Jacquelyn E. Humphrey

Socially Responsible Investment Fund Performance: The Impact of Screening Intensity

Perhaps the most common criticism of socially responsible investment funds is that imposing non-financial screens restricts investment opportunities, reduces diversification efficiencies and thereby adversely impacts performance. In this study we investigate this proposition and test whether the number of screens employed has a linear or curvilinear relation with return. Moreover, we analyse the link between screening intensity and risk. Screening intensity has no effect on unadjusted (raw) returns or idiosyncratic risk. However, we find a significant reduction in α of 70 basis points per screen using the Carhart performance model. Increased screening results in lower systematic risk – in line with managers choosing lower β stocks to minimize overall risk.

The independent effects of environmental, social and governance initiatives on the performance of UK firms

We investigate the effect of environmental, social and governance factors on the financial performance of UK firms. We examine the three factors separately to disentangle the relation of each with performance. We find no difference in the performance of firms with high or low environmental, social or governance rankings. The firms also do not differ in their systematic risks, book-to-market ratios or momentum exposures. However, high-rated firms are consistently larger. Our findings demonstrate that UK investors can incorporate environmental, social or governance criteria into their investment strategies without incurring any significant cost (or benefit) in terms of risk or return.

Do Fund Flow-Return Relations Depend on the Type of Investor?

This study investigates whether the relation between macro-level fund flow and market returns varies between the retail and institutional fund management markets. We find evidence of a contemporaneous relation between flow and market return for retail funds and also find evidence to support the notion that retail investors are feedback traders. In contrast, we find no relation between flow and market return for institutional funds, consistent with these investors being more informed than their retail counterparts. We find no evidence of flow inducing price pressure for either group of funds.

Comparing extraction rates of fossil fuel producers against global climate goals

Meeting global and national climate goals requires action and cooperation from a multitude of actors1,2. Current methods to define greenhouse gas emission targets for companies fail to acknowledge the unique influence of fossil fuel producers: combustion of reported fossil fuel reserves has the potential to push global warming above 2 °C by 2050, regardless of other efforts to mitigate climate change3. Here, we introduce a method to compare the extraction rates of individual fossil fuel producers against global climate targets, using two different approaches to quantify a burnable fossil fuel allowance (BFFA). BFFAs are calculated and compared with cumulative extraction since 2010 for the world’s ten largest investor-owned companies and ten largest state-owned entities (SOEs), for oil and for gas, which together account for the majority of global oil and gas reserves and production. The results are strongly influenced by how BFFAs are quantified; allocating based on reserves favours SOEs over investor-owned companies, while allocating based on production would require most reduction to come from SOEs. Future research could refine the BFFA to account for equity, cost-effectiveness and emissions intensity.Meeting emissions targets requires limiting use of fossil fuel reserves. For the largest investor- and state-owned producers allowable extraction varies dependent on the approach to calculate burnable fossil fuel allowance.

The Many Faces of Socially Responsible Investing - Does the Screening Mechanism Affectthe Risk and Return of Mutual Funds?

We investigate whether positive or negative screening impacts the performance and risk of socially responsible mutual funds. We mimic the characteristics of mutual funds and bootstrap firm returns to form portfolios which reflect actual mutual fund holdings. We find positive screening results in increased returns, but also increased total risk and beta. We do not find support for the conjecture that positively screened firms have lower unsystematic risk. Return results from negative screening are not as clear, but we do find that increasing the number of stocks excluded from a portfolio may impede the ability to fully diversify.