Is a Socially Responsible Investment Necessarily Efficient? Evidence from SRI Mutual Funds and Sin Stocks

Abstract

Socially responsible investment (SRI) integrates environmental, social, and governance (ESG) issues into decision-making and has grown significantly, attracting academic interest. Despite mixed empirical findings, some literature intriguingly suggests SRI outperforms financially, which contradicts theoretical expectations that restricted portfolios should underperform. Applying Markowitz's Modern Portfolio Theory and Tobin's Separation Theorem to a sample of 259 SRI mutual funds and 159 sin stocks, we conclude that investing exclusively in SRI funds is inefficient. However, while SRI may hinder financial performance, it should not be discouraged, as many investors value the responsible use of their savings despite lower returns. This study highlights the need to expand investment efficiency criteria beyond risk and return, aligning more closely with investors' broader utility functions.