Can SRI Funds Better Resist Global Financial Crisis?
Evidence from Japan

Miwa Nakai
Keiko Yamaguchi
Kenji Takeuchi

September 2015
Discussion Paper No.1530

GRADUATE SCHOOL OF ECONOMICS
KOBE UNIVERSITYROKKO, KOBE, JAPANCan SRI Funds Better Resist Global Financial Crisis?
Evidence from Japan
Miwa Nakai,a* Keiko Yamaguchi,b and Kenji TakeuchicaPresidential Endowed Chair for “ Platinum Society”, The University of Tokyo,
Ito International Research Center, 7-3-1 Hongo, Bunkyo, Tokyo 113-0033 Japanb

Graduate School of Humanities and Social Sciences, Okayama University,
3-1-1, Tsushima-naka, Kita-ku, Okayama, 700-8530 Japanc

Graduate School of Economics, Kobe University,
2-1Rokkodai, Nada, Kobe, Hyogo 657-8501 Japan*Corresponding author (email: nakai@platinum.u-tokyo.ac.jp)

Abstract
In this paper, we examined the market reaction of SRI funds relative to conventional funds in theJapanese market amid the recent global financial crisis. We chose the bankruptcy of the Lehman Brothers
as the momentous event, for it is known to have triggered a further drop in stock prices and economic
losses during the recession. Empirical results estimated by event study methodology with the Fama–
French three-factor model showed that the event significantly increased the performance of SRI funds at
the 5% level, while the significant negative impact on conventional funds was estimated and a difference
between two groups of funds were statistically significant at the 1% level. We also found that theresilience of SRI funds amid the event was largely due to international funds, a possibility given thatinvestors might evaluate the CSR activities of international firms more than those of domestic firms.
Alternatively, we can assume that the universe of domestic SRI funds is too limited to enjoy risk
diversification. Altogether, we confirmed that SRI funds better resisted the bankruptcy of the Lehman
Brothers than conventional funds.

Keywords: Socially responsible investment, event study, financial crisis

JEL classification: A13, G01, M14
1

1 Introduction
The global economic recession following the subprime crisis has dealt crippling blows toeconomies both in the United States and worldwide. Since 2007, the potential global write-downs ofloans and securities due to this financial crisis have been estimated to total USD $4.1 trillion (IMF, 2009),
and drops in GDP from 2008 to 2009 were 2.6%, 4.1%, 5.2%, and 4.9% in the United States, theeurozone, Japan, and the United Kingdom, respectively (IMF, 2010). In 2010, the unemployment rate in
the United States reached 9.6% (US Department of Labor Bureau of Labor Statistics, 2015). In general,
all major economic indicators stress the seriousness of impact of the crisis; without a doubt, it has been
the worst economic downturn since the Great Depression in 1929. One cause of the crisis was subprime
lending intended for low-income households and subprime borrowers, which could more likely to lead todefaults. The securitisation of loans into wide-ranging financial commodities disabled tracking
responsibility for defaults, and investment behaviour focusing extensively on short-term economic gains
compounded the problem. While calls for remedying the situation by tightening the regulation andgovernance of financial institutions have been issued, another self-regulatory mechanism is alreadyembedded in the market that could effectively enhance corporate activity for social profit: socially
responsible investment (SRI).
SRI is an investment process using positive or negative screening that promotes taking into
account while making investment decisions not only financial performance but also the value of corporatesocial responsibility (CSR), as seen in voluntary activities concerned with environmental or social issues.
SRI already occupies space in many major financial markets, and the Global Sustainable Investment
Alliance (2015) has reported that the proportion of SRI to total management assets in Europe and theUnited States is 58.8% and 17.9%, respectively, thereby underscoring SRI’s substantial presence in thesemarkets. As a reflection of the popularity of SRI in Western countries, a considerable amount of academic
literature addresses SRI, and these studies can be divided into two categories. The first category
encompasses research discussing whether SRI funds out- or underperform funds that are not socially
screened, and the general conclusion of these studies is that the difference between SRI and conventional
funds is not statistically significant, though it depends on the time and place analysed (Renneboog et al.,2008).
In a study ranking among the earliest research to compare the performance of SRI andconventional funds, Hamilton and Statman (1993) used the monthly return data of equity mutual funds in
the United States during 1981–1990 and measured performance with Jensen’s alpha. Based on the capital
asset pricing model (CAPM), Jensen’s alpha measures the performance of stock relative to the market
2portfolio (Jensen, 1968). Results showed that the mean monthly excess return of SRI funds established
before or during 1985 was greater than that of conventional funds, though the difference was notstatistically significant, while SRI funds established after 1985 showed a mean excess return lower thanthat of conventional ones, though also not at a statistically significant level. In effect, the results indicatedthat the market did not value the non-financial benefits of SRI funds. In line with Hamilton et al. (1993),
the performance of SRI funds has also been found to not differ from those of conventional funds in astatistically significant way according to data from the United States (Climent & Soriano., 2011; Gil–
Bazo et al., 2010; Goldreyer et al., 1999); the United Kingdom (Gregory et al., 1997); the United
Kingdom, the Netherlands, Sweden, and Germany (Kreander et al., 2005); Germany, the United Kingdom,
and the United States (Bauer et al., 2005); Australia (Bauer et al., 2006); Canada (Bauer et al., 2007);
European countries (Ziegler et al., 2007; Ziegler, 2009), 17 countries worldwide (Renneboog et al.,2008); and Japan, the United States, and the countries of Europe (Itoh et al., 2013).
More recently, Bollen (2007) raised the interesting question of whether investor behaviour
regarding SRI and conventional funds differs, a question that characterises the second category of studies
addressing SRI. In examining the relationship between fund flows and returns for SRI funds in the United
Kingdom, Bollen (2007) found that SRI funds were more sensitive to lagged positive returns thanconventional funds, while SRI investors showed less response to negative returns than investors inconventional funds during 1980–2002. He furthermore showed that flow volatility was less in SRI funds
than in conventional funds during 1991–2002. In sum, his findings suggested that investors in SRI funds
are more loyal investors than those in conventional funds.
While Bollen (2007) focused on the relationship between past returns and money flows for US
SRI funds, Renneboog et al. (2011) expanded the analysis by investigating whether investment decisions
were made considering not only past returns, but also other factors, including fund size, age, risk, and fee
structure. Their chief findings showed that, along with conventional investors, investors in SRI funds
chased past returns, return rankings, and persistence in performance. Moreover, similar to Bollen (2007),Renneboog et al. (2011) found that investors in SRI funds did not mind negative returns too much morethan positive ones, unless poor performance persisted, as well as that greater money inflows stemmed
from smaller, younger funds and funds belonging to large-fund families. These authors additionally
showed that higher-intensity screenings attracted more inflows than otherwise, yet that some types ofscreening, such as those considering the environment or ethics, reduced cash flows. At the same time, thevolatility of money flows in SRI funds was greater than that in conventional ones—again, unless poor
performance persisted—and smaller, younger, or riskier SRI funds were associated with a greater
magnitude of volatile money flows than conventional funds.
3

