The Effect of Socially Responsible Investing on Portfolio Performance

More and more investors apply socially responsible screens whenbuilding their stock portfolios. This raises the question whether theseinvestors can increase their performance by incorporating such screensinto their investment process. To answer this question we implement asimple trading strategy based on socially responsible ratings from theKLD Research & Analytics: Buy stocks with high socially responsibleratings and sell stocks with low socially responsible ratings. We findthat this strategy leads to high abnormal returns of up to 8.7% peryear. The maximum abnormal returns are reached when investorsemploy the best-in-class screening approach, use a combination of severalsocially responsible screens at the same time, and restrict themselves tostocks with extreme socially responsible ratings. The abnormal returns remainsignificant even after taking into account reasonable transaction costs.