DIPARTIMENTO DI ECONOMIA E MANAGEMENT
CORSO DI LAUREA MAGISTRALE IN BANCA, FINANZA
AZIENDALE E MERCATI FINANZIARI
Tesi di laurea
Empirical research on SRI indexes
Relatore:
Candidato:
Prof.ssa Caterina GIANNETTI
Bettina GRANCHI
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Abstract
This study analyses Ethical Finance and investigate whether its tools are more profitable than other types of investments. After a brief overview of the general concept of Ethical Finance, the dissertation focuses on Sustainable Responsible Indexes (SRIs) and on the economic discussion behind these tools. This study concludes with an empirical assessment of the performance, in two different time periods, of the two main SRIs in comparison with their benchmarks. Results do not show any advantages of this kind of investment when looking at the mean of returns, but show some advantages in terms of risk especially in crisis times.
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Index
Introduction………..5
1) ETICHAL FINANCE I) Principals and tools……….6
II) SRIs and ESG criteria...………..8
III) Previous related work………....9
2) SRIs INDEXES I) FTSE4GOOD………15
II) DJSI………...16
3) EMPIRICAL RESEARCH I) Data and sample description……….19
II) Econometrics Methods………...25
III) Empirical Results a. First Period Comparison………28
b. Second Period Comparison………33
Conclusions………..38
List of Figures………..39
List of Tables………40
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Introduction
This dissertation focuses on Ethical Finance (EF), a topic that is discussed more and more in the recent years. EF is a branch of finance that contains a variety of different financial activities, guided by different principles and ethical rules. There are some academics and practitioners that believes it gives performance advantages, especially in crisis time, while there are those who believe that there is not such an advantage. Analysing the trend of several sustainable responsible indexes (SRIs) in different intervals of time, in the
following I will try to answer this question.
The dissertation is divided into three chapters; the first one discusses EF, providing an overview of its definitions and measurements. It also focuses on sustainable responsible investments and its criteria. The first chapter ends reporting some contrasting results from recent empirical research on EF.
In the second chapter, it reports a short overview of two families of SRIs that will be used
in the empirical analysis in the third chapter: the FTSE4GOOD index series and the Dow Jones Sustainable Index.
In the last chapter, the thesis concludes with an empirical analysis. In this analysis, the performance of these two SRIs indexes are compared with a conventional benchmark for
3 different geographic areas (USA, EU, Global). These comparisons are made by splitting the period of the analysis into two: the first part of the study relies on all available data (from 2002 to 2017), while the second one considers only the time periods following the subprime crisis (from first month of 2007 to the last month on 2012). Results show that there is not a strong difference between the SRIs performance and its benchmark, but there are some differences in terms of risk. To conclude, there is no evidence of advantages or disadvantages of this kind of investments in term of mean returns, but there are some advantages in terms of risk especially in crisis times.
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1)
ETHICAL FINANCE
I. Principles and tools
Nowadays several studies and discussions around the economic world concern EF, which is a branch of Finance that is not just focused on profitability of investments, but also on sustainable development for societies. “Sustainable development” means a development that can satisfy economic, environmental and social needs of actual generation without compromising the advancement of next generations.1 Beyond the discussion on whether this branch of Finance is deserving from an ethical point of view, there are economic discussions about the possibility that this branch is more profitable than other type of investments. For instance, during the recent economic crisis, funds and societies that didn’t focus their core business on speculation (that is one of the ethical finance principles) obtained better performances than others.2
It is not easy to give a unique definition of EF, because it has not a clear perimeter, it contains a variety of different financial activities and ethical rules. The first EF fund, the Pax World Fund,3 was constituted on 1971 during the Vietnam war and on his portfolio, it excluded activities connected with tobacco, weapons, as well as alcohol sectors. On 1976, in Bangladesh, Muhammad Yunus has founded a bank that, using also unconventional guarantees, grants loans to poor people, the Grameen Bank.4 In Europe, the first bank, focused on financing ethical funds and projects about environmental problems, was founded on 1974, the GLS Bank.5 From microcredit to unconventional guarantees from financing of human or
1Berti M. et al., (2013), “Studi in ricordo di Tommaso Fanfani”, pp. 687-709 2 Fini G., (2009), Solo l'etica fa da antidoto agli errori della finanza, ilsole24ore 3 www.paxworld.com
4www.grameenresearch.org
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Weber O. and Remer S., editors., (2011), “Social banks and the future of sustainable finance. Taylor & Francis”
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profit projects to SRIs (Socially Responsible Investments), EF has had several
manifestations creating discussions throughout academics to delineate which activities and principles are related with this branch. In 1998, the Italian association AFE (Associazione Finanza Etica) published the “Manifesto della Finanza Etica”,6 where there are the fundamental principles of the EF:
1) Credit, in all its manifestation, is a human right (accepting unconventional guarantees);
2) Efficiency is one element of ethical liability (EF is not a kind of donation);
3) It is not legitimate to make profit by merely speculative activities; 4) The finance is transparent (depositors have to know the institution
process of operating, the decisions about investment and every other important information);
5) It is necessary that savers, even more than business partners, take part to important decisions;
6) Investment criteria are economic but also social and environmental; 7) The managers that guide all financing activities have to adhere globally
and coherently with EF principles, being inclined to the monitoring from savers and guarantees institutions.
Concluding, EF is a branch of Finance that can hinder negative effects of capitalism, and sustain an harmonic development of economy, fighting against squandering of resources from corruption phenomenon and allowing the right global competition.7
6Associazione Finanza Etica, (1998), Manifesto della finanza etica, www.bancaetica.it
8 II. SRIs and ESG criteria
In a large sample of EF tools, the most diffuse one are the Sustainable Responsible Investments.8 SRIs involves a decision-making process based on corporate social
responsibility (CSR), such as a real diffused business method. Such as the general EF, also for the SRIs there is not a unique definition, but there are different
explanations from economic and geographic different contests based on their own experiences. In all definitions, there are some common parts: SRIs are descripted as
a medium-long term investment method that integrates ESG criteria with the objective to create positive economic and social results.
