. This is confirmed by Hong and Kacperczyk (2009), who used a zero-investment portfolio with long US sin stocks and short in their comparables. After controlling for firm characteristics they found sin stocks significantly outperform their comparables by 0.29% using Carhart’s four-factor model. Finally, Durand et al. (2013) confirm the results of these studies; they found a four-factor alpha of 0.31%. The exclusion of certain industries or controversies in portfolios would, according to the above literature, lead to underperformance. According to Renneboog et al. (2008), negative screening leads to underinvestment in financially attractive investment opportunities. More intense screening intensity reduces the investment universe further, which may weaken the financial performance of the SRI portfolio.

Personally, I expect deontological portfolios to underperform to the entire investment universe, since the investment universe from which an investor can pick his stocks is reduced through negative screening. An investor trying to optimize his

portfolio may be willing to select stocks, which are excluded from the investment universe through negative screening. Based on the above studies and my personal expectations, the second financially motivated hypothesis is:

𝐻2𝑎: Deontological motivated portfolios show underperformance compared to the entire investment universe.

Grougiou et al. (2016) found that there exists a negative correlation between CSR performance and SIN stocks. Where CSR is the equally weighted score of the three CSR pillars. According to their findings, social performance is expected to increase by excluding SIN stocks in the deontological motivated portfolio. This is in line with my personal expectations. By excluding controverting stocks, the average ESG score is likely to increase. Leading to the following hypothesis:

𝐻_2𝑏: Deontological motivated portfolios show an significant ESG-score outperformance compared to the entire investment universe.

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Page 10 of 50 conducted by decreasing the weight on bad behaving firms and increasing the weight of good behaving firms. From a psychological perspective, according to Bentham (1983), actions that lead to an overall better world are the ones that should be broadly labeled as “good”. Moral reasoning, according to the consequentialist, is to figure out which actions maximize overall well being or minimize overall harm. Consequentialist investors expect their investments to help responsible firms grow, reduce the market share and raise the cost of capital from irresponsible firms (Langbein and Posner, 1980; Heal, 2001; Stanley and Herb, 2007). The consequentialist portfolio is actively managed to maximize the utility of the portfolio. Since the construction of the ESG-score is

composed of more than 400 metrics per company, it is a reasonable proxy for a

companies’ behavior. By increasing stocks weight of stocks high on ESG and decreasing stock weight of stocks low on ESG, the portfolio seeks to generate returns by rewarding good behaving firms, and punishing bad behaving firms. The expectations of the

consequentialist portfolio are in line with those from the financial motivated portfolio, neither a positive nor a negative relationship is expected. The consequentialist portfolio consists of the same stocks as the entire portfolio since all stocks are included, however the distinction derives from the weighting of stocks. Since according to the literature there is no significant difference in performance between SRI funds and conventional funds, I expect no statistical distinction between the consequentialist portfolio and the entire investment universe:

𝐻3𝑎: Consequentialist motivated portfolios show neither under- nor outperformance compared to the entire investment universe.

The social performance of consequentialist motivated portfolios are likely to result in significantly higher scores compared to the entire investment universe since stocks high on ESG are weighted more heavily in the portfolio. Therefore the hypothesis is as follows:

𝐻_3𝑏: Consequentialist motivated portfolios show significant ESG-score outperformance compared to the entire investment universe.

The last investor motive is expressive; expressive investors use their transactions to express their personal identity to themselves and others according to Williams

(2007). They worry that negative social performance taints companies and, by

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Page 11 of 50 Schueth (2003) found that expressive investors feel the need to put their money to work in a manner that is more closely aligned with their personal values and

priorities. Investors who are primarily motivated by this desire are sometimes described in the modern media as “feel good” investors. Presumably they feel better about themselves and their socially responsible investment portfolios. Michelson et al. (2004) found that expressive investors feel the need to put their money to work in ways that are consistent with their personal values, and are generally committed to their socially responsible investments even if they perform poorly or are ethically ineffective (Webley et al., 2001). Part of their motivation might be to simply ‘‘feel good’’ or to try and promote social change, even if this means receiving a slightly lower financial return than conventional investors. The expressive portfolio is not expected to outperform since investors seek to express themselves and therefore violate Markowitz’ Modern Portfolio Theory’s (1952) assumption of homogeneous mean-variance optimization of investors.

The expectations of the financial performance of expressive portfolios are similar to these from financial portfolios since both portfolios primarily focus on inclusion of companies high on ESG performance. Therefore the hypothesis compares the financial performance of expressive motivated portfolios with entire investment universe

portfolio. According to the literature, there should be no significant distinction (Capelle-Blancard and Monjon, 2014). Therefore I constructed the following hypothesis:

𝐻4𝑎: Expressive motivated portfolios show neither under- nor outperformance related to entire investment universe.

The expectations of the social performance of expressive motivated portfolios are similar to these from financial and consequentialist motivated portfolios. Therefore the hypothesis is as follows:

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3. Methodology and portfolio construction

In this section, the methodology used in this research is discussed. Furthermore, the construction of each portfolio is briefly dealt with. Finally, the statistical tests that are used to examine the formulated hypotheses are discussed.