Benson and Humphrey (2008) provided further insights into SRI investor behaviour by
incorporating both monthly and annual returns in order to investigate whether investors reacted to current
and/or past information, as well as by incorporating lagged flow in order to account for the persistence offund flow. Unlike the flow of conventional funds, that of SRI funds was shown to be a negative functionof current, past, and lagged returns, which suggested that SRI investors cared about returns less than theirconventional counterparts. If such is the case, then this finding would accord with the hypothesis thatinvestors in SRI funds obtained some additional non-financial utility. Furthermore, the lagged flow of
SRI funds was significantly positive and its coefficient greater than that of conventional funds, meaningthat SRI fund flows were more persistent than conventional ones. It therefore seems likely that investors
in SRI funds have reinvested in funds that they already own. Benson and Humphrey (2008) also
investigated the differences in flow performance regarding the best- and worst-performing funds; whereas
conventional fund investors responded to good performance greatly but reacted less to poor performance,
SRI fund investors were less sensitive to performance than their conventional fund counterparts.
Despite considerable research on SRI in various countries, very little has been analysed about theJapanese SRI market. In one of the few studies to examine the performance of SRI as a means to identify
possible roles of SRI in Japanese pension portfolios, Jin et al. (2006) compared the performance of ahypothetical SRI index to that of a market index, between which there were no indexical inconsistencies.
In short, they found no major differences between the indices. With stock-by-stock panel data analysis,
they additionally investigated whether SRI added excess return to the period before the first SRI index
was launched in Japan; however, holding an SRI portfolio was found to have prompted lesser returns
during the post-launch period. Together, these results implied that including SRI portfolios in pension
funds would not offer any additional benefits to pension participants in Japan. Comparing investor
behaviour between SRI and conventional funds, Renneboog et al. (2011) included data from Japan,
though as information of only one of 17 countries examined in their analysis. It thus remains unknown
how exactly investment behaviour in Japan structurally differs in terms of SRI and conventional funds.
In response, this paper compares SRI and conventional funds from a perspective other than that of
the abovementioned studies—namely, their reaction to financial crisis. The findings of earlier studies
suggest that investors do not consider SRI to constitute costs, at least because there is no difference inperformance between SRI and conventional funds. In terms of investor behaviour, SRI investors are moreloyal than conventional investors, since SRI funds are more sensitive to lagged positive returns but less soto negative returns. Taking these results into consideration, we expect that, though most counties
worldwide have recently experienced a significant economic downturn, SRI investors might retain theirfunds instead of selling them. In this sense, the performance of SRI might have suffered from the4

financial crisis; however, if CSR activity was evaluated positively by the market, then the decrease in the
returns of SRI would be lower than those of conventional investments. We therefore articulated the
hypothesis that SRI funds have been able to better resist the negative impact of the recent global recession
than conventional funds, particularly in JapanTo examine this hypothesis, we adopted event study methodology. Event studies cast light on how
unanticipated events impact changes in fund prices, given that the market is efficient. The unanticipated
event focused on here is the bankruptcy of Lehman Brothers, a critical moment during the global
financial crisis that triggered further drops in stock prices and even greater economic losses. Among the
few studies with a similar research objective, Nofsinger and Varma (2014) compared the performance of
US SRI and conventional mutual funds during periods of crisis—namely, March 2000 to October 2002 as
the technology bubble burst, and October 2007 to March 2009 as the global financial crisis—and periodsof non-crisis that was one other than two crisis periods during 2000-2011. Their estimation results
showed that, during the crises, SRI funds significantly outperformed conventional ones, whereas the
opposite result emerged during the non-crisis period. They added that this asymmetric pattern was driven
by SRI funds stipulating environmental, social and governance (ESG) positive screening.
More recently, Becchetti et al. (2015) examined the performance of SRI and conventional funds,
albeit in different markets, during the period January 1992–April 2012 with both a market model and amultifactor model. They found that, during the global financial crisis from December 2007–June 2009,
SRI funds also significantly outperformed conventional ones in all markets except those in North
America, yet did not differ when the technology bubble burst during March–November 2001. Moreover,they expanded their findings by revealing that the limited diversification constraint did not notably lower
SRI performance.
At the same time, Leite and Cortez (2015) compared the performance of SRI and conventional
funds during periods of market crisis in France: the period until the technology bubble burst (January
2001–March 2003), the global financial crisis (June 2007–February 2009), and the euro sovereign debt
crisis (May 2011–May 2012). Their principal finding was that SRI funds significantly underperformed
compared to conventional funds during non-crisis periods, which aligns with Nofsinger and Varma’s(2014) results. Unlike Nofsinger and Varma (2014), however, Leite and Cortez (2015) discovered that thedifference between SRI and conventional funds was not statistically significant during crises; though SRI
funds achieved returns comparable to those of conventional funds during crisis, they could not provide
additional protection to investors at the time. These authors also demonstrated that the inferior
performance of SRI during non-crisis periods was spurred by funds employing negative screenings, for
SRI funds with positive screenings showed no significant differences in performance when compared5