ESG9 (Environmental, Social and Governance) criteria concern the social and environmental impact as well as the investment governance. There are two types of ESG criteria: negative or exclusion criteria, which exclude the investment on societies that have either a negative impact on environmental and social life; positive or inclusion criteria, which reward deserving societies that have a positive impact on the same topics. ESG criteria are shared in three subclasses:
• Environmental criteria look at the production of good and services using as less as possible natural resources, minimizing the production of wastes and pollution and maximizing the use of clear energy. In this category are also comprised the rules about information like the documentation of activities, the monitoring of past and actual environmental impact and the environmental responsibilities;
• Social criteria are focused on two points: job and social development. The job category comprises worker conditions, and so, among other things, the application of international and national laws, the safety of the work place, the absence of discrimination, as well as reasonable wages. The social development category looks at the violation of human rights, social programs and investment in developing areas or in countries with a difficult politic contest;
• Governance criteria concern several topics: the level of rights of business partners, stakeholders and creditors; the level of transparence of internal
8 Berti M. et al., (2013), “Studi in ricordo di Tommaso Fanfani”, pp. 687-709 9 Berti M. et al., (2013), “Studi in ricordo di Tommaso Fanfani”, pp. 687-709
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decisions and processes; all information about liabilities and relationships inside and outside of societies.
III. Previous related work
There are several articles investigating the performance of sustainable investments. The majority of papers, focused on this topic trying to understand whether SRI can have a smaller or larger positive impact on portfolio management, such as investor utility and decision-making. Belghitar et al. (2014) compare the performance of Socially Responsible Investments (SRI) and conventional investments.10 The evidence they provide on the empirical mean-variance suggests that there is no significant difference between the two types of investments.
Figure 1 Indexes of Belghitar et al. 2014
10 Belghitar, Y., Ephraim C., and Nitin, D. (2014) "Does it pay to be ethical? Evidence from the FTSE4Good." Journal of Banking & Finance 47, 54-62
10
In this paper, SRIs are examined through four socially responsible FTSE4-Good
indexes that are compared with other trademarked conventional indexes, as well as with indexes composed of conventional firms carefully matched with firms in the FTSE4Good indexes. In Figure (1) is reported the indexes used in Belghitar et al (2014): six groups of indexes showing the equity performance of different geographic areas. Inside each group of this comparison, there is a SRIs index, a
Conventional (benchmark) index and a Total Market index. The study period starts from July 2001, when the FTSE4Good index series was launched, and ends at November 2010. This gives them almost 10 years of weekly data. Their results show that although there is nothing to be gained or lost from socially responsible investing, both in terms of mean and variance, there is a higher price to be paid in investor utility when higher moments of the return distributions are taken into account.
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Other papers show, instead, how the SRIs can have a better performance than
different investments. Lins et al. (2016) analyses Corporate Sustainable Responsibility activities bringing ratings from the MSCI ESG Stats Database, which contains environmental, social, and governance ratings of large, publicly traded companies.11
The sample is built removing financial activities due to the extensive amount of government support given to such firms during the crisis; also removing micro-cap stocks (those with a market capitalization below $250 million as of year-end 2007), because these stocks tend to have low liquidity and high bid-ask spreads, and are subject to more price pressure effects of trading, all of which would likely be more severe during the financial crisis.
Figure 3 Studies reported from UNEP Finance Initiative research
11Lins, K. V. et al., (2017), “Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis”, The Journal of Finance, 72(4), 1785-1824
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Moreover, the period of study the financial crisis is defined as the period from August 2008 to March 2009 (August of 2008 preceded the September 2008 Lehman Brothers bankruptcy, while March of 2009 is the month in which the S&P 500 hit its lowest point of the crisis).
This paper provides evidence that firm-specific social capital, built up through CSR activities, pays off in a time when the importance of trust unexpectedly increases. It shows that firms with high CSR ratings outperform firms with low CSR ratings during the crisis by at least four percentage points, after controlling for a variety of firm characteristics and risk factors. Moreover, it shows how there is no difference in stock return performance between high- and low-CSR firms during the recovery period after the crisis. Overall, these results suggest that increased social capital created through CSR efforts matters predominantly in periods when trust in corporations at large has eroded, and that during normal times any benefits of social capital are already imbedded in a firm’s share price.
In literature, there are also several papers, which show how sustainable investments have not a larger and significant performance in comparisons with different activities, while others show how SRIs are attractive particularly in crisis time. In
Figure (2) and (3) are reported names and results of different studies on EF tools, from an UNEP Finance Initiative research.12
In particular, it is highlighted whether these studies have found positive, neutral or negative elements on ESG factors. The most recent study reported on the UNEP Finance Initiative research, analyses data from 1990 to 2004. Moreover, all papers rely on data in an interval of time that is antecedent the last economic crisis. Some of them are around the dot-com bubble (1995-2001), but majority use previous data set this bubble.
12United Nations Environment Programme Finance Initiative, (2007), “Demystifying Responsible
Investment Performance: A review of key academic and broker research on ESG factors” A joint report by The Asset Management Working Group of the UNEP and Mercer
13
Figure 4 Empirical results from Ameur and Senanedsch research
Ameur and Senanedsch (2014) report an empirical research on DJSI index series.13 The study compares Dow Jones of USA, Europe and Asia Pacific with the corresponding Dow Jones Sustainable Index. The research uses weekly data from January 2004 to November 2013. Figure (4) reports the graphs of their results showing the conditional volatility of conventional and sustainable indexes for the different regions. It may be noted that conditional volatilities of sustainable and standard indexes follow the same trend, with higher levels for the standard indexes except in the Asia Pacific region. Moreover, the financial crisis of 2008 is clearly visible in the data with a high level of volatility. This confirms the findings in the
13 Ameur H.B. and Senanedsch J., (2014) "Socially responsible investments: An international empirical study of time-varying risk premiums." Journal of Applied Business Research 30.5
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literature which suggest that, in the long term, SRIs should exhibit less specific risk
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2)
SRIs INDEXES
The SRIs indexes generally are built by filtering a broader set of stocks in according
to a variety of social or environmental criteria, such as the SRIs indexes created
from the index providers Dow Jones or MSCI. Other kinds are developed from SRI research providers. Each SRI index series has its own method of inclusion or exclusion, which can be either associate to the Environmental or Social or Government criteria, as well as to all three criteria simultaneously. In the present study are reported two different kinds of SRIs indexes series: the FTSE4GOOD and
the DJSI.