3.1 Methodology

To measure the performance of the SRI portfolios, the Fama and French (1993) three-factor model expanded with the Carhart (1997) momentum factor is used. The so-called four-factor model measures the performance of the portfolio after correcting for external factors over time. The use of the four-factor model is in line with previous studies regarding SRI and financial performance (e.g. Kempf et al., 2008; Renneboog et al., 2008; Galema et al., 2008; Trinks and Scholtens., 2017). The model controls for the impact of the market risk, the size factor, the book-to-market factor, and the momentum factor on return as follows:

𝑅_𝑖𝑡− 𝑅_𝑓𝑡 = 𝛼_𝑖 + 𝛽_1𝑖(𝑅_𝑚𝑡− 𝑅_𝑓𝑡) + 𝛽_2𝑖𝑆𝑀𝐵_𝑡+ 𝛽_3𝑖𝐻𝑀𝐿_𝑡+ 𝛽_4𝑖𝑀𝑂𝑀_𝑡+ 𝜀_𝑖𝑡 (1) The dependent variable is the monthly excess return of portfolio i in month t. The independent variables are the returns of four zero-investment factor portfolios. Alpha denotes the abnormal return of the portfolio i. 𝑅_𝑚𝑡− 𝑅_𝑓𝑡 denotes the excess return of the market portfolio on a value-weighted market proxy. 𝑆𝑀𝐵_𝑡 denotes the return

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Page 13 of 50 Furthermore, the Fama and French (2015) five-factor model is estimated to control for the impact of investment styles on financial performance. In practice, there are few papers using the five-factor model for financial performance of SRI funds. An explanation for the lack of use could be that the five-factor model is relatively new. However, evidence exists (e.g. Novy-Marx, 2013; Titman et al., 2004) that the previous Fama and French model misses much of the variation in average returns related to profitability and investment. Therefore, Fama and French added profitability and investment factors to the original three-factor model:

𝑅_𝑖𝑡 − 𝑅𝑓𝑡 = 𝛼𝑖+ 𝛽1𝑖(𝑅𝑚𝑡− 𝑅𝑓𝑡) + 𝛽2𝑖𝑆𝑀𝐵𝑡+ 𝛽3𝑖𝐻𝑀𝐿𝑡+ 𝛽4𝑖𝑅𝑀𝑊𝑡+ 𝛽5𝑖𝐶𝑀𝐴𝑡+ 𝜀𝑖𝑡 (2)

Where 𝑅𝑀𝑊_𝑡 is the difference between the returns on diversified portfolios of stocks with robust and weak profitability. 𝐶𝑀𝐴𝑡 is the difference between the returns on diversified portfolios of the stocks of low and high investment firms.

3.2 Portfolio construction

In this section, the construction of each portfolio is discussed based on their motivation for SRI. To test for sensitivity of the portfolios, multiple sub-samples of the portfolios are constructed. For each portfolio, only companies having an ESG rating in year t and a return series of 12 months in year t are available for inclusion. The return series are calculated as the natural logarithm of a stock’s return index on t=0 divided by a stock’s return index on t=1. The portfolios are tested on outperformance to the so-called ‘entire portfolio’. The entire portfolio consists of all stocks in the investment universe of the dataset with a return series and an ESG-score in the corresponding year. The number of stocks included in the entire portfolio can be found in table E of the appendix. Outperformance is tested relative to the entire portfolio since the aim of the research is to find the impact on performance of differences in investors’ motivations solely in SRI portfolios. Therefore, in this study the entire portfolio is assumed to be the benchmark for SRI portfolios. All portfolios are actively managed portfolios and

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3.2.1 Financial motivated portfolio

According to the literature (Bagnoli et al., 2003; Maxwell et al., 2000; Baron, 2001; Lyon and Maxwell, 2006), financially motivated investors exhibit the beliefs that prior social performance is a reliable indicator for future financial performance of

companies. The threshold for inclusion is based on the ESG rating of a company in year t, which is in line with the definition of egoism: “behavior of investors is solely driven by self-interest”, since investors believe that superior ESG leads to superior financial performance. Hence, the construction of financial portfolios is solely based on environmental, social and governance performance.

The threshold of a minimum ESG rating of 75 is based on one standard deviation from the average ESG score of the entire sample period. The average ESG score of the entire sample is 49.84 with a standard deviation of 24.7. Four portfolios are constructed to test whether an increase in CSR-rating is affiliated with superior financial

performance. Steps of five ESG-points are used to make sure the portfolios are different in terms of the number of stocks included for each portfolio as represented in table E of the appendix. Resulting in the following four portfolios ranging from a threshold of 𝐸𝑆𝐺_𝑡𝑖 > 75 to 𝐸𝑆𝐺_𝑡𝑖 > 90, where t equals the month and i the stock:

1. 𝐸𝑆𝐺𝑡𝑖 > 75 2. 𝐸𝑆𝐺_𝑡𝑖 > 80 3. 𝐸𝑆𝐺𝑡𝑖 > 85 4. 𝐸𝑆𝐺_𝑡𝑖 > 90

DeMiguel et al. (2007) conducted research against the effectiveness of

sophisticated optimization models for portfolios. They found that ‘naive’ diversification strategies are performing better than expected. Out of 14 optimization models none is consistently better than the equally weighted portfolio in terms of Sharpe ratio, certainty-equivalent return, or turnover. Therefore the stocks are equally weighted in the portfolio and rebalanced on a yearly basis: 𝑊𝑖𝑡 =

1

𝑁𝑡 where N is the number of stocks included in year t.