with conventional funds.
Although these studies provide a broad perspective on the resilience of SRI funds during crisis,
they have also all identified long-term periods of market crisis lasting 1–2 years. In this sense, theirresults could have accommodated the effects of other events or factors on fund performance during timesof crisis. In contrast to these studies, our study identifies events lasting three days only, meaning that
results can show the immediate effect of financial crisis on fund performance. According to a survey ofindividual investors in Japan (Japan Securities Dealers Association, 2014), the most important
determinant of investment is stability and low risk. From this angle, the present study can provide
information useful to stakeholders in exploring the resilience of SRI from short-term perspective on topof mid-, and long-term perspectives that earlier studies looked from. Although the Japanese SRI market
remains at a developing stage, an assessment of the potential impact of SRI is worthwhile, given its
expected growth due to the steady growth of pension funds. Since studies of Japanese SRI performance(Itoh et al., 2013; Nakai et al., 2013; Nakajima, 2011) have nevertheless not investigated how market
crisis impacts fund performance, our study can fill a gap in current knowledge of SRI, especially in Japan.
The principal findings of this paper are that the abnormal impact of the recent global financial
crisis on SRI funds was significantly positive, while that on conventional funds was significantly negative
estimated by Fama–French three-factor model (Fama & French, 1993); and that the greater resilience of
SRI funds in Japan amid the global financial crisis has been induced by international SRI funds. Other
recent studies (Leite & Cortez, 2015; Nofsinger & Varma, 2014) have examined whether the types ofscreening prompt any difference in performance, largely because SRI funds in European countries or theUnited States exhibit a variety of screenings. At the same time, Japanese SRI funds identified by theJapan Sustainable Investment Forum (JSIF) have employed positive screening and focus mostly on
environmental issues.1 We therefore do not investigate the effect of differences in screening on fundperformance.
The rest of this paper is structured as follows. After Section 2 describes the data, Section 3

1

SRI funds analysed in this study exhibit a few notable features. First, none use the exclusion approach according to
the JSIF classification rule. Second, only four of the 62 SRI funds focus on issues other than environment-related
ones; three SRI funds—namely, the Amundi Risona Woman J Fund, Amundi Womenomics Balance Kabushiki 30(monthly distribution type), and Amundi Womenomics Balance Kabushiki 30 (active growth)—actively invest infirms in which numerous women have played important roles or that provide goods or services to women, while theMitsubishi UFJ SRI Fund actively invests in family-friendly firms in which employees can choose flexible working
hours in order to strike better life–work balances, as based on an evaluation by the Good Bankers Co., Ltd. The 58
other funds focus on environmental issues in some way; 17 of them pose CSR as a screening criterion, 10 pose ESG,and eight pose environmental issues. By contrast, some funds specify their interest of screening to be climate changeor sustainable energy. It should be noted that CSR activities of Japanese firms encompass environmental
conservation efforts, meaning that most SRI funds in the present study have adopted a homogeneous screening
strategy. We therefore conclude examining the impact of differences in screening criteria on performance is
unnecessary.

6introduces the event study method, along with the EGARCH model and Fama–French three-factor model.
Estimated results are summarised in Section 4, followed by an explanation of the significance of results in
Section 5 and a summary of findings in Section 6.

2 DataThe history of SRI funds in Japan is far brief than that of similar funds in Europe and the UnitedStates. Early SRI funds were eco-funds launched in the late 1990s and early 2000s, the same time during
which attention to environmental problems escalated noticeably (Dentsu Macromill Insight, 2012).
Eco-funds were imported from the West as new financial products as part of the push to introduce newmarket mechanisms for intermediate cash flow from households into SRIs (Sakuma & Louche, 2008).
This situation differs drastically from that in the United States and Europe, where SRI has religious roots.
Furthermore, though many SRI investors in Europe and the United States are basically institutional
investors, especially in pension funds, most SRI in Japan occurs in publicly offered SRI funds targeting
individual investors.
Figure 1 shows changes in the number of publicly offered SRI funds in Japan and their total net
assets in billions of USD (JSIF, 2015). At the beginning of the SRI market in Japan, few funds existed,
and though both the number of funds and their total net assets have steadily grown, a sudden,
considerable decrease occurred in 2008 due to the financial crisis. Total net assets of SRI funds amounted
to USD $10 billion at the end of December 2011, a figure that represents only 0.2% of the Japanesemutual market—a smaller share than in Europe and the US, where SRI funds constitute more than 10% of
mutual fund markets (JSIF, 2013). In Japan, screening has targeted environmental aspects since 2007, and
it is reported that, as of 2013, more than 70% of SRI funds have been environmentally screened (JSIF,2014).
Figure 2 depicts the number of conventional funds and their total net assets in Japan (Investment
Trusts Association, Japan, 2010). While the SRI fund market in Japan continues to develop, since theconventional fund market seems to have already matured, there has been no rapid increase in the numberor net assets of conventional funds. Conventional funds experienced a slight drop in total net assets
compared to that of SRI funds, and their number has gradually increased since 2004.