I. FTSE4GOOD
The FTSE4GOOD14 index series are a branch of benchmark and trading indexes for investors in ESG that are offered from FTSE Russel from the FTSE Russel and they derive from FTSE Global Equity Index Series.
FTSE4Good Index Series family is a composed from 19 different indexes that are showed in Figure (5). This series is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance (ESG) practices. Transparent management and clearly-defined ESG criteria make FTSE4Good indexes suitable tools to be used by a wide variety of market participants when creating or assessing sustainable investment products.
To be included in the FTSE4Good Indexes companies must: support human rights, have good relationships with the various stakeholders, be making progress to become environmentally sustainable, ensure good labour standards not only for their own company but also for companies that supply them as well, and fight bribery and corruption. The following companies are excluded automatically: tobacco companies, manufacturers of nuclear weapon systems, manufacturers of whole weapons systems, companies involved in producing electricity from nuclear power, and businesses involved in the mining or processing of uranium.
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FTSE4Good indexes can be used in four main ways:
• Financial products: as tools in the creation of index-tracking investments, financial instruments or fund products focused on sustainable investment;
• Research: to identify environmentally and socially sustainable companies;
• Reference: as a transparent and evolving global ESG standard against which companies can assess their progress and achievement;
• Benchmarking: as a benchmark index to track the performance of sustainable investment portfolios.
II. DJSI
The Dow Jones Sustainability Index (DJSI) series was launched in 1999,15 as the first global sustainability benchmark, by S&P Dow Jones Indices and RobecoSAM. DJSI series act as an indicator of the sustainability performance of the largest 2,500 companies listed on the Dow Jones Global Total Stock Market Index, tracking the
15www.sustainability-indices.com
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stock performance of the world's leading companies in terms of economic, environmental and social criteria.These series serve as benchmarks for investors who integrate sustainability considerations into their portfolios, and provide an effective engagement platform for investors who wish to encourage companies to improve their corporate sustainability practices. The Dow Jones Sustainability Index family comprises global, regional, and country benchmarks as shown in the following list:
• DJSI World
• DJSI North America
• DJSI Europe
• DJSI Asia Pacific
• DJSI Emerging Markets
• DJSI Korea
• DJSI Australia
• DJSI Chile
For Investors who wish to limit their exposure to controversial activities, RobecoSAM and S&P Dow Jones Indices also offer the DJSI Indexes with exclusion criteria such as Armaments & Firearms, Alcohol, Tobacco, Gambling and Adult Entertainment. All DJSI indexes are calculated in both price and total return versions and are disseminated in real time.
The DJSI World applies a transparent, rules-based component selection process based on the companies’ Total Sustainability Scores resulting from the annual RobecoSAM Corporate Sustainability Assessment (CSA). Companies are selected based on a defined set of criteria which is used to assess the economic, social, and environmental opportunities of the companies that the DJSI has listed, where the economic, environmental and social dimensions receive equal weighting (33% each) in the assessment. Only the top ranked companies within each industry are selected for inclusion in the Dow Jones Sustainability Index family. No industries are excluded from this process. Companies listed in DJSI are asked to fill in an annual questionnaire, and submit various documents, including stakeholder reports. Once a company is listed on the DJSI, it is then monitored daily for any
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critical issues that might arise and lead to the exclusion of the company from the index.
In return to the pressing criteria required, companies take part at a ranking system that is appreciated from the investor community. This system, each year, provides to award to the companies one, or a combination of the following, statuses:16
1. Sector Leader: the company that is best prepared to seize the opportunities and manage the risks deriving from economic, environmental and social developments. The sector leader is also the firm with the best score of all companies assessed in this sector. Through the sector leader it is possible make another classification: SAM Gold Class – to qualify for this, the Sector Leader must achieve a minimum total score of 75%. Peer-group companies whose total score is within 5% of the Sector Leader are also awarded. There is also a SAM Silver Class, awarded to the Sector Leader that has achieved a total score in the range of 70% to 75% percent; and a SAM Bronze Class for Sector Leaders that achieve a total score in the range of 65% to 70%;
2. Sector Mover: awarded to the company that achieved the biggest proportional improvement in its sustainability performance compared with the previous year.
16https://www.2degreesnetwork.com
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3)
EMPIRICAL RESEARCH
In the following analysis, a 2x2 comparison is conducted: there are two different groups of indexes (FTSE4GOOD and DJSI) which are compared in two different periods of time. Both comparisons are made using weekly data, and by looking at 3 different geographic areas: USA, Europe and Global. More precisely, both comparisons are once made for an interval of time that goes from first quotation of SRIs indexes to November 2017, while the second interval of time starts from the
last weekly data of 2006 to the first weekly data of 2012. That is, the analysis will be conducted by looking before and after the last economic crisis.
I. Data and sample description
The study is made comparing the SRIs indexes with Conventional indexes in two
different intervals of time, considering the weekly prices of each index as collected from DataStream.
The first period of time goes from the first available quotation to the most recent available date. For the FTSE4GOOD series the first interval of time starts from 06/10/2000 and finishes at 06/10/2017, amounting 888 observations, while for the DJSI series it goes from 11/10/2002 to 30/12/2016 with 743 observations.
The second period of time is in all cases around the most recent economic crisis, ranging from the first quotation of 2007 to the first quotation of 2012. I choose this long interval to include all times where there was less trust in the global economy, following the empirical approach of Lins et al. (2016): the Subprime Mortgage Crisis, that started in the USA and spread out to rest of the world, and the first and heaviest part of European sovereign crisis.
The comparison made using the FTSE4GOOD index series is divided in three groups related to different geographical area: USA, Europe and Global. Following Belguitar (1997)17 I compared the performance of the FTSE4Good series with a similar conventional index, and used relevant benchmarks to represent the parent
17 Belghitar, Y., Ephraim C., and Nitin, D. (2014) "Does it pay to be ethical? Evidence from the FTSE4Good." Journal of Banking & Finance 47, 54-62
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market portfolio for both the SRIs as well as conventional indexes, so that each
group consists of one market index, one SRI index and one conventional index. Table (1) reports the 3 groups of indexes compared with the appropriate FTSE4GOOD index.