3.2.2 Deontological motivated portfolio

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Page 15 of 50 affiliated with their social preferences. In negative screening processes, companies affiliated with controversies are considered as sin stocks. The majority of the literature has constructed sin portfolios by clustering stocks in a portfolio from the alcohol, tobacco and gambling industries, which is commonly referred to as the Triumvirate of Sin (Liston-Perez et al., 2018). However, in this paper, the construction of deontological portfolios is based on negative screening and provides three levels of exclusion. Three portfolios are constructed to test whether there exists a relationship between the screening intensity of the portfolios and the social- and financial performance. The portfolios are built on each other, which implies that all exclusions of the first deontological portfolio are also excluded from the second and third portfolio. The exclusions of the second portfolio are also excluded from the third portfolio.

The first (1) deontological portfolio excludes the Triumvirate of Sin stocks; alcohol, tobacco and gambling stocks which is in line with previous studies (e.g. Trinks et al., 2017; Salaber, 2007; Hong et al., 2009). The second (2) deontological portfolio extends the exclusions according to the exclusion list of ABN-AMRO (2019) which are matched to the available exclusions in the Negative Screening Database provided by Eikon Thomson Reuters. ABN-AMRO was one of the first major Dutch banks to publicly post their exclusion list and update it on a regular basis on new insights on

sustainability. The second deontological portfolio excludes alcohol, animal testing, armaments, diversity and opportunity controversies, gambling, nuclear and tobacco. The third (3) deontological portfolio is based on Triodos’ Minimum Standards (2019a). Triodos is well known as one of the leaders in sustainable development and ethical decision-making, and is therefore the strictest portfolio in terms of exclusions. Triodos (2019b) claims to only finance companies that focus on people, the environment or culture. The Minimum Standards list is matched to the available exclusions in the Negative Screening Database provided by Eikon Thomson Reuters. The third

deontological portfolio excludes alcohol, animal testing, armaments, business ethics controversies, diversity and opportunity controversies, employee health & safety controversies, gambling, nuclear, pornography, spills and pollution controversies, tax fraud controversies, tobacco and wages or working condition controversies. In chapter 4 the number of controversial stocks per category can be found in table 2 with a

specification for each deontological portfolio. A brief description of each controversial screening class can be found in table L of the appendix. The stocks in deontological portfolios are equally weighted on a yearly basis: 𝑊𝑖𝑡 =

1

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3.2.3 Consequentialist motivated portfolio

Consequentialist investors expect their investments to help responsible firms grow, reduce the market share and raise the cost of capital from irresponsible firms (Langbein and Posner, 1980; Heal, 2001; Stanley and Herb, 2007). Referring to the Efficient Market Hypothesis (Fama, 1970), in which all information is reflected in stock prices, the stock price is a barometer for the company’s health in terms of profitability and growth. Since in the short run a stock’s price is determined by supply and demand, a change in trading volume has impact on stocks prices, which is confirmed by literature (Bose et al., 2015). Investors impact the trading volumes of stocks by increasing the weight of companies high on ESG and decreasing the weight of companies low on ESG. Resulting in an increase in the cost of capital from irresponsible firms and a decrease in the cost of capital from responsible firms. Which is in line with the initial motivation of a consequentialist investor. Therefore, the included stocks are weighted based on their ESG rating in year t: 𝑊_𝑖𝑡 = 𝐸𝑆𝐺𝑖𝑡

∑ 𝐸𝑆𝐺𝑡 where ESG is the equally weighted average of the E-, S-, and G-ratings for company i in year t.

3.2.4 Expressive motivated portfolio

Expressive investors use their transactions to express their personal identity to themselves and others according to Williams (2007). Corporate Knights, a media, research and financial information products company based in Toronto, release the Global 100: most sustainable corporations in the world on a yearly basis. Since expressive investors want to express their identity by investing in sustainable companies, the inclusion of the top companies listed on the Global 100 seems

appropriate. The Global 100 Index made a net investment return of 127.35% from 1 February 2005 to December 31 3018, which outperforms the MSCI ACWI by more than 9% over this time period. Three portfolios are constructed to account for sensitivity of the number of included companies. Fisher and Lorie (1970) found that when having 16 stocks in a portfolio there is a reduction of 90% in dispersion and when having 32 stocks a reduction of 95%. The first (1) expressive portfolio consists of the top 10 companies of each year. The second (2) expressive portfolio consists of the top 20 companies of each year. Finally, the third (3) expressive portfolio consists of the top 30 companies of each year. The portfolios are updated on a yearly basis by the Global 100 of the according year. The included stocks are equally weighted in the portfolio on a yearly basis: 𝑊_𝑖𝑡 =

1

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3.3 Statistical tests comparison portfolios

In this section, the choices for each statistical tests are discussed and motivated. Furthermore, the interpretations of the statistical tests are briefly discussed.

