SRI: Truths and lies

This paper proposes a skeptical look at the socially responsible investing (SRI) industry. Building upon a new database for European and American domestic equity mutual funds, it investigates whether there is a discrepancy between what is said (e.g., names or labels) and what is done (investments of mutual funds holdings) about SRI. It turns out that the correspondence between de jure and de facto SRI is weak. Additionally, using a novel nonlinear factor-augmented panel model, it is found that the de facto ethical positioning only matters for the funds’ financial performance. Both results shed new light on the SRI industry and pave the way for a new regulation framework.