Is socially responsible investing more risky? Australian evidence

Prior studies, which analyse the performance of socially responsible investments (SRIs) compared to conventional funds, have thus far ignored the assessment of risk. In response to this identified lack of research, we make a major attempt to fill the void by investigating whether daily returns of Australian equity socially responsible investment funds have different tail risk exposure in the return distribution compared to matched conventional equity funds. The Australian funds management industry provides a natural setting within which to study the risk exposure of SRI funds. The Australian funds management industry has one of the largest and fastest growing funds management sectors in the world. This growth is underpinned by Australia’s government-mandated retirement scheme. In addition, Australia is the first country to introduce regulations that require issuers of financial products and financial advisors to disclose and advise on ethical, social, and governance (ESG) considerations. Using a sample of 26 funds spanning the period 1998–2013, we establish several new findings. First, in assessing tail risk exposure we observe no evidence of significant difference in riskiness amongst socially responsible investment compared to that of conventional funds with similar investment styles. Second, when comparing two downside risk measures across socially responsible and matched conventional funds, namely Value-at-Risk and expected shortfall, we find that return distributions amongst Australian funds do not exhibit particularly heavy tails. Taken together, we show that investors do not pay a penalty (in terms of higher risk) to invest ethically.