3.3.1 Test for normality of data

To test whether the return series of the portfolios are normally distributed, the Jarque-Bera test is conducted. The conduct of this test is needed to determine which statistical test is appropriate to answer the hypotheses. The Jarque-Bera test is a goodness-of-fit test of whether the sample date have the skewness and kurtosis matching a normal distribution. The test statistic is as follows:

𝐽𝐵 = 𝑛 − 𝑘 + 1

6 (𝑆

2₊1

4(𝐶 − 3)

2₎ (3)

The Jarque-Bera test statistics convincingly establish that both the return and the ESG samples are non-normally distributed, which is in line with Fama (1965): “Distributions of daily and monthly stock returns are rather symmetric about their means, but the tails are fatter (i.e., there are more outliers) than would be expected with normal

distributions”.

3.3.2 Mann-Whitney U test

Since the data is non-normally distributed, the use of a two-sample t-test to compare means is inappropriate. The Mann-Whitney U test (Mann and Whitney 1947), also referred to as the Wilcoxon rank-sum test, is a non-parametric test of the null-hypothesis that is equally likely that a random selected value from one sample will be less or greater than a randomly selected value from the second sample. The Mann-Whitney U test is in line with the assumption of non-normality in the distribution of our sample, which is confirmed by the Jarque-Bera test. The use of the Mann-Whitney U test is in line with previous research regarding the comparison of SRI portfolios, on both financial and social performance, (e.g. Durand et al., 2013; Trinks et al., 2017; Liang et al., 2017) and is used to answer the hypotheses regarding financial- and social

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3.3.3 Kruskal-Wallis ANOVA-test

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4. Data and descriptive statistics

The analysis of this study is based on two datasets provided by Thomson Reuters Eikon database. The first dataset is Thomson Reuters Eikon ESG Scores (formally

referred to as ASSET4 Equal Weighted Ratings), which provides ESG factors covering over 7,000 publicly listed companies, across more than 400 different ESG metrics. The 400 ESG metrics are translated into 10 categories, which are equally weighted over the three CSR pillars: social, environmental and governance, as reported in table 1.

This table presents the 10 categories retrieved from Thomson Reuters ESG Scores, 2018.

The dataset provides data ranging from 2002 up until 2019. Covering roughly 80% of the investment universe. The data used in this study is retrieved on the 11th_of March 2019. At this point in time, 7,907 companies were covered in the database dispersed over 68 countries. Table C in the appendix shows how the stocks in 2019 are distributed over the 68 countries, including the legal system of each relevant country. The database provides return time series of each company, companies that are delisted or went bankrupt are not excluded but lack ESG-ratings and returns series from the moment a company is either delisted or dead, and are therefore not eligible for inclusion in portfolios from that moment on. However, to circumvent survivorship bias, delisted or dead companies are eligible for inclusion up until the moment of delisting or

bankruptcy. Table 2 provides an overview of the number of stocks available in the investment universe in each year after clearing for data availability.

The monthly total return index (RI) of DataStream is retrieved in order to obtain the return series of each stock. The return index assumes that dividends on a stock are reinvested in the stock, which depicts a stock’s theoretical growth in value. The use of the RI is in line with Lobe and Walkshäusl (2011), Salaber (2013) and Trinks and

Scholtens (2017). Thomson Reuters Eikon is also the provider of the Negative Screening tool, this tool reports whether companies in the investment universe are involved in specific markets or controversies such as alcohol, gambling and tobacco. A descriptive summary of the excluded stocks per negative screening class is presented in table 3. In table L in the appendix, one can find a description of each negative screening class, including the corresponding ESG pillar and the source of the data of each controversy. Table 1: ESG score construction

ESG pillars

Environmental Social Governance

Resource Use Management Workforce

Emissions Shareholders Human Rights

Innovation CSR Strategy Community

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Page 20 of 50 Table 2 presents the number of stocks that are available for inclusion after clearing for data availability. The availability for ESG ratings is measured on a yearly basis where each stock requires data on E, S, and G

variables. The availability for return series is also measured on a yearly basis where a stock requires a 12 month return series in the corresponding year.

Table 3 shows that the total number of companies involved in controversies in the first deontological portfolio is 375, which is 4.74% of the investment universe. Since companies may be involved in multiple controversies, the total number of stock in controversies is not equal to the number of stocks excluded in each deontological portfolio. To test whether there is a significant correlation between negative screening classes a correlation matrix is presented in table D in the appendix. Even though there is no universal theory, the rule of thumb for correlation coefficients states that a

correlation coefficient between -0,3 and 0,3 can be considered as weak correlation and can thus be neglected (Hinkle et al. 2003). The other variables that are significant and have a correlation higher than 0,3 or lower than -0,3 are Alcohol5, Gambling5 and Tobacco5 to Alcohol, Gambling and Tobacco respectively. Significant correlation between these variables is expected and can be explained by overlap in the screening classes. Stocks included in an above 5% screening class are also included in the above 0% screening class.