7

Figure 1. Socially responsible investment funds and total net assets in Japan, 2002–2010

Figure 2. Conventional funds and total net assets in Japan, 2002–2010

To conduct our analysis, we used data purporting the value of funds and the market portfolio.
Daily return data regarding publicly offered investment trusts are available from the Investment Trusts
Association, Japan, which offers a sample of 3,824 funds as of the end of July 2010. Data concerning
privately offered investment trusts are unavailable and thus were not included in our sample. We applied
JSIF classification to identify SRI funds, of which 89 were listed for the same period. An additional
condition was that the funds had to survive during the entire period under study, from 7 February to 17
September 2008. As a result, our data encompasses 2,136 conventional funds and 62 SRI funds (for thelatter, see Appendix A). Funds were also classified into domestic or international funds; whereas
domestic funds are mutual funds that invest in stocks and/or bonds of chiefly domestic companies,
international funds as those investing in both domestic firms and foreign companies, or only the latter. In
8accordance with these criteria, there were 793 domestic conventional funds and 24 domestic SRI funds inour sample. International funds had 1,343 conventional funds and 38 SRI funds (Table 1). We used theTokyo Stock Price Index (TOPIX), Russel Nomura Large Cap Growth Index, Russel Nomural Large Cap
Value Index, Russel Nomura Small Cap Growth Index, Russel Nomura Small Cap Value Index, andJapan Benchmark 10-Year Government Index to construct the market premium index, small minus big(SMB) index, and high minus low (HML) index, as well as to complete the Fama–French three-factor
model, as detailed in section 3.3. All data were downloaded from Datastream. Table 2 provides thedescriptive statistics of the fund returns of SRI funds, conventional funds, and other indexes, thecalculation of which appears in section 3.1; each fund showed 152 returns during the study period.

Table 1. Sample sizes of SRI and conventional funds
Domestic

International

Total

SRI

24

38

62

Conventional

793

1343

2136

Total

817

1381

2198

Table 2. Descriptive statistics
Observation

Mean

Std.Dev.

Min.

Max.

SRI

9,424

-0.0009

0.0150-0.0672

0.0661

Conventional
Market Proxy(TOPIX)
MarketPremium

325,128-0.0009

0.0135-0.1852

0.1131152-0.0001

0.0168-0.0519

0.1131152-0.00130.0206-0.06440.0570SMB Index

152

0.00010.0067-0.0206

0.0266HML Index

152

0.00050.0045-0.0079

0.01699

3 Method
3.1 Event Studies with Ordinary Least Squares
Event study methodology was introduced by Fama et al. (1969) for the purpose of examining therelationship between a particular unanticipated event and changes in stock prices. More specifically,
numerous studies have used the methodology to analyse whether positive or negative CSR-related events
impact corporations’ share prices (Arora, 2001; Gupta & Goldar, 2005; Hamilton, 1995; Takeda &Tomozawa, 2006, 2008; Yamaguchi, 2008, 2009). The validity of any event study relies on a few
assumptions: the notion of market efficiency, the unexpectedness of the event, and the nonexistence ofother contemporaneous events that could have affected share prices analysed (McWilliams & Siegel,1997).
To conduct our event study, we needed to define the event window—that is, the period examinedfor changes in fund price. We set a three-day period as our event window that included the day before theevent, the day of the event, and the day after the event. The event window is normally set for a period
longer than the day of the event in order to encompass both changes in fund price resulting frominformation leaked before the event and the investment action taken by latecomers on the day after the
event.
Since the Japanese market was closed on 15 September 2008 due to a public holiday, we haveidentified the bankruptcy of Lehman Brothers to have occurred on 16 September 2008, here designated as

T0 ; the last transaction day before the event (12 September) is labelled T−1 and the transaction day
following the event (17 September) T+1 . We used fund price data for 150 transaction days before theevent window as our estimation window. Using the following formula, we calculated the fund returns
from fund prices:ri,t = log(
in which ri,t is the fund return and

Pi,t)Pi,t−1(1)

Pi,t is the fund price on day t for firm i .

We next estimated the normal return, or the counterfactual return in the case that the event did notoccur. We assumed that the return of the market proxy—here, TOPIX—and of each fund has a linear
relationship. To calculate the normal return, α i andβi were estimated in the market model with datafrom the estimation window, as shown below:

ri,t = α i + βi rm,t + εi,t ,

10

(2)

in whichE[εi,t ] = 0 and Var !"εi,t #$ = σ (2εi,t ) ; rm,t signifies the return of the market index, whereas

αi and βi are unknown parameters. With estimated parameters, the normal return for each three-day
event window can be estimated, and subtracting this value from the realised return gives the abnormal
return (AR).

ARi,t = ri,t − (α̂ i + β̂i rm.t ),(3)

The cumulative abnormal return (CAR) is then calculated after adding the abnormal returns offirm i for the three-day event window.
T1

CARi (T−1,T1 ) = ∑ ARi,t .

(4)

t=T−1

All CAR values can be analysed for the entire sample in the same category, called the average cumulative
abnormal return (ACAR), as follows:N

ACAR(T−1,T1 ) = ∑ CAR(T−1,T1 ) / N.

(5)

i=1

The variance of the average cumulative return can thus be obtained as follows:

VAR[ACAR(T−1,T1 )] =1 N ˆ2∑σ (T−1,T1 ).
N 2 i=1(6)

Once ACAR values are obtained, we tested the null hypothesis that the event did not impact fundreturns by using the following J-statistics:

J=

ACAR(T−1,T1 )~ N(0,1).
N
12∑σˆ (T−1,T1 )N 2 i=1(7)

If we could not reject the null hypothesis, then it became meaningless to interpret the value of ACAR.