Equity USA market
DJusTM Total Market Index
S&P100 Conventional Index
FTSE4GOOD100US SRI Index
Equity European market
EUROstoxxTMconsumer Total Market Index EUROstoxx50 Conventional Index FTSE4GOODEurope50 SRI Index
Equity Global market
FTSEallWORLD Total Market Index S&PGLOBAL1200 Conventional Index FTSE4GOODGLOBAL100US SRI Index
For what concern the group “Industrial stock USA market” I used the Conventional index the S&P 100 Index,18 a sub-set of the S&P 500, which measures the performance of large cap companies in the United States. The Index comprises 100 major blue chip companies across multiple industry groups. Individual stock options are listed for each index constituent.
18www.us.spindices.com
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For the Total Market Index, I used the Dow Jones U.S. Total Stock Market Index,19 a member of the Dow Jones Total Stock Market Indices family, that is designed to measure all U.S. equity issues with readily available prices. This broad index is sliced according to stock-size segment, style and sector to create distinct sub-indexes that track every major segment of the market. It is created and maintained, like the other indexes of his family, according to an objective and transparent methodology with the fundamental aim of providing reliable, accurate measures of U.S. equity performance.
For the Total Market Index I used the Dow Jones U.S. Total Stock Market Index,20 a member of the Dow Jones Total Stock Market Indices family, that is designed to measure all U.S. equity issues with readily available prices. This broad index is sliced according to stock-size segment, style and sector to create distinct sub-indices that track every major segment of the market. It is created and maintained, like the other indexes of his family, according to an objective and transparent methodology with the fundamental aim of providing reliable, accurate measures of U.S. equity performance.
The FTSE4GOOD100US is the examined SRI index,21 that is the index that reflects the trend of 457 companies which must meet a series of stringent environmental and social criteria in areas including environmental management, labor rights, human rights, health and safety, and diversity (it includes Apple Inc., Microsoft Corp, Facebook Class A, Johnson & Johnson...).
In the “Industrial stock European” group I used to look at the total trend of European industrial market the EURO STOXX Total Market Index22 (TMI) which covers approximately 95% of the free float market capitalisation of Europe. With a variable number of components, the EURO STOXX TMI represents a broad coverage of Eurozone companies. The index includes Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The EURO STOXX TMI comprises large, mid and small capitalisation indexes: the
19www.us.spindices.com 20www.us.spindices.com 21www.ftse.com
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EURO STOXX TMI Large Index, the EURO STOXX TMI Mid Index and the EURO STOXX TMI Small Index.
In this case, for the Conventional index I choose the EURO STOXX 50 Index:23 Europe's leading Blue-chip index for the Eurozone, provides a Blue-chip representation of sector leaders in the Eurozone. The index covers 50 stocks from 11 Eurozone countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The EURO STOXX 50 Index is licensed to financial institutions to serve as underlying for a wide range of investment products such as Exchange Traded Funds (ETF), Futures and Options, and structured products worldwide.
For what concerns the SRI index, I use the FTSE4Good Environmental Leaders Europe 40 Index that is designed to identify European companies with leading environmental practices.24 These are the companies that are doing more to manage their environmental risks and impacts. The index is constructed by taking all European companies in the FTSE4Good Index Series that have obtained the ‘best practice’ environmental rating of at least 4 (out of 5), ranking them by full market capitalisation, and then selecting the top 40 to be included in the index.
In the last group, “Industrial stock Global market” the Conventional index used is represented by the S&P GLOBAL120025 that gives the exposure to the global equity market. Capturing approximately 70% of global market capitalization, it is constructed as a composite of 7 headline indexes, many of which are accepted leaders in their regions. These include the S&P 500® (US), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40.
I rely on the global equity trend the FTSE Global Equity Index Series26 that covers around 7,400 securities in 47 different countries - covering every equity and sector relevant to international investors’ needs. Indexes within the FTSE Global Equity Index Series are designed for the creation of a broad range of financial products, such as index tracking funds, derivatives and Exchange Traded Funds (ETFs), as
23www.stoxx.com 24www.ftse.com
25www.us.spindices.com 26www.ftse.com
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well as being performance benchmarks. FTSE indexes are used extensively world-wide for benchmarking portfolios, performance measurement, investment analysis, asset allocation, index tracking funds and structured products.
The SRI index of the last group is the FTSE4GOOD Global 100 - launched on 01/07/2001 - that shows trend of 70 societies, the best societies around the world that follow ESG criteria.27
The other comparison is with DJSI index series.28 There is a group of indexes for different geographic area: USA, Europe and Global. Each group is shared between the SRI and the conventional index.
Equity USA market
DJSI USA SRI
S&P U.S. BMI Conventional index Equity European market
DJSI Europe SRI
S&P Euro Conventional index
Equity Global market DJSIWorld Diversified SRI S&PGLOBAL100 (BMI) Conventional index 27www.ftse.com
28 Tognarelli A., (2016), “Investimenti sostenibili e responsabili: aspetti generali e analisi qualitativa e quantitativa di alcuni indici azionari”
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Table (2) shows the three couples of indexes compared with the SRIs indexes from
DJSI family, for each determined geographic area.
In the first group, “Equity USA market”, I used for the comparison the S&P U.S. BMI29 that is a country sub-index of the S&P Global BMI, which includes all U.S. domiciled companies with float-adjusted market capitalizations of at least USD 100 million and annual value traded of at least USD 50 million (societies like Apple Inc., Microsoft Corp, Amazon.com Inc, Facebook Inc A, Berkshire Hathaway B, Johnson & Johnson).
The Dow Jones Sustainability U.S. Composite Index30 (DJSI USA) applies a sustainability best-in-class selection process. The index tracks the performance of the top 20% of the largest 600 U.S. companies in the Dow Jones Sustainability North America Index, selected by the RobecoSAM's Total Sustainability Score.
The second group, “Equity EU market”, is composed from the S&P Euro Index31 that is a subset of the S&P Europe 350 Index and includes all the stocks from the Euro zone countries in the S&P Europe 350 Index. The number of stocks is not fixed and remains flexible depending on the make - up of S&P Europe 350 Index. The base date for this index is December 31, 1997 (it reflects the trend of societies like Allianz SE or Siemens AG).