Table 2: Number of stocks available for inclusion after clearing for data availability

Year Availability of ESG ratings Availability of return series

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Page 21 of 50 Table 3 presents the number of stocks per controversy in each panel. Panel A presents all available negative screening classes from the database. Panel B is the referred to as the Triumvirate of Sin. Panel C is the exclusion list of ABN-AMRO. Panel D is the exclusion list of Triodos. Stocks could be present in multiple screening classes if a company is involved in multiple controversies. The percentage denoted in each panel is the percentage of the controversy related to the entire stock universe.

Table 3: Number of controversial stocks per category in absolute figures and as percentage of total sample

Panel A: Negative screening Panel B: Exclusion (1) Panel C: Exclusion (2) Panel D: Exclusion (3) Negative screening class #Stocks % #Stocks % #Stocks % #Stocks %

Alcohol 101 1,28 101 1,28 101 1,28 101 1,28 Alcohol 5% revenues 62 0,78 62 0,78 62 0,78 62 0,78 Animal testing 391 4,94 391 4,94 391 4,94 Anti-competition controversies 314 3,97 Armaments 223 2,82 223 2,82 223 2,82 Armaments 5% revenues 86 1,09 86 1,09 86 1,09 Business ethics controversies 344 4,35 344 4,35 Consumer controversies 79 1,00 Contraceptives 22 0,28

Diversity & opportunity

controversies 50 0,63 50 0,63 50 0,63

Embryonic stem cell

research 28 0,35

Employee health & safety

controversies 29 0,37 29 0,37

Environmental impact

controversies 59 0,75

Gambling 93 1,18 93 1,18 93 1,18 93 1,18

Gambling 5% revenues 67 0,85 67 0,85 67 0,85 67 0,85

GMO free products 48 0,61

Insider dealing controversies 29 0,37 Management compensation controversies 17 0,21 Nuclear 240 3,04 240 3,04 48 0,61 Pornography 36 0,46 36 0,46

Customer health & safety

Public health controversies 25 0,32

Shareholder rights

Spills & pollution

Tax fraud controversies 40 0,51 40 0,51

Tobacco 28 0,35 28 0,35 28 0,35 28 0,35

Tobacco 5% revenues 24 0,30 24 0,30 24 0,30 24 0,30

Wages or working condition

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Page 22 of 50 In line with previous studies regarding this topic, the risk-adjusted performance is measured using Carhart’s (1997) regression model. I make use of the global factors provided by Kenneth French’s website, where the risk free rate is equal to the US one-month Treasury-bill rate. The global factors are factors that correct the returns for well-known anomalies in finance. The market proxy is equal to all CRSP (Center of Research in Security Prices) firms incorporated in the US and listed on the NYSE, AMEX, or NASDAQ that have (i) a CRSP share code of 10 or 11 at the beginning of month t, (ii) good shares and price data at the beginning of t, and (iii) good return data for t (French, 2019). Fama and French (2012) recommend using the global portfolios factors, since the stocks in the portfolio are composed by stocks around the entire investment universe. Even though the Fama and French five-factor model has not been used much in SRI studies, I will perform the regression model to check whether the results from Carhart’s regression model are consistent. The lack of proof in SRI studies based on the five-factor model may be explained by the fact that the five-factor model is relatively new. The factors are kindly provided by the website of Kenneth R. French. The mean and standard deviation of the factor portfolios are provided in table 4. The mean returns of these portfolios represent the monthly average return of each anomaly over the sample period of 2002 until 2018. The Market-Rf portfolio represents the value-weighted market proxy minus the one-month Treasury bill. SMB represents the difference in monthly return between a small and large-cap portfolio. HML is the difference between a value and a growth portfolio. RMW is the profitability factor, which is captured by robust minus weak. CMA is an investment factor, which is captured by conservative minus aggressive. Finally, MOM is the momentum factor, which is captured by the monthly return on a portfolio long on past year winners and short on past year losers.

Table 4: Summary statistics of Fama and French factors

A) Fama and French factor models Mean return (%) Mean standard deviation (%)

Fama and French regressions

Market-Rf portfolio _0,552 4,296 SMB portfolio _0,190 1,570 HML portfolio _0,179 1,699 RMW portfolio _0,297 1,317 CMA portfolio _0,177 1,396 MOM portfolio _0,460 3,486

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Page 23 of 50 In order to construct the expressive portfolios, the most sustainable companies for each year are needed. The use of the highest ESG-rated companies in the Thomson Reuters Eikon ESG Scores universe oversees the relevance of a formal ranking.