3.2 Event Studies with EGARCH
Most earlier studies listed in 3.1 adopted an event study methodology that does not account forheteroskedasticity. In fact, the standard market model assumes that the residuals of share prices are
simply white noise. However, financial time series data such as those of share prices and exchange rates
generally have nonconstant variance. An autoregressive conditional heteroscedasticity (ARCH) model(Engle, 1982) and a more extended version, a generalised autoregressive conditional heteroskedasticity(GARCH) model (Bollerslev, 1986), were thus developed to account for heteroskedasticity. In several
earlier studies, the GARCH model was employed to estimate time-variant conditional variance, though it
11exacted some limitations—for example, nonnegative restriction on estimators. By contrast, the EGARCH
model introduced by Nelson (1991) does not assume the nonnegative constraint when using a natural
logarithm, thereby making it superior to the GARCH model since the nonnegative conditions are often
violated by estimators. We used the EGARCH (1,1) model to confirm that results found using ordinary
least squares (OLS) were robust. In the same manner as in the OLS model, parameters were estimated to
calculate the normal return. The error term was divided into independent white noise and standard error:

ri,t = α i + βi rm,t + εi,t ,in which εi,t =(8)

hi,t ν i,t . The variance of the standard error, called conditional variance, can be shownaslog(hi,t ) = ω i + α1,iε i,t −1
hi,t −1+ α 2,i

ε i,t −1
hi,t −1+ βi log(hi,t −1 ),(9)in which εi,t Ωt ~ N(0, hi,t ) and Ω represent information set at time t upon which the distributionof errors is assumed to be conditioned. This formula is well known as the conditional variance equationin the EGARCH (1,1) model. Abnormal returns, CAR, and ACAR were estimated in same manner aswith the OLS model.
To obtain the standardised residual terms, we calculated the conditional variance in each three-day
event window for firm i using both estimated parameters from Eq. (9) and data from the estimation
window. Once the conditional variances for each event window were calculated for firm i , we take theexponential for each and found the average over the three-day period. We then obtained the average
conditional variance for firm i as follows:hi (T−1,T1 ) =exp(ĥi,T−1 ) + exp(ĥi,T0 ) + exp(ĥi,T1 )
3

.

(10)

The variance of the average cumulative return could thus be obtained as follows.

VAR[ACAR(T−1,T1 )] =1 N
∑ hi (T−1,T1 ).
N 2 i=1(11)

Finally, we tested the null hypothesis that the event did not impact fund returns by using thefollowing J-statistics:

J=

ACAR(T−1,T1 )N

1∑ hi (T−1,T1 )N 2 i=1

12~ N(0,1).

(12)

3.3 Event Studies with the Fama–French Three-Factor ModelIf our data has similar biases as other countries’ data of earlier studies, the multifactor model
must be employed to our analysis, too. Firstly, we need to check whether those factors have a significant
effect on the return of funds. We follow the study of Faff (2004) to construct the Fama-French “SMB”
and “HML” factors using existing style indexes that are Russel Nomura Large Cap Growth Index, Russel
Nomura Large Cap Value Index, Russel Nomura Small Cap Growth Index, and Russel Nomura Small
Cap Value Index developed by Global Research Division, the Nomura Securities Co., Ltd and Russell
Investments.2 SMB stands for “Small Minus Big” that enables us to control for small-effect based on theidea that firms with smaller market capitalisation can earn higher return than bigger firms in the financial
market. The proxy of SMB at time t is obtained as following:! R + RSGt $ ! RLVt + RLGt $SMBt = # SVt
&−#
&
"
% "
%
2
2
where

(13)

RSVt is the return on the Russel Nomura Small Cap Value Index at time t ; RSGt is the returnon the Russel Nomura Small Cap Growth Index at time t ;RLVt is the return on the Russel Nomura

Large Cap Value Index at time t ; RLGt is the return on the Russel Nomura Large Cap Growth Index attimet . Another Fama-French factor, HML (High Minus Low) shows the difference in the return

between the firm with a high book to market ratio (often called as value stock) minus the one with a low
book to market ratio (so-called growth stocks). HML at time t can be constructed as below:

HMLt = (Using

RLVt + RSVt
2)−(

RLGt + RSGt
2

).

(14)

SMB t and HMLt proxies, we estimated the expected return with a multifactor model toascertain the effects of these variables on fund return and compare them in terms of SRI and conventional
funds, according to the following:2

See http://qr.nomura.co.jp/QR/FRCNRI/frnri_info.html for more details.

13ri,t − rf ,t = α i + β1i MarketPremium i,t + β2i SMBt + β3i HMLt
+ β 4i d _ SRI * MarketPremium i,t + β5i d _ SRI * SMBt(15)

+ β6i d _ SRI * HMLt + εi,tMarket Premium can be calculated by subtracting the risk-free rate rf ,t calculated from the
10-Year Japanese Government Bond Index from the market portfolio. If the coefficients of

β1i , β2i , β3i

are estimated to be significant, then the variables have to be controlled for according to event study
methodology. An interaction term among the three factors and a dummy variable d_SRI were included as
d_SRI *Market Premium, d_SRI*SMB, and d_SRI*HML, in which the dummy variable equalled 1 if thefund group was an SRI fund and 0 if the fund group was a conventional fund. This technique enabled us
to investigate whether these risk exposures differ significantly between SRI and conventional funds.

Table 3. Regression results using the Fama–French model
Coeff.

Std. Err.

Constant

0.0001***0.0000Market Premium

0.8917***0.0011SMB

0.6478***0.0035HML-0.2912***0.0053d_SRI*Market Premium

0.4083***0.0067d_SRI*SMB-0.3976**

0.0210d_SRI*HML-0.0891***

0.0312***Statistically significant at the 1% level.
**Statistically significant at the 5% level.

