Analysis of Risk and Return of Traditional and Socially Responsible Investing (SRI): An Empirical Study of Asia and India (2016)

IntroductionPressure on the environment is increasing as people are exploiting the resources on earth with the population of the world touching a whopping six billion figure. Global warming, corporate governance and corporate social responsibility are nowadays most discussed topics everywhere. Investors are not the exception to this development; investors are fast moving towards the socially responsible investing (SRI). They want to invest in the companies which are socially and ethically responsible and cautious about the environmental changes. Investors are now more concerned than ever about the SRI. These days large number of investors, institutions and finance professionals are inclining towards SRI, as people are becoming more and more aware about the damage the business is causing to the environment.Investors are moving towards investing in green, ethical and environment friendly companies. At the same time they are also worried that SRI investment may hurt the returns. This study explores how beneficial it is for the investors to invest in the socially responsible companies instead of traditional one. This study also tries to explain if there is any significant difference in the risk and return of the investment in socially responsible companies and traditional companies?Socially responsible investing (SRI) is also called as ethical, green or sustainable investing. Investors in SRI avoid investment in companies involved in manufacturing socially controversial products such as weapons, alcohol etc. At the same time environmental unfriendly companies emitting GHG (Green House Gases) and other harmful gases are also coming under severe criticism.Investors are incorporating Environmental, Social and Corporate governance (ESC) as a key strategy of SRI investment for portfolio construction across a range of asset classes. SRI is fast becoming an investment alternative for the environmental conscious investors. Growth of SRI depends upon the hypothesis that there is no significance difference between the performance of SRI and traditional investment. The paper studies the difference between the returns and risk of SRI and traditional investment. SRI investments has grown rapidly in the world in the past decades. Number of SRI funds and their assets under management has grown rapidly in US and Europe and other developed countries like Canada and Australia but new in Asia and developing countries.In US the number of SRI mutual funds has grown from 55 in 1995 to 201 in 2005 and their asset under management from $12 billion to $179 billion respectively. In Europe there were only four SRI mutual funds in 1984 which have grown to 375 in 2005 with asset under management to $ 30 billion.6 In US more than 11 percent of total assets under management are held in SRI funds9. In other countries SRI investment is at its early stage of development and appears to be growing at rapid pace.Logically, investors are sometimes willing to sacrifice the returns for SRI investments. Do they really sacrifice returns is an important question, which this study will try to answer.This study provides empirical analysis of the difference between returns and risk in SRI and traditional investments in Asian and Indian stock markets using the S and P's SRI and traditional indices.At Asian level paper compares S and P Asia Pacific BMI (traditional index) with S and P Asia Alternate energy and S and P Asia water index. In Indian markets the paper compares the S and P BSE Sensex with S and P BSE Carbonex and S and P BSE Sensex Greenex.Review of LiteratureVarious researchers have conducted research and compared SRI with traditional investment. Amene and Sourd1, Bauer et al2, Derweil and Koedijk', Kreander et al7 and Schroeder9 etc. found no significant difference between the returns of SRI and traditional mutual funds.Amene and Sourd' compared mutual funds with conventional indices in France from January 2002 to December 2007 and found no significant performance difference. …