Expressively motivated socially responsible investors want to express their personal identity to themselves and others; they do so by adopting stocks in their personal portfolio, which are listed on a formal ranking. This dataset is freely provided by CorporateKnights on their website, known as the Global 100 most sustainable corporations in the world index. CorporateKnights reveal the Global 100 on a yearly basis since 2005. Publicly listed companies with a gross revenue of at least 1 billion dollars are eligible for inclusion in the Global 100. Eligible companies are assessed on 21 key performance indicators4_{covering resource management, employee management,} financial management, clean revenue and supplier performance (CorporateKnights, 2019). Table 5 presents the average CSR scores of the top 30 companies listed on the Global 100 for each year. The ISIN codes of the companies in the Global 100 list of the most sustainable companies are linked to the ISIN codes of the Thomson Reuters Eikon ESG Scores database. Consequently, the CSR ratings of the top 30 companies each year are retrieved from the Thomson Reuters Eikon ESG Scores database for the relevant companies.

This table presents the average social scores from the Thomson Reuters Eikon ESG Scores database linked to the companies adopted in the Global 100 most sustainable companies. The table presents the averages of the top 30 companies for each year.

4_{The KPI’s used in the methodology of CorporateKnights are: energy productivity, GHG} productivity, water productivity, waste productivity, VOC productivity, NOx productivity, SOx productivity, particulate matter productivity, innovation capacity, percentage tax paid, CEO-average/employee pay ratio, pension fund status, supplier sustainability score, injuries, fatalities, employee turnover, women in executive management, women on boards, sustainability pay link, sanctions deduction and clean revenue.

Table 5: Social performance of global 30 most sustainable companies by CorporateKnights

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Page 24 of 50

5. Results

This section presents and discusses the results. First the summary statistics of the constructed portfolios are discussed. Then I estimate the results of the 4- and 5-factor models, followed by a ranking based on CFP and CSP. Finally the robustness of the results is checked by the sensitivity analysis.

5.1 Portfolio performance:

Table 6 reports the summary statistics of the performance of the constructed portfolios as discussed in paragraph 3.2. The performance of the constructed portfolios is measured over the sample period of 2002 until 2018. Starting with the entire

portfolio, which includes all stocks in the investment universe with data availability for both return and ESG variables. The number of inclusions per year for each constructed portfolio can be found in table E of the appendix. The financial performance is based on retrospective returns over the sample period.

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Page 25 of 50

Table 6: Summary statistics portfolios

A) Financial performance

Portfolio mean return

(%) Portfolio mean standard deviation (%) Portfolio Sharpe ratio

Constructed SRI portfolios

Entire portfolio 0,178 4,883 0,015646 Financial 75 0,165 4,808 0,013212 Financial 80 0,189 4,789 0,018239 Financial 85 0,186 4,689 0,018122 Financial 90 0,088 4,771 -0,00291 Deontological 1 0,182 4,887 0,016534 Deontological 2 0,176 4,889 0,015175 Deontological 3 0,175 4,898 0,015027 Consequentialist 0,163 4,866 0,012574 Expressive 1 0,200 5,771 0,017019 Expressive 2 0,194 5,181 0,017775 Expressive 3 0,111 4,931 0,001887

B) Social performance Mean E Mean S Mean G Mean ESG

Constructed SRI portfolios

Entire portfolio 49,223 (0,803) 49,593 (1,105) 50,981 (2,373) 49,932 (1,288) Financial 75 86,896 (0,967) 86,539 (2,064) 80,267 (1,809) 84,568 (1,132) Financial 80 88,893 (1,046) 88,536 (2,169) 84,114 (1,216) 87,181 (0,888) Financial 85 90,852 (1,047) 90,719 (2,038) 87,794 (0,59) 89,788 (0,942) Financial 90 92,965 (1,026) 93,094 (1,256) 91,386 (0,774) 92,482 (0,803) Deontological 1 49,219 (0,862) 49,549 (1,1) 50,935 (2,358) 49,901 (1,281) Deontological 2 48,838 (0,852) 49,380 (1,119) 50,744 (2,444) 49,654 (1,306) Deontological 3 48,432 (0,775) 48,891 (1,026) 50,380 (2,345) 49,234 (1,22) Consequentialist 62,063 (1,821) 62,782 (2,124) 59,899 (3,251) 61,581 (2,194) Expressive 1 91,243 (2,88) 90,221 (3,802) 68,916 (9,26) 83,460 (4,014) Expressive 2 89,334 (2,781) 87,519 (5,057) 66,945 (7,952) 81,266 (4,227) Expressive 3 88,378 (3,382) 86,910 (5,022) 65,535 (6,788) 80,274 (4,179)

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Page 26 of 50

5.1.1 Financial performance:

Table 7 shows the results of the four-factor model for each constructed portfolio minus the entire investment universe portfolio, which replicates a portfolio long in the monthly returns of the constructed portfolios and short in the entire investment universe portfolio. In line with the literature (Capelle-Blancard and Monjon, 2014) the alphas of the portfolios show neither significant under- nor outperformance. This implies that none of the constructed portfolios is able to outperform the benchmark in terms of financial performance. However, the five-factor model in table 8 shows significant outperformance for portfolio deontological 1 compared to the investment universe portfolio at a 5% significance level. Furthermore, the model exhibits significant underperformance at a 10% significance level for the consequentialist portfolio. This infers that socially responsible investors able to outperform the benchmark by constructing a portfolio screened from the Triumvirate of sin stocks, according to the findings of the five-factor model. This result is slightly contradicting to the existing literature (e.g. Chong et al., 2006; Durand et al., 2013; Trinks et al. 2017) of

outperformance from portfolios consisting of Triumvirate of sin stocks only, but only holds for the first deontological portfolio in the five-factor model.