The SRI compared with S&P Euro index is the Dow Jones Sustainability™ Europe Index32 that comprises European sustainability leaders as identified by RobecoSAM. It represents the top 20% of the largest 600 European companies in the S&P Global BMI based on long-term economic, environmental and social criteria.
In the last group, “Equity Global market”, the comparison is with the S&P GLOBAL10033 (BMI) like conventional index. It is a global index suite with a transparent, modular structure that has been fully float adjusted since 1989. This comprehensive, rules-based index series employs a transparent and consistent
29www.us.spindices.com 30www.spindices.com 31www.eu.spindices.com 32www.us.spindices.com 33www.us.spindices.com
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methodology across all countries and includes approximately 10,000 stocks from 25 developed and 23 emerging markets.
While the SRI index is the Dow Jones Sustainability™ World Diversified Index is a global index that exhibits a sustainable tilt while minimizing region, industry and size biases relative to traditional global benchmarks.34 It includes the top 50% float-adjusted market capitalization within regions and GICS sectors of the index universe based on corporate sustainability score as assessed by RobecoSAM (it is constituted from 912 constituents, societies like Apple Inc. or Microsoft).
II. Econometrics Methods
The empirical analysis is focused on the performance of SRIs indexes compared to
the appropriate benchmark or conventional return indexes. To study the characteristics of these variables and to make comparisons, I calculate the weekly return, for all indexes, in both intervals, with the simple formula:
𝑅𝑖,𝑡 =(𝑃𝑡− 𝑃𝑡−1) 𝑃𝑡−1
Relying on the weekly returns, and using the “Gretl” programme,35 I calculate the main statistical indicators to study how the variables are distributed around its means and if there are strong differences (i.e. it highlights whether one variable is risker than another):
• Mean ∑𝑁𝑖=1(𝑅𝑖,𝑡) 𝑁 ;
• Median, that is the value separating the higher half of a data sample from the lower half;
• Minimum and Maximum;
• Standard Deviation (Std. Dev.= √∑(𝑟𝑖−𝑟𝑚𝑒𝑑)2
𝑁 = 𝜎) that measures the deviation from the mean (lower values are preferable);36
• Coefficient of Variation (CV = σ
|𝑟𝑚𝑒𝑑|) that shows the extent of variability in relation to the mean of the population (lower values are preferable);37
34www.eu.spindices.com 35www.gretl.sourceforge.net 36www.macroption.com
26 • Skewness ( ∑(𝑟𝑖−𝑟𝑚𝑒𝑑)3
(𝑛∗𝜎3) ) that is a measure of the asymmetry of the probability distribution of a real-valued random variable about its mean.38 It can be positive, if the mass of the distribution is concentrated on the left and the right tail is longer; negative the mass of the distribution is concentrated on the right of the mean and the left tail is longer; undefined (positive values are preferable, meaning an increasing trend);
• Ex. Kurtosis (𝜇4/𝜎4) where μ4 is the fourth central moment and 𝜎 is still the Standard Deviation.39 It measures the "tailed-ness" of the probability distribution of a real-valued random variable: it is a statistical term describing that a probability, or return distribution, has a kurtosis
coefficient that is larger than the coefficient associated with a normal distribution, which is around 3. This signals that the probability of obtaining an extreme outcome or value from the event in question is higher than would be found in a probabilistically normal distribution of outcomes.
If it is higher or lower than zero creates different curves that are Leptokurtis, Normokurtis and Platikurtis.
To have a risk indicator I calculated, with Excel, the Sharpe Ratio40 that is the average return earned in excess of the risk-free rate per unit of volatility or total risk (i.e. the volatility measured with the standard deviation):
𝑆𝑖,𝑡 = (𝑟𝑚𝑒𝑑 − 𝑟𝑓𝑟) 𝜎𝑖,𝑡
I use the median (𝑟𝑚𝑒𝑑) and the standard deviation (𝜎𝑖,𝑡), previously found with Gretl. I analyse the Euribor41 index historical data and for the first six years (2002 to 2008) it had values higher than zero, but then for the next eight years (2009-2017) it was around zero or, even, negative, so I chose to use a risk-free (𝑟𝑓𝑟) peer at zero. 37www.macroption.com 38www.macroption.com 39www.macroption.com 40www.investopedia.com 41www.euribor.it
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To observe if SRIs had a better performance than the benchmark, I apply to the
weekly return data the Simple Regression Model42: 𝑌𝑖,𝑡 = 𝑎𝑖+ 𝛽𝑖∗ 𝑟𝑖,𝑡𝑅𝑀+ 𝑢𝑡.
where 𝑎𝑖 measures the profit and 𝛽𝑖 that measures the risk and 𝑢𝑡 is the error term or disturbance in the relationship. The SRIs or Conventional indexes are the
dependent variables (𝑌𝑖,𝑡) while the Total Market indexes are the independent variables (𝑟𝑖,𝑡𝑅𝑀). I obtain estimation for 𝑎, 𝛽 by applying Τ Ordinary Least Squares (OLS).
Hypotheses:
If 𝑎𝑖 > 0, index has a better performance than 𝑟𝑖,𝑡𝑅𝑀 If 𝑎𝑖 < 0, index has a worst performance than 𝑟𝑖,𝑡𝑅𝑀 If 𝛽𝑖 > 1, index is risker than 𝑟𝑖,𝑡𝑅𝑀
If 𝛽𝑖 < 1, index is less risky than 𝑟𝑖,𝑡𝑅𝑀
By remembering one of the algebraic proprieties of the Ordinary Least Squares, which imposes that 𝑌𝑖 = 𝑌𝑖^+ 𝑢𝑖^ , where 𝑌𝑖 represents the variables (SRI return indexes), 𝑌𝑖^ is the explained part from the model while 𝑢𝑖^ the residual or the part not explained, I derive the total sum of squares (SST = ∑ (𝑌𝑛1 𝑖− 𝑌𝑚𝑒𝑑)2) that can be partitioned into the explained sum of squares (ESS = ∑ (𝑌𝑛1 𝑖^− 𝑌𝑚𝑒𝑑)2) and the residual sum of squares (RSS = ∑ (𝑢𝑛1 𝑖^)2): (𝑆𝑆𝑇 = 𝐸𝑆𝑆 + 𝑅𝑆𝑆).
