Screening activities by socially responsible funds: A matter of agency?

This study analyzes the social and financial performance of firms that appear in the portfolios of European socially responsible funds (SRFs), relative to the performance of firms in portfolios of European conventional funds (CFs). Corporate social performance (CSP) reflects the extent to which a company engages with environmental, social, and corporate governance issues. Corporate financial performance (CFP) instead pertains to accounting-based profitability. The analysis reveals differences between CSP and CFP across companies in the two types of portfolios. First, firms held by SRFs exhibit poorer CSP than firms selected by CFs. Second, in the long term, companies in SRF portfolios achieve worse risk-adjusted returns than firms held by CFs. These results challenge the actual social responsibility of SRFs and further raise concerns about the screening activity of SRFs with regard to the profitability of the target firms.