There exists a slight difference in conclusions for the different factor models. The conclusions of the four-factor model are in line with previous studies that SRI portfolios do neither under- nor outperform conventional portfolios. Furthermore, both the Mann-Whitney U test statistics and the Kruskal-Wallis test statistics are in line with the results of the four-factor model and are somewhat contradicting for the five-factor model. Therefore, the results of the four-factor model are leading in the conclusions of this research and the reliability of the five-factor model is somewhat doubtful. The results of the four- and five-factor models indicate that there is not enough evidence to reject hypotheses 𝐻_1𝑎 and 𝐻_4𝑎 of no significant financial under- or outperformance of respectively financial and expressive portfolios compared to the entire investment universe. Which is perfectly in line with the literature (e.g. Capelle-Blancard and Monjon, 2014) of no significant distinction between SRI portfolios and conventional portfolios.

Hypothesis 𝐻2𝑎 of statistical financial underperformance of the deontological motivated portfolios compared to the entire investment universe portfolio is rejected based on the results of the four-factor model in table 7, showing no significant

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Page 27 of 50 This table presents Carhart’s four-factor model estimates from each individual portfolio minus the entire portfolio. The alpha is the intercept, indicating monthly out- or underperformance relative to the entire portfolio. Standard deviations are denoted between brackets. *, **, and *** stand for the significance levels at the 10%, 5%, and 1% thresholds respectively.

The final financially driven hypothesis is 𝐻_3𝑎 of no significant financial under- or outperformance of the consequentialist portfolio compared to the entire investment universe portfolio. The results of the four-factor model find not enough evidence to reject the zero hypothesis. On the other hand, the five-factor model finds a negative relationship between the financial performance of the

consequentialist portfolio related to the entire investment universe of -0,033% monthly return at a 10% level of significance. The results of the five-factor model imply that consequentialist motivated investors bear the costs of being a socially responsible investor and

significantly underperform to the benchmark.

Table 7: Carhart's four-factor model portfolios minus entire portfolio

Alpha Mkt-RF SMB HML MOM Adj-R2

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Page 28 of 50 This table presents the Fama and French five-factor model estimates from each individual portfolio minus the entire portfolio. The alpha is the intercept, indicating monthly out- or underperformance relative to the entire portfolio. Standard deviations are denoted between brackets. *, **, and *** stand for the significance levels at the 10%, 5%, and 1% thresholds respectively.

5.1.2 CSR performance:

Table A of the appendix show that all three CSR pillars from each constructed portfolio are significantly different from those from the entire investment universe, either at a 1% or a 5% level of significance. Hence, there is not enough evidence to reject the hypothesis of 𝐻_1𝑏, 𝐻_3𝑏 and 𝐻_4𝑏 of ESG outperformance for respectively financial and deontological motivated portfolios. However, the deontological portfolios show significant underperformance instead of outperformance, therefore the 𝐻2𝑏 is rejected at a 1% level of significance. Table 8: Fama and French five-factor model portfolios minus entire portfolio

Alpha Mkt-RF SMB HML RMW CMA Adj-R2

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Page 29 of 50

5.1.3 Combined performance:

Table 9 presents a comparison analysis of the portfolio statistics on both the CSR pillars and the financial performance. Both performance indicators are assumed to be equally important for socially responsible investors since most of the investors are driven by the popular saying -“doing well by doing good”. This is confirmed by Jansson and Biel (2011), their survey (n=457) found that private investors are not only guided by the believes of lower risks of SRI funds, but also feel responsible to some extend for their investments. Financial performance is based on the ranking of each portfolio in terms of their corresponding Sharpe ratio, as presented in table 5. The portfolio with the highest Sharpe ratio receives the highest rank in terms of financial performance. The table is sorted on the highest combined CFP and CSR score, where the Financial 85 portfolio is the portfolio with the highest equally weighted ranking based on CFP and CSR. The portfolio including only stocks with ESG-scores of 85 or higher yields the highest utility for socially responsible investors. Remarkable is the poor ranking of all deontological portfolios. Apparently, negative screening does not lead to superior financial and/or social performance. The last five portfolios all yield a lower equally weighted utility in comparison to the entire portfolio, one could say for these five portfolios socially responsible investors are the ones who eventually bear the costs of being a social investor.

This table presents the equally weighted ranking of CSP and CFP for each constructed portfolio. CFP is based on the Sharpe ratio of each portfolio, which is the excess return of the portfolio divided by the standard deviation of the portfolio. CSR is the equally weighted average of E, S, and G. The table is sorted on the equally weighted ranking of CSR and CFP.

