The urge to act: A comparison of active and passive socially responsible investment funds in the United States

Abstract

Innovative finance vehicles are required to facilitate the transition towards a sustainable society. Here, we investigate two very successful innovations in the fund industry, namely index mutual funds and passively managed exchange traded funds (ETFs). We study socially responsible investment (SRI) funds in the United States and particularly focus on their financial performance, cost of investing and degree of active management. We do not find persuasive evidence that the actively managed funds perform better than their passively managed counterparts do. Furthermore, we find that some active SRI funds seem to operate as ‘closet indexers’ with a low degree of active management. We conclude that passively managed socially responsible funds have the potential to enrich the spectrum of financial products that may help advance the sustainability transition.

Responsible or Thematic? The True Nature of Sustainability-Themed Mutual Funds

“…The structure of this paper is first related to the traditional literature about socially responsible funds, mainly aimed at comparing risk-adjusted returns of responsible and conventional funds, given the different level of diversification and resulting level of profitability [4,19,22,24,27,29,.…”

“…To deepen the study on the relationship between portfolio financial returns and their level of responsibility, some previous empirical analysis distinguished the funds according to their sustainability rating [18]. To the best of our knowledge, few studies have focused on the comparison of performance yielded by different responsible methodologies of portfolio selection, for example, a best-in-class screening criteria with a negative screening approach [19][20][21][22][23][24][25][26]. Other research has analyzed theme-specific funds, such as green funds or water-related funds [6,[27][28][29][30][31][32][33][34], but without a general overview of the thematic approach linked to sustainability.…”

Shareholder Theory/Shareholder Value

“…A refocus to enlightened shareholder value is consistent with the growing numbers of institutional investors who include sustainability criteria and metrics when developing and assessing portfolios of shares (Chen and Scholtens 2018;Miralles-Quiros et al 2017;Sullivan et al 2015). Even Michael Jensen, the champion of agency theory, has conceded that in order to maximize value, managers must not only satisfy but enlist the support of all corporate stakeholders (Jensen 2002).…”

The role of mutual funds in the sustainable energy sector

“…Environmentally aware investors and mutual funds with long‐term investment horizons attracted by the high return opportunities—coming from energy policies established by governments that help firms to adopt renewable energy strategies, leading to growth in the renewable energy sector—have ploughed money into renewable energy (Jansson & Biel, ; Reboredo, ; Wahba, ), channelizing private financial resources into firms' climate‐related projects. The effectiveness of mutual funds as a financial instrument to mobilize private capital for climate investment depends on their managers' ability to generate positive financial performance for investors implementing the renewable energy attribute in their investment strategies in a similar way to SRI mutual funds (Bollen, ; Chen & Scholtens, ) and other long‐term financial instruments (Martí, ; Miralles‐Quirós, Miralles‐Quirós, & Nogueira, ).…”