Social responsibility indices
Social responsibility indices follow what is designated as Socially Responsible Investing (SRI), an investment discipline that considers environmental, social and corporate governance criteria (ESG) in the hope of generating long-term competitive financial returns and positive societal impact. According to the Forum for Sustainable and Responsible Investment's 2012 Report on Socially Responsible Investing Trends, SRI held $3.74 trillion (11.3 %) in total assets under management out of the $33.3 trillion in the U.S. investment marketplace. The report identifies 720 funds which apply various environmental, social and governance (ESG) criteria in their investment analysis and portfolio selections.[note 1] Social Responsibility indexes fall within the Screened security selection/Market Capitalization security weighting segment of the Index Strategy Box (Fig.1).
Social responsibility screens
SRI adopts the following investment approaches to security selection and fund management:
- Screening: Screens can be both positive and negative. Positive screens seek companies judged to have good employer-employee relations, strong environmental practices, products that are safe and useful, and operations that respect human rights around the world. SRI funds tend to negatively screen companies whose products and business practices are judged harmful to individuals, communities, or the environment.
- Shareholder advocacy: This involves SRI funds taking an active role as shareholders. This includes talking with companies on issues of social, environmental or governance concerns as well as filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, gender/racial discrimination, pollution, and problem labor practices.
- Community Investing: Directing capital from investors and lenders to communities that are judged underserved by traditional financial services institutions. Community investing provides access to credit, equity, capital, and basic banking products that these communities might otherwise lack.
Each SRI index provider tends to have differing detailed social and ethical criteria for screening companies, so an investor needs to assess each index (and SRI fund) to assure that the ethical standards of the investment match his or her ethical convictions. Among the industries commonly excluded from SRI indexes are tobacco, alcohol, adult entertainment, firearms, gambling, nuclear power, and military weapons. SRI indexes have been developed based on environmental and social criteria (Sustainability Indexes) and on religious criteria (Catholic and Islamic Indexes).
The oldest SRI Index is the Domini 400 Social Index, which started in 1990. The Calvert Social Index started in 2000, and the FTSE4Good Indexes date from 2005. Currently index funds and ETFs are available that track the Domini 400 Social Index, the FTSE4Good Select Index, and the MSCI US ESG Broad Market and ESG Select Social Indexes. MSCI has created a series of social indexes which cover the entire US market and discrete segments of the market:
|MSCI ESG Social Responsibility Indexes|
The performance history of SRI Indexes is short. Statman (2005) found that during the period May 1990 – April 2004 the Domini Social 400 Index produced a monthly alpha that exceeded that of the S&P 500 Index by 0.09%. However, none of the alphas are statistically significant. The correlations between the returns of socially responsible indexes and the S&P 500 Index were high but tracking errors were substantial. For example, the mean difference between the returns of the DS 400 Index and the S&P 500 Index in 12-month periods was 2.49% and the maximum difference was 8.01%. Statman also found that the outperformance of SRI indexes above the S&P Index were period dependent, with outperformance coming in the 1990's and underperformance occurring with the market decline in 2000 and continuing through 2004. Ter Horst, Zhang, and Renneboog (2007) examined the global universe of SRI funds and found that from 1991-2003 US and UK SRI funds provided risk adjusted returns that tracked their indexes closely, while European and Asia Pacific SRI funds had risk adjusted returns that trailed their indexes by -5.00% annually. They also found that SRI fund returns were increasingly being explained by the Fama and French three-factor model.
Social responsibility index returns
Total Return Index
|MSCI USA ESG|
The MSCI ESG 400 index is the present moniker of the Domini 400 Index.
- ESG funds include mutual funds, annuity funds, closed-end funds, exchange-traded funds (ETFs), alternative investment funds and other pooled products, but exclude separate account vehicles and community investing institutions.
- Indexing in the 21st Century: Portfolio Solutions Inc.
- SRI Basics
- Forum for Sustainable and Responsible Investment
- 2012 Trends Report Executive Summary: 2012 Report on Sustainable and Responsible Investing Trends in the United States, from The Forum for Sustainable and Responsible Investment
- Social Investment Forum Socially Responsible Investing Facts
- Richard A. Ferri, All About Index Funds, ISBN 0-07-148492-2
- S&P Dow Jones Sustainability Indices
- SRI Index Funds:
- Statman, Meir, Socially Responsible Indexes: Composition and Performance (January 2005)
- Ter Horst, Jenke R., Zhang, Chendi and Renneboog, Luc, The Price of Ethics: Evidence from Socially Responsible Mutual Funds (May 2007). ECGI - Finance Working Paper No. 168/2007; TILEC Discussion Paper No. 2007-012; CentER Discussion Paper Series No. 2007-29
Social responsibility index methodologies
- Ground Rules For The Management Of The FTSE4Good Index Series
- The Calvert Social Index Frequently Asked Questions
- MSCI ESG Indexes