Business and Society

Is ‘doing good’ the real reward in SRI funds?

December 5, 2011 | 3 min read

These are some of the findings presented in the paper “Is ethical money financially smart? Nonfinancial attributes and money flows of socially responsible investment funds” by Professors Luc Renneboog and Jenke Ter Horst of CentER, Tilburg University (NL), and Professor Chendi Zhang of the Finance Group, Warwick Business School (UK).

“In their investment decisions, investors in SRI funds may be more concerned with ethical or social issues than with fund performance,” say the authors. “Therefore, SRI money flows are less related to past fund returns.” But factors of geography and culture, specific ‘screens’ used by SRI fund management (from environmental impact to religious beliefs), and the marketing of such funds, all have an impact on the money flows into SRI funds in the markets surveyed (which included the US, UK, EU and Asia/Pacific Rim).

Different Objectives

While SRI and ethical investment has grown steadily over the past two decades, investors in these types of funds (which in the US already accounts for 12% of the universe of professionally managed assets from institutional and retail investors) may have many different types of socially responsible objectives, leading to a variety of different ‘screens’ used by SRI fund management in their portfolio development. The authors identify four different categories of SRI Screens, and whether those screens are negative (avoidance) or positive (support):

  • Sin – tobacco, alcohol, gambling, weapons, pornography (all negatives in SRI)
  • Ethical – positive screens for healthcare, but negative for such issues as animal testing, GMOs, etc;
  • Social – positive or negative screens related to human rights, business practices, corporate governance and labour issues;
  • Environmental – positive screens for firms with renewable energy and good ecological practices, negative for firms involved with nuclear energy, for example.

Of the issues covered by these four screens, some tend to be more culturally or geographically focused. Some US SRI funds cater to the ethics embraced by religious investors – negative screens here include for example the anti-abortion convictions of Christian-identified investors.Environmental screens were perceived as positive across cultures and regions. “Our finding of the enhanced flow-return sensitivity for Environmental screens suggests that the environmental attribute is complimentary to good fund performance,” say the authors.

Younger funds spend more on marketing, attract more money flows

The authors also noted that – like their ‘conventional’ fund counterparts – younger, smaller SRI funds tend to market more heavily and to experience larger money flows than more established (and less heavily-advertised) funds. “We confirm that funds with higher marketing expenses attract more inflows, especially for younger SRI funds,” say the authors. ”Because new funds can be more innovative and exert more marketing efforts than established funds, younger funds can attract more flows than can older ones. In addition, smaller funds can attract a larger percentage of inflows, and funds charging lower fees can increase money flows due to more competitive pricing of services.”

Global control group

The control group for this research comprised 321 SRI equity mutual funds in 21 countries around the world.The ‘ethical’ funds in the US, Continental Europe and Rest of the World were benchmarked against 3113 ‘conventional’ US funds; while ‘conventional’ UK funds were the reference group for the UK SRI funds. While SRI funds and ethical investment are still in an early stage of development, that development appears robust, particularly in the US and UK, where such funds are much larger than in the EU and the Rest of the World. The average size of US SRI funds is 249 million euro, while the European funds averaged 39 million euro. The average monthly growth rate of the SRI industry ranges from 2.2% in the UK to 3% in The Rest of the World.

Smart money?

So, is ethical money smart money? Not in the sense that ethical investors will be able to predict the future performance of their SRI investments by looking at past performance. “We find no relation between past average flows and future returns for either conventional funds or SRI funds,” state the authors. “Our main findings are that SRI investors are less concerned about negative returns than are investors in conventional funds. The fact that SRI flows are significantly less sensitive to past negative returns suggests that SRI investors consider nonfinancial fund attributes in their investment decisions.”


This article may be reproduced according to our terms of use with attribution (and link, if online) to To be cited as: “Is ‘doing good’ the real reward in SRI funds?”, Luc Renneboog, Jenke Ter Horst, Chendi Zhang,, December 5, 2011.

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Research Paper


Jenke ter Horst
Professor of Portfolio Management, Tilburg Sustainability Center

Luc Renneboog
Professor of Corporate Finance, Tilburg University

Chendi Zhang
Assistant Professor of Finance

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