P-values evaluate how well the sample data support the argument that the null hypothesis is true, or, in other words, it measures how compatible the data are with the null hypothesis. If P-values are high data are likely with a true null, instead is P values are low data are unlikely with a true null, suggesting that the sample
28
provides enough evidence that it is possible to reject the null hypothesis for the entire population.43
I calculated the R-squared (𝑅2 = 𝐸𝑆𝑆
𝑆𝑆𝑇), that is the measure of how much the linear model can explain the variable variation. R-squared is a value between 0 and 100%, where if the values are near at zero it means that model does not explain anything of the variability of the response data around its mean, while if the values are near 100% it means that model can explain all the variability of the response data around its me44
To conclude the empirical analysis, I report the residual sum of square (RSS) and the 𝑅2 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑. The 𝑅2 𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 is a measure about how much variability of the dependent variable is affected from the independent variables (in fact it is more used with the multi regression analysis).45
III. Empirical results.
a. First performance comparison and analysis
The first comparison is, like previously said, in the interval of time that goes from 06/10/2000 and finishes at 06/10/2017.
Table (3) shows the results of the main statistical indicators for the three indexes groups taking part of FTSE4GOOD series comparison. In the USA indexes group, it is reported, in term of mean returns, for the conventional index a better performance (with a value around 0.06%) than SRI index (with a value around -0.03%); while there is not a strong difference between their standard deviation results. Looking at the statistical distribution indicators, the only substantial result is that SRI index has a major variability, with a C.V. value higher than conventional index.
43 Wooldridge J. M., (2012), “Introductory Econometrics a Modern Approach Fifth Edition” 44 Wooldridge J. M., (2012), “Introductory Econometrics a Modern Approach Fifth Edition”
29
For what concerns the European and Global contest, there are no significant divergences between the SRI index and its benchmark: in each case the mean results are lower than zero, but the conventional indexes have higher results. Also by looking at the Standard Deviation there are no strong differences between SRI and conventional indexes in the European and Global group: European SRI index has a lower value, while Global SRI index has an higher value than its benchmark.
Table (4), that is still focused on the FTSE4GOOD series comparison, shows the results of OLS method: none of all the indexes reported has a significant α, while for what concerns β, the SRI index of European and Global groups show a value of the coefficient larger than one, with a zero p-value.
Mean Median Minimum Maximum Std.
Dev. C.V. Skewness Ex. kurtosis USA indexes Conventional 0,0006 0,0028 -0,2218 0,1015 0,0235 39,870 -1,4628 12,503 SRI -0,0003 0,0023 -0,2727 0,1111 0,0258 104,13 -1,6873 15,729 Total Market 0,0005 0,0022 -0,2198 0,1137 0,0249 51,231 -1,2038 9,4421 European indexes Conventional -0,0008 0,0027 -0,2857 0,1271 0,0314 37,299 -1,2213 8,6979 SRI -0,0009 0,0018 -0,2894 0,1321 0,0282 30,938 -1,4732 14,177 Total Market 0,0009 0,0037 -0,1838 0,1352 0,0235 25,054 -0,8637 6,5067 Global indexes Conventional -0,0001 0,0018 -0,2445 0,1014 0,0249 242,19 -1,4347 12,356 SRI -0,0002 0,0023 -0,2727 0,1111 0,0258 104,13 -1,6873 15,729 Total Market 0,0003 0,0024 -0,2515 0,1089 0,0245 89,806 -1,6908 14,557
30 α p-value (α) β p-value (β) R^2 Adjusted R^2 Sum squared resid USA indexes Conventional −0,0003 0,0447 0,9466 0,0000 0,9650 0,9650 0,0171 SRI −0,0002 0,3529 0,9709 0,0000 0,9493 0,9492 0,0265 European indexes Conventional −0,0019 0,0000 1,0538 0,0000 0,7713 0,7710 0,1616 SRI −0,0019 0,0007 1,1314 0,0000 0,7179 0,7176 0,2468 Global indexes Conventional −0,0004 0,0405 0,9925 0,0000 0,9527 0,9526 0,0261 SRI −0,0005 0,0028 1,0318 0,0000 0,9585 0,9585 0,0245
Table 4 OLS method results of FTSE4GOOD series in first interval of time
Indexes SHARPE ratio
USA Conventional 0,0313 SRI 0,0365 Total Market 0,0447 Europe Conventional -0,0268 SRI -0,0323 Total Market 0,03994 Global Conventional -0,0041 SRI -0,0096 Total Market 0,0111
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In Table (5) there is the Sharpe Ratio: for the USA indexes group are reported positive results, while for the European and Global contest results are negative, but there is no strong difference between the values of SRI and the conventional indexes.
Subsequently, the same results are reported for the DJSI index series and its benchmark for the interval of time that goes from 11/10/2002 to 30/12/2016.
Table (6) shows the results of the main statistical indicators. The mean returns are all positive and in each geographic contest the SRI index has a value lower than the conventional, but not significantly. For what concerns the Standard Deviation in each case the Conventional index has higher value than the SRI index, but just for the global contest there is a strong difference of around 0,02.
Mean Median Minimum Maximum Std.
Dev. C.V. Skewness Ex. kurtosis DJSI USA 0,0014 0,0027 -0,1521 0,115 0,0234 16,766 -0,3888 4,9522 S&P USA 0,0018 0,0028 -0,1801 0,127 0,0241 13,701 -0,5279 6,9290 DJSI EU 0,0003 0,0026 -0,2856 0,1137 0,0271 77,589 -1,8922 17,428 S&P EU 0,0004 0,0037 -0,281 0,1039 0,0290 70,091 -1,6352 12,521 DJSI GLOB 0,0012 0,0026 -0,2115 0,1365 0,0260 21,203 -0,8859 8,6209 S&P GLOB 0,0027 0,0027 -0,2686 0,3067 0,0438 16,381 0,4046 9,8577
The C.V. results show that in each case the DJSI indexes have higher value than conventional, meaning a major variability in relation to the mean of the population. Looking at Skewness and Ex. Kurtosis results, the indexes have all different values meaning that the variables are distributed differently.