As shown in Table 3, all variables and interactions with the SRI dummy have statisticallysignificant coefficient. We thus concluded that the Fama–French three-factor model should be applied.
The coefficient of market premium and that interacted with the SRI dummy was statistically significant
and positive, indicating that SRI funds had greater exposure to the market premium than conventional
funds, a finding consistent with the results of earlier studies encompassing crisis periods (Becchetti et al.,2015; Leite & Cortez, 2015; Nofsinger & Varma, 2014).
Our finding that the SMB factor was significantly positive at the 1% level indicated to us thatfunds comprising smaller firms’ stock are more likely to obtain larger returns than their counterparts,
which marks a small effect. By contrast, the coefficient of d_SRI*SMB showed that SRI funds were less14

exposed to small effects than conventional ones, a finding consistent with the results of Leite and Cortez(2015). As Leite and Cortez (2014) earlier showed, since their sample of French funds was mostly
screened with best-in-class strategies, larger, well-established companies could thus be selected as thebest companies for CSR. SRI funds in Japan are also identified with either positive screening or
best-in-class, meaning that SRI funds in Japan and France are less exposed to SMB effect thanconventional funds.
At the same time, the coefficients of HML became statistically significant and negative at the 1%
level, suggesting that funds in our study are more growth- than value-oriented, which runs counters to theresults of Nofsinger and Varma (2014) and Leite and Cortez (2015), yet is similar to those of Becchetti etal (2015). Furthermore, the negative coefficient of d_SRI*HML underscores that that SRI funds are more
growth-oriented than conventional ones.
To render the Fama–French model applicable to the event study, we estimated parameterswith eq. (15) instead of eq. (2) and calculated the abnormal return for each three-day event window, as
follows:

ARi,t = ri,t − "#α̂ i + β̂1i (rm,t − rf ,t ) + β̂2i SMBt + β̂3i HMLt + εi,t .$%(16)

Eq. (16) is equivalent to eq. (3) of the market model. We can take the exactly same step as the Market
Model afterwards to examine whether the event significantly affect the fund price with eq. (5) to eq. (7).

4 Empirical Results
As we confirmed in 3.3 that Fama-French factor did have effect on performance of SRI andconventional funds, we mainly discuss the estimation results of the model in this section. Unlike theempirical results with other two models (discussed later in this section), the ACAR of SRI funds issignificantly positive (0.0026) at the 5% level, while the one of conventional funds remains significantly
negative (-0.0069) at the 1% level. Therefore, we reject that the null hypothesis that the event did nothave any effect on the funds. The difference of those ACARs is also significant at the 1% level (See theTable 4). Hence, we conclude that SRI fund is more resilient towards the bankruptcy of Lehman Brothers.
The result can be interpreted that investors did not sell out SRI funds even under the difficult situation,
while they seemed to sell off conventional funds.
The resilience of SRI funds towards the collapse of the Lehman Brothers was also found in15

OLS and EGARCH model. Although the ACARs of SRI funds are negative in these models, the absolutevalue is smaller than the ACARs of conventional funds. This means the impact of the bankruptcy ofLehman Brothers on SRI funds was less severe than that on conventional funds. With the OLS model, thedifference in the ACARs between SRI funds and conventional funds is statistically significant at the 5%
level. We also applied the EARCH model since the stock price data often contains the heteroskedasticity.
We conducted an ARCH-LM test for all of the data and found that 24 out of 62 SRI funds and 1,003 outof 2,139 conventional funds have ARCH effects. (The results of the ARCH-LM test for SRI funds areshown in Appendix 3B). Since it is confirmed that there exists an ARCH-effect in a considerable numberof funds, we also analysed the data using the EGARCH (1,1) model, and we obtained the similar resultswith the OLS model.
In order to analyse how serious this negative shock was, we would have to compare theobtained ACARs with other event studies. Unfortunately, there have been no other event studies using
fund data that we know of. Comparison of the impact of the financial crisis on SRI funds with otherevents that might affect the returns of SRI funds would require further study.

Table 4. Comparisons of ACAR
The Type of FundOLS

EGARCHFama-French ModelSRI Fund-0.0034***-0.0024**0.0026**(-3.0408)(-1.7236)(1.9031)-0.0112***-0.0110***-0.0069***(-56.5757)(-41.3268)(-25.2622)

0.0078**0.0086***0.0095***[2.2420][5.3272][2.7442]

Conventional Fund

Difference*** Statistically significant at the 1% level** Statistically significant at the 5% level
Numbers in parentheses and square brackets are J statistics and t statistics, respectively.

5 Discussion: Domestic versus International Funds
It remains unclear why the impact of the recent global financial crisis on SRI funds was less thanthat upon conventional funds. One possible reason is that investors might have supposed that any
company targeting CSR would be one with a sound long-term strategy and hence a more forward-looking
firm than its counterparts, since its goods or services could be differentiated in terms of long-term
environmental or social aspects from an understanding that it incurs a short-term expense complementing

16CSR activities. In this case, investors might believe that such a firm could be more likely to weather afinancial crisis, which is consistent with the idea that CSR activity is a factor that can induce stable,
growing development for firms (Scalet & Kelly, 2010). Consequently, SRI funds would have been soldless than conventional ones on the day of the bankruptcy of Lehman Brothers. To explore this idea, thepresent section focuses on the differences of investment destination to explain why SRI funds have been
more resilient during the financial crisis than conventional funds.
In our study, we classified funds as either domestic or international funds. Domestic funds aremutual funds that invest in the stocks and/or bonds of domestic companies, whereas international funds
invest in both domestic and foreign companies or in foreign companies only. If investors behave
differently toward domestic SRI and international SRI funds, then they also respond differently tofinancial shock sustained by these funds. We estimated ACAR values with the OLS, EGARCH, andFama–French three-factor model, yet separately for the group of domestic funds and the group ofinternational funds. We first found that the most ACARs of domestic funds were estimated to be negativewith all models. Besides, the collapse of Lehman Brothers dropped the return of SRI funds more than thatof conventional funds, though the difference between the two funds was statistically significant only with
the EGARCH model, as Table 5 shows. Second, the ACAR of international SRI funds by Fama–French
three-factor model turned significantly positive and the difference between ACARs of SRI andconventional funds is significant at the 1% level, which is a result similar to that estimated with the entire
sample. The result might thus indicate that an increase in SRI performance could be induced by the
resilience of international SRI funds, possibly because international funds can enjoy a greater
diversification of investment opportunities than domestic ones. As a result, the impact of financial shockon domestic SRI funds and domestic conventional funds might become similar.

