Socially responsible investment fund performance: the impact of screening intensity

Perhaps the most common criticism of socially responsible investment funds is that imposing non-financial screens restricts investment opportunities, reduces diversification efficiencies and thereby adversely impacts performance. In this study we investigate this proposition and test whether the number of screens employed has a linear or curvilinear relation with return. Moreover, we analyse the link between screening intensity and risk. Screening intensity has no effect on unadjusted (raw) returns or idiosyncratic risk. However, we find a significant reduction in alpha of 70 basis points per screen using the Carhart performance model. Increased screening results in lower systematic risk - in line with managers choosing lower beta stocks to minimize overall risk.