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Table (7) shows the results of OLS method for DJSI series. In the case of USA indexes, it is reported a negative value for α, while for the European and Global comparison it is reported a positive α, in each case with p-value above the conventional level of confidence.
Indexes α p-value (α) β p-value (β) R^2 Adjusted R^2 Sum squared resid DJSI USA -0,0003 0,2211 0,939 0,0000 0,9394 0,9394 0,0245 DJSI EU 0,0000 0,8992 0,911 0,0000 0,9498 0,9498 0,0286 DJSI GLOB 0,0003 0,7103 0,3516 0,0000 0,3505 0,3496 0,3254
Table 7 DJSI series results of OLS method in first interval of time
For what concern the β values, all DJSI indexes have a value of the coefficient lower than 1, but while for USA and European comparison the values are around 0.9, for the Global DJSI the value is smaller and around 0.35. In all cases, however, the p-values are zero.
Index SHARPE ratio
DJSI USA 0,0597 S&P USA 0,0730 DJSI EU 0,0129 S&P EU 0,0143 DJSI GLOB 0,0472 S&P GLOB 0,0611
Table 8 DJSI series Sharpe RATIO in first interval of time
Table (8) reports the Sharpe Ratio results for DJSI indexes and its benchmarks. In all cases the conventional indexes have a higher value than the SRI. The difference
33
is not strong for what concern European contest, but it is more significant for the other groups with a difference value around 0.02.
b) Second performance comparison and analysis
All the comparison of the previous section are repeated in the following by looking at the second interval of time that goes from the first quotation of 2007 to the first quotation of 2012 both for FTSE4GOOD and DJSI series.
Table (9) shows the results of main statistical indicators for the three indexes groups taking part of FTSE4GOOD series, as obtained after the crisis time. For the USA and European groups, the means are negative with a little better performance for SRI indexes. The Global contest, instead, shows a mean for conventional index positive against a negative mean for the SRI index. The standard deviation results are all around 0.03 without a substantial divergence, except in the case of European conventional index that has a Std. Dev. higher than SRI index.
Mean Median Minimum Maximum
Std.
Dev. C.V. Skewness
Ex. Kurtosis
USA equity indexes
Conventional -0,0001 0,0004 -0,1802 0,1103 0,0311 7324,10 -0,4750 4,6937
SRI -0,0000 0,0009 -0,1849 0,1248 0,0329 373,17 -0,3980 4,4846
Total Market 0,0003 0,0013 -0,1802 0,1283 0,0334 115,68 -0,4258 4,0499 European equity indexes
Conventional -0,0030 0,0000 -0,2857 0,1087 0,0402 13,381 -1,5932 9,3092
SRI -0,0025 -0,0002 -0,2894 0,1225 0,0373 15,160 -1,9199 13,762
Total Market 0,0002 0,0048 -0,1838 0,1352 0,0299 198,43 -0,90904 6,4689 Global equity indexes
Conventional 0,0015 0,0014 -0,2445 0,1014 0,0341 23,065 -1,4902 9,5981
SRI -0,0021 0,0014 -0,27266 0,1111 0,0366 17,718 -1,7329 11,274
Total Market -0,0013 0,0012 -0,2515 0,1089 0,0350 26,813 -1,6410 10,019
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Beyond some divergences, there are not significant anomalies around the indexes symmetrical distributions in European and Global groups. In USA group, all the indexes have a high C.V., but Conventional has the highest.
Table (10) shows the results of the OLS method that, also for the crisis time, show negative α value for all indexes: conventional indexes have a higher α both for USA and Global contest, while have a few higher value in the European contest. Looking at β, for each index, β p-value is zero. Results for the USA contest show similar values, with a better performance for the conventional index. European indexes report β higher than 1 both for conventional and SRI index, but SRI index has a better result. The Global contest shows a β lower than 1 for conventional index, while a β higher than 1 for SRI index.
α p-value (α) β p-value (β) R^2 Adjusted R^2 Sum squared resid
USA equity indexes
Conventional -0.0003 0.3576 0.9193 0.0000 0.9768 0.9768 0.0058
SRI -0.0004 0.3497 0.9672 0.0000 0.9629 0.9628 0.0105
EUROPE equity indexes
Conventional -0.0032 0.0149 1.1495 0.0000 0.7288 0.7277 0.1144
SRI -0.0026 0.0134 1.1099 0.0000 0.7913 0.7905 0.0756
GLOBAL equity indexes
Conventional -0.0002 0.5683 0.9575 0.0000 0.9636 0.9636 0.0110 SRI -0.0007 0.0703 1.0319 0.0000 0.9693 0.9692 0,0108
Table 10 FTSE4GOOD series, in crisis time, results of OLS method
Table (11) reports the Sharpe Ratio for FTSE4GOOD series in crisis time that is in each case has a negative value. In USA and Global contest conventional index has a Sharpe ratio higher than SRI index; in contrast, the European group the SRI index has a better Sharpe ratio than the conventional.
35
Thereafter Table (12) reports the results of main statistical indicator for DJSI series and its benchmarks, during the crisis time. Looking at the standard deviation results, in each case the SRI index has a better performance than conventional: the largest difference is on Global group where standard deviation of conventional index is higher than SRI around 3%. Symmetrical distribution indicators do not report any significant divergence among the indexes.
The USA and Global groups reported a positive mean for conventional indexes against a negative mean for SRI indexes. In the European contest, each index has a negative mean with a little difference of value.
Indexes SHARPE ratio
USA Conventional -0,0001 SRI -0,0027 Total Market 0,0087 European Conventional -0,0738 SRI -0,0658 Total Market 0,0061 Global Conventional -0,0435 SRI -0,0566 Total Market -0,0374
Table (13) reports the results of the OLS method. Both USA and Global groups have a negative value of α with a p-value higher than 0.2, while the European has a positive α result (0.04%) with a p-value larger than 0.4. With a p-value of β peers
36
of 0 for each OLS regressions, both the USA and European DJSI have a β around 0.9, while the Global DJSI has the lowest β, around 0.4. In each case the β p-value is zero.
