Performance of Socially Responsible Investment Funds against an Efficient SRI Index: The impact of benchmark choice when evaluating active managers

Performance measurement of socially responsible investment (SRI) has been the subject of numerous studies in various countries.  However, the conclusions of performance assessments always depend on the choice of the reference index one uses.  SRI criteria lead to a reduction of the stock universe.  Typical SRI indices respect such screenings and then simply weight the acceptable stocks by market cap, or alternatively by sustainability scores.  They thus ignore the risk/return properties of stocks and in particular the correlations.  Consequently, they do not necessarily reflect the performance available from a well-diversified portfolio of SRI-compliant stocks. Released by EDHEC-Risk Newsletter September 2011