Table 9: Combined financial and social performance

Rank CFP Rank E Rank S Rank G

Equally weighted CSR

CFP and CSR

weighted score Rank

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Page 30 of 50

5.2 Sensitivity analysis:

Driven by the results of Liang and Renneboog (2017), who found that CSR ratings are strongly correlated with their legal origin, the research is reproduced for a common- and civil law sample as sensitivity analysis. Countries are assigned to their

corresponding legal system and companies from other legal systems (e.g. mixed legal systems or religious legal systems) are excluded from the sample. Countries in the sample with their corresponding legal system can be found in table C of the appendix. Table H and I in the appendix imply that none of the portfolios, in both legal systems, significantly out- or underperform to the entire investment universe using Carhart’s four-factor model. Which is perfectly in line with the previous findings of no significant out- nor underperformance of the entire sample. Table J and K present the financial performance based on Fama and French five-factor model on both legal systems. For both legal systems, the first deontological portfolio significantly outperforms the entire portfolio, consistent with the original sample. In the common law sample the

consequentialist portfolio significantly underperforms to the entire portfolio, whereas the civil law sample exhibits no significant underperformance. Hence, the only

distinction in terms of financial performance is the lack of significance in the

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Page 31 of 50

6. Conclusion and limitations

In this section, the conclusion of the research is discussed. Furthermore, the limitations of this research are debated which steers the suggestions for future research.

6.1 Conclusion

In this thesis, evidence is provided of possible distinctions in financial and social performance of SRI portfolios. Portfolios are constructed based on the motivations for SRI provided by Chatterji et al. (2009), resulting in four portfolio types with multiple sub-portfolios to test for sensitivity in portfolio construction strategies. The investment universe consists of 7,907 globally, publicly traded stocks, covering around 80% of the investment universe. Contrary to previous studies regarding the relationship between CFP and CSR, this study goes beyond financial performance and assumes equal

importance of social and financial performance. The main research question is: What is the impact of differences in investors’ motivations for SRI on both social- and financial performance?

The performance of the constructed portfolios is measured by a portfolio long in the constructed portfolio and short in the entire investment universe portfolio. After controlling for size, value and momentum using the four-factor model, none of the portfolios is able to significantly outperform the entire investment universe. Which is in line with the previous findings of no significant out- or underperformance of SRI

portfolios (e.g. Capelle-Blancard and Monjon, 2014). The Mann-Whitney U test statistics and the Kruskal-Wallis test statistics are in line with the results of the four-factor model and endorse the findings of the four-factor model. The financial performance of the constructed portfolios is back tested by the five-factor model (Fama and French, 2015). The results of the five-factor model slightly differ from the four-factor model. The first deontological portfolio, excluding the Triumvirate of Sin stocks, outperforms the entire investment universe by 0.005% at a 5% level of significance on a monthly basis. The consequentialist portfolio shows underperformance of -0.033% at a 10% level of significance on a monthly basis. However, these results are not endorsed by the test statistics of the Kruskal-Wallis test statistics and are not in line with previous studies regarding the relationship between SRI and CFP (e.g. Capelle-Blancard and Monjon, 2014). Therefore, the significant results of the five-factor model are considered as estimation errors and no statistical difference in terms of financial performance has been found.

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Page 32 of 50 significance. Most of the distinction in social performance is expected and driven by the allocation strategies of the portfolios. The statistical distinction in social performance of SRI portfolios is in line with the findings of Grougiou et al. (2016) who found that

screened SRI portfolios outperform Sin stock portfolios in terms of CSR scores. However, the deontological portfolios all show slightly lower CSR scores. This contradicts the findings of Grougiou et al. (2016).

The combined analysis of both social and financial performance show that the Financial 85 portfolio yields the highest utility for SRI investors. Remarkable is the poor performance of the deontological motivated portfolios. An increase in screening

intensity results in a lower ranking based on both financial and social performance which is in line with studies regarding the relationship between negative screening and portfolio performance (e.g. Chong et al., 2006; Jo et al., 2010; Trinks et al., 2017).

Altogether, the impact of differences in investors’ motivations is not statistically significant in terms of financial performance and one can say that the constructed portfolios do neither under- nor outperform the benchmark. In terms of CSR

performance, all constructed portfolios either under- or outperform the benchmark significantly. The results are robust to the sensitivity analysis, where subsamples are composed based on the legal origin of the included stocks.

6.2 Limitations and future research

The first limitation of this study follows from the motivations for SRI by Chatterji et al. (2009), they state that investors can be a combination of any of the four

motivations. However, in this research, an investor is assumed to be one of the four motivations rather than a combination. In practice, it is reasonable to assume that investors have multiple motivations for being a socially responsible investor. The second limitation derives from the data availability of the Global 100 most sustainable companies. The database provides information from 2005 until 2018, whereas the other constructed portfolios are constructed from 2002 until 2018. The last limitation comes from the subjectivity of this research. The way the portfolios are constructed is partly subjective, even though the investment strategies are partly based on literature, it was impossible to base all portfolios entirely on literature due to the lack of papers involving the motivations for SRI of Chatterji et al. (2009).

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Page 33 of 50

7. Literature

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Page 35 of 50 Elkington, J., 1999. Cannibals with Forks. The Triple Bottom Line of 21st_Century

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Page 36 of 50 Heal, G., 2001. Survey-mastering investment: the bottom line to a social conscience. The Financial Times, July 2 2001.

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