INDICE Mean Median Minimum Maximum Std.
Dev.
C.V. Skewness Ex. kurtosis
DJSI USA -0,0002 0,0022 -0,1521 0,1150 0,0314 165,48 -0,3305 3,0366 S&P USA 0,0003 0,0013 -0,1801 0,1270 0,0336 108,84 -0,4249 3,9591 DJSI EU -0,0023 0,0000 -0,2856 0,1137 0,0371 15,828 -1,9375 13,087 S&P EU -0,0029 0,0010 -0,2810 0,1039 0,0388 13,482 -1,7007 10,020 DJSI GLOB -0,0005 0,0016 -0,2115 0,1365 0,0363 80,653 -0,7799 5,1061 S&P GLOB 0,0004 -0,0010 -0,2380 0,3067 0,0616 170,75 0,8013 4,6412
Table 12 DJSI series, crisis time, main statistical indicators
Indexes α p-value (α) β p-value
(β) R^2 Adjusted R^2 Sum squared resid DJSI USA −0,0005 0,2136 0,9174 0,0000 0,9619 0,9618 0,0098 DJSI EU 0.0004 0, 4381 0,9363 0,0000 0,9609 0,9607 0,014 DJSI GLOB −0,0006 0.7339 0,3785 0,0000 0,4118 0,4096 0,2028
Finally, Table (14) shows the Sharpe Ratio results for DJSI series in crisis time. All DJSI index has a negative result, especially for USA and Global contest where, instead, the conventional index has a positive Sharpe Ratio. In Europe indexes group each index has a negative result and the result of conventional index is lower than SRI.
37
Indexes SHARPE ratio
DJSI USA -0,0061 S&P USA 0,0092 DJSI EU -0,0633 S&P EU -0,0742 DJSI GLOB -0,0124 S&P GLOB 0,0059
Analysing the results of all comparisons in the first period of time, both for FTSE4GOOD and DJSI series, as well as in the second period of (crisis) time, my empirical analyses do not show any evidence of significant advantages of SRI in terms of performance, as measured by mean returns. However, there are significant differences in terms of risk as measured by the standard deviation of the results (both for the OLS method results and the Sharpe Ratio).
38
Conclusions
Ethical Finance (EF) is a widespread and discussed topic: there is not a unique answer to the question whether sustainable responsible investments are better, in term of performance, than other type of investments.
The results of my empirical research do not show any evidences that SRIs indexes are more advisable than the selected benchmarks in terms of mean returns. Just in a few cases, SRIs indexes have a better mean returns than their benchmark. However, in this case, the difference is not statistically or economically significant. SRIs are thus not more advisable than other type of investments. However, SRIs indexes have in some cases a lower risk than their benchmarks.
These results contribute in two important ways to previous research. In particular, my research is based either on indexes that reflect blue chips or societies with a large capitalization, while previous research that found positive results with SRI indexes are based on societies with small or middle capitalization, with an accurate selection. Moreover, my research is based in two large intervals of time, while previous research with positive results are based on tighter intervals.
To sum up, mixed results about the SRIs performance from previous research are driven by the geographic area analysed, by the selected time interval as well as by the object of study. As also my results suggest, the differences in SRIs performance are sensitive to the chosen specification. However, they can provide a better alternative in crisis time.
39
Figures
1. Indexes of Belghitar research
2. Studies reported from UNEP Finance Initiative research 3. Studies reported from UNEP Finance Initiative research 4. Empirical results from Ameur and Senanedsch research 5. FTSE4GOOD index series
40
Tables
1. Indexes object of study on FTSE4GOOD comparison 2. Indexes object of study on DJSI comparison
3. Main statistic indicators of FTSE4GOOD SERIES in first interval of time 4. OLS method results of FTSE4GOOD SERIES in first interval of time 5. FTSE4GOOD Sharpe Ratio in first interval of time
6. Main statistic indicators of DJSI SERIES in first interval of time 7. OLS method results of DJSI in first interval of time
8. DJSI Sharpe Ratio in first interval of time
9. FTSE4GOOD series, crisis time, main statistical indicators 10. FTSE4GOOD series, crisis time, results of OLS method 11. FTSE4GOOD series, crisis time, Sharpe Ratio
12. DJSI series, crisis time, main statistical indicators 13. DJSI series, crisis time, results of OLS method 14. DJSI series, crisis time, Sharpe Ratio
41
Sources
www.bancaetica.itwww.paxworld.com www.grameenresearch.org www.ftse.com www.ftserussell.com www.sustainability-indices.com www.us.spindices.com www.finanza-mercati.ilsole24ore.com www.stoxx.com www.sri-connect.com www.macroption.com www.blog.minitab.com www.researchgate.net www.unepfi.or www.2degreesnetwork.com www.theguardian.com www.euribor.it www.investopedia.com www.gretl.sourceforge.net
42 Bibliography
Ameur H.B. and Senanedsch J., (2014) "Socially responsible investments: An international empirical study of time-varying risk premiums." Journal of Applied
Business Research 30.5
Associazione Finanza Etica, (1998), Manifesto della finanza etica, www.bancaetica.it
Belghitar, Y., Ephraim C., and Nitin, D. (2014) "Does it pay to be ethical? Evidence from the FTSE4Good." Journal of Banking & Finance 47, 54-62
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43
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44 Acknowledgments
“Grazie a mia madre per avermi messo al mondo, a mio padre semplice e profondo, grazie agli amici per la loro comprensione,
ai giorni felici della mia generazione, grazie alle ragazze a tutte le ragazze. Grazie alla neve bianca ed abbondante,
a quella nebbia densa ed avvolgente, grazie al tuono, piogge e temporali, al sole caldo che guarisce tutti mali, grazie alle stagioni a tutte le stagioni. Ma che film la vita tutta una tirata
storia infinita a ritmo serrato da stare senza fiato. Grazie alle mani che mi hanno aiutato, a queste gambe che mi hanno portato, grazie alla voce che canta i miei pensieri,
al cuore capace di nuovi desideri, grazie all'emozioni, a tutte le emozioni.
Ma che film la vita tutta una tirata storia infinita a ritmo serrato
da stare senza fiato.”
