Is ethical money financially smart? Nonfinancial attributes and money flows of socially responsible investment funds

• Published in: Journal of financial intermediation Vol. 20; no. 4; pp. 562 - 588
• Main Authors: Renneboog, Luc, Ter Horst, Jenke, Zhang, Chendi
• Format: Journal Article
• Language: English
• Published: San Diego Elsevier Inc 01.10.2011; Elsevier; Elsevier BV
• Series: Journal of Financial Intermediation
• Subjects: Cash flow; Ethical funds; Ethics; Financial performance; Fund management; Investment returns; Investment screens; Investment trusts; Investments; Investor clienteles; Mutual funds; Mutual funds Ethical funds Investor clienteles Investment screens; Scandals; Social investing; Social responsibility; Studies; Investment screens; Investor clienteles; G11; Mutual funds; G10; G12; Ethical funds
• ISSN: 1042-9573; 1096-0473
• DOI: 10.1016/j.jfi.2010.12.003

We study the money flows into and out of socially responsible investment (SRI) funds around the world. In their investment decisions, investors in SRI funds may be more concerned with ethical or social issues than with fund performance. Therefore, SRI money flows are less related to past fund returns. Ethical money is less sensitive to past negative returns than are conventional fund flows, especially when SRI funds primarily use negative or Sin/Ethical screens. Social attributes of SRI funds weaken the relation between money inflows and past positive returns. However, money flows into funds with environmental screens are more sensitive to past positive returns than are conventional fund flows. Stock picking based on in-house SRI research increases the money flows. These results give evidence on the role of nonfinancial attributes, which induce heterogeneity of investor clienteles within SRI funds. We find no evidence of a smart money effect, as the funds that receive more inflows neither outperform nor underperform their benchmarks or conventional funds.