17

Table 5. Comparison of average cumulative abnormal return of domestic and international funds
Domestic
Ordinary

SRI funds

Conventional funds

Difference

International
EGARCHFama–

Ordinary

EGARCH

Fama–

least

Frenchleast

Frenchsquaresmodel

squaresmodel-0.0015***-0.0016***-0.0006-0.0045***-0.0003*

0.0046***(-2.7269)(-5.9867)(-0.8911)(-2.5418)(-1.3304)(2.0954)-0.0002-0.0002*0.0000-0.0178***-0.0175*-0.0110***(-1.1822)(-1.3242)(0.1709)(-60.7034)(42.3994)(-27.5943)-0.0013-0.0014*-0.0006

0.0133***0.0172***0.0156***(-1.1078)(-1.4190)(-0.2969)(7.5220)(6.9517)(2.9353)

Note. Numbers in parentheses and brackets are t-statistics.
***Statistically significant at the 1% level.
*Statistically significant at the 10% level.

6 Conclusion
Using the event study methodology, in this paper we examined the market reaction of SRI funds
relative to conventional funds in the Japanese market amid the recent global financial crisis. We chose thebankruptcy of the Lehman Brothers as the momentous event, for it is known to have triggered a further
drop in stock prices and economic losses during the recession. Empirical results with the Fama–French
three-factor model showed that the event significantly increased the performance of SRI funds at the 5%
level, while the significant negative impact on conventional funds was estimated and a difference
between two groups of funds were statistically significant at the 1% level. We also found that theresilience of SRI funds amid the event was largely due to international funds, a possibility given thatinvestors might evaluate the CSR activities of international firms more than those of domestic firms.
Alternatively, we can assume that the universe of domestic SRI funds is too limited to enjoy risk
diversification. Altogether, we confirmed that SRI funds better resisted the bankruptcy of the Lehman
Brothers than conventional funds. This result could be useful information to help the diffusion of SRI
since stability is the most important investment factor for individual investors in Japan (Japan Securities
Dealers Association, 2014).
Our approach can be extended to investigate the impact of financial crisis in other countries and inother time periods. Comparison of the impact of the financial crisis on SRI funds with other events, using
data from other countries as well would provide useful information. Fund data in the United States market

18

could be analysed with the same methodology, since the financial crisis was triggered by defaults on
subprime loans in the US. Such studies might lead to some interesting comparison of the level of impact
on SRI funds in Japan with SRI funds elsewhere in the world.

19

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23

Appendix A: SRI Funds Analysed
ID

Name

Stock company

Initial date1

Nikko Eco Fund

Nikko Asset Management

20 Aug 1999

2

Nenkin Tsumitate Eco Fund

Nikko Asset Management

31 Oct 2001

3

Sompo Japan Green OpenSompo Japan

30 Sep 1999

4

Eco Partners

Mitsubishi UFJ Trust and

28 Jan 2000

Banking5Asahi Life SRI Shakai Kouken FundAsahi Asset Life Management

28 Sep 2000

Co., Ltd.
6

Sumishin SRI Japan OpenThe Sumitomo Trust and Banking

26 Dec 2003

Co., Ltd.
7

Sumishin DC Good Company

The Sumitomo Trust and Banking

27 Feb 2004

Co., Ltd.
8

Fukoku SRI Fund

Shinkin Asset Management Co.,

27 Feb 2004

Ltd.
9

Daiwa SRI Fund

Daiwa Asset Management

20 May 200410

DC Daiwa SRI Fund

Daiwa Asset Management

20 July 2004

11

Mitsubishi UFJ SRI Fund

Mitsubishi UFJ Trust and3 Dec 2004

Banking
12

SAIKYO Nihon Kabushiki CSR Fund

PineBridge Investments Japan

18 Mar 2005

Co., Ltd.
13

Risona Japan CSR Fund

PineBridge Investments Japan

18 Mar 2005

Co., Ltd.
14

Sompo Japan SRI OpenSompo Japan

25 Mar 2005

15

PainBridge Hirogin Nihon Kabushiki

PineBridge Investments Japan

28 Apr 2005

CSR FundCo., Ltd.

Nihon SRI OpenOkasan Asset Management Co.,

16

12 Aug 2005

Ltd.
17

Daiwa Eco Fund

Daiwa Asset Management

9 Mar 2006

18

Sumishin Nihon Kabushiki SRI FundThe Sumitomo Trust and Banking

12 Jun 2006

Co., Ltd.
19

Amundi Risona Woman J Fund

Amundi Asset Management24

30 May 2006

Japan20

Chuo Mitsui Shakaiteki Sekinin Fund

Chuo Mitsui Asset Management

30 Nov 2006

Co., Ltd.
21

Shinkin SRI Fund

Shinkin Asset Management Co.,

8 Dec 2006

Ltd.
22

23

STAM SRI Japan Open (only for

The Sumitomo Trust and Banking

separately managed account)Co., Ltd.

