RT Journal Article
SR Electronic
T1 Lowering Portfolio Risk with Corporate Social Responsibility
JF The Journal of Investing
FD Institutional Investor Journals
SP 43
OP 52
DO 10.3905/joi.2019.28.2.043
VO 28
IS 2
A1 John Clark
A1 Kevin Krieger
A1 Nathan Mauck
YR 2019
UL https://pm-research.com/content/28/2/43.abstract
AB This article examines the link between corporate social responsibility (CSR), as measured by the Kinder, Lydenberg, and Domini Research and Analytics Inc. (KLD) data, and the likelihood that a firm experiences an extreme return in a given year. An extreme-return firm is defined as one that has a return either in the top or bottom 3% of all firms with CSR data. The authors find CSR is negatively related to the likelihood of a firm experiencing an extreme return. Accounting for this negative relationship significantly improves a model used to predict future extreme returns. Finally, they form two portfolios: one with all firms with CSR data and one with all firms with CSR data except those firms with the highest predicted probability of extreme returns in the following year. Our results indicate that the returns for the two portfolios are nearly identical. However, the standard deviation of the portfolio excluding likely extreme movers is 3% lower than the portfolio with all firms. Thus, this simple portfolio strategy incorporating CSR has the potential to lower risk without impacting return.TOPICS: ESG investing, portfolio theory, portfolio construction