PineBridge Nihon Kabushiki SRI Fund

PineBridge Investments Japan

16 Feb 2007

20 Dec 2007

Co., Ltd.
24

Eco Balance

Sumitomo Mitsui Asset

31 Oct 2000

Management Co., Ltd.
25

Nikko Global Sustainability Fund A

Nikko Asset Management

17 Nov 2000

Nikko Asset Management

17 Nov 2000

Nikko Asset Management

25 Oct 2001

Nikko Asset Management

25 Oct 2001

Nomura Asset Management

26 Mar 2004

Nomura Asset Management

26 Mar 2004

(without hedge)
26

Nikko Global Sustainability Fund B(with hedge)

27

Nenkin Tsumitate Global
Sustainability (without hedge)

28

Nenkin Tsumitate Global
Sustainability (with hedge)

29

World Water Fund A Course (withcurrency hedge)

30

World Water Fund B Course (without
currency hedge)

31

Nomura Global SRI 100

Nomura Asset Management

28 May 2004

32

Nomura Sekai SRI Index Fund (forNomura Asset Management

30 July 2004

Chikyu Ondanka Boushi Kanren Kabu

Shinko Asset Management Co.,

30 May 2006

Fund

Ltd.

34

Nikko DWS New Resource Fund

Deutsche Asset Management

20 Dec 2006

35

Global Water Fund

Nikko Asset Management

15 June 2007

36

New Generation Sekai Kankyo

United Investments Co., Ltd.

29 June 2007

37

Chikyu Ondanka Boushi Kanren Kabu

Shinko Asset Management Co.,

25 July 2005

defined contribution pension fund)
33

25

38

Fund (3-month closing type)Ltd.

Mitsubishi UFJ Global Eco Water

Mitsubishi UFJ Trust and

27 July 2007

Banking
39

Nomura Aqua Toushi A Course (withNomura Asset Management

29 Aug 2007

Nomura Asset Management

29 Aug 2007

UBS Global Asset Management

31 Aug 2007

Kokusai Asset Management Co.,

31 Aug 2007

exchange hedge)
40

Nomura Aqua Toushi B Course(without exchange hedge)

41

UBS Chikyu Ondanka Taiou Kanren
Kabu Fund

42

Ondanka Taisaku Kabushiki Open

Ltd.
43

Chikyu Ondanka Taisaku Kabushiki

Kokusai Asset Management Co.,

Open

Ltd.

44

Chikyu Kankyo Kabu Fund

Daiwa Asset Management

31 Aug 200745

DWS Shinshigen Technology Fund

Deutsche Asset Management

31 Aug 2007

46

Ondanka Boushi Kankyo Kanren Kabu

Okasan Asset Management Co.,

27 Sep 2007

Open

Ltd

47

Fidelity Three Basic F

Fidelity Investments Limited

29 Oct 2007

48

Tokyo Kaijo Select Sekai Kabushiki

Tokio Marine Asset Management

6 Dec 2007

FundCo., Ltd.

Amundi Sekai Mizukanren Kabushiki

Amundi Asset Management

F

Japan

TA Clean Energy Fund

Toyota Asset Management Co.,

49

50

31 Aug 200717 Dec 2007

20 Dec 2007

Ltd.
51

52

Amundi Sekai Kankyoryoku

Amundi Asset Management

21 Dec 2007

Kabushiki FundJapan

DIAM Koukakuduke Income Open

DIAM Co., Ltd.

22 Dec 2005

Daiwa Asset Management

14 Mar 2006

SRI (monthly closing type)53

6 Shisan Balance Fund (distribution
type)

54

6 Shisan Balance Fund (growth type)Daiwa Asset Management

14 Mar 2006

55

Shizen Kankyo Hogo Fund

DIAM Co., Ltd.

26 May 2006

26

56

Sekai 6Shisan Kintou Bunsan Fund

Daiwa Asset Management

28 June 2006

Daiwa Asset Management

27 Sep 2006

Amundi Womenomics Balance

Amundi Asset Management

19 Jan 2007

Kabushiki 30 (monthly distributionJapan(monthly distribution type)57

Shigagin SRI 3Shisan Balance Open
(odd-month distribution type)

58

type)
59

60

Amundi Womenomics Balance

Amundi Asset Management

19 Jan 2007

Kabushiki 30 (active growth)Japan

Chikyu Kankyo Kabu Gaisai Balance

Daiwa Asset Management

31 Aug 2007

Shinko Asset Management Co.,

14 Dec 2007

Fund
61

Kankyo Hozen Global Balance

Ltd.
62

Amundi Risona Sekai Green Balance

Amundi Asset Management

Fund

Japan

27

21 Dec 2007

Appendix B: ARCH-LM Test for SRI Funds
Fund ID

Arch

Fund IDArch

1

0.96606732

15.87687***2

1.027735

33

16.22302***3

2.68646*34

7.315012***4

1.402577

35

3.2449*50.01011236

1.531446

60.525505

37

16.2176***70.471471

38

5.985241**8

1.227087

39

3.641264*90.116404

405.598984**

100.087552

41

6.926547***

11

0.0021142

16.0997***12

1.58285743

16.04057***

13

0.94806644

19.68416***140.16351245

7.191673***15

1.650385

46

0.436857

160.90185747

6.381472**

170.044793

48

29.76349***18

0.061683

49

33.6517***19

0.0363450

0.752861

20

0.040993

51

24.56617***21

1.19708952

17.05208***22

0.695522

53

3.056855*

230.66122554

0.630496

24

0.08215855

23.84215***25

25.51617***56

0.096191

26

25.48944***

57

9.647576***27

11.17471***58

20.62302***28

12.13686***59

5.670033**

29

5.405308**60

20.79893***30

9.281398***61

16.46026***31

15.70286***62

24.95287******Statistically significant at the 1% level.
*Statistically significant at the 5% level.
*Statistically significant at the 10% level.

28