Financial Performance of Socially Responsible Investment: Does the Visibility of Firms in the Portfolio Matter?

In this study we investigate the question of financial performance of Socially Responsible Investment (ISR) funds using BNP Paribas Investment Partners (BNPP IP) Best-In-Class (BIC) universe of European stocks. We originally contribute to the literature by developing analyses enlightened by recent theoretical developments. We show that within this market, from January 2008 to July 2013, it has been possible to create financial value added by selecting systematically stocks of firms in the BIC universe. Moreover we show a negative relationship between visibility of firms and the amount of performance that has been generated by portfolios built with stocks of firms in the BIC universe (i.e. SRI funds): the relationship between extra-financial and financial performance of SRI funds interacts with visibility of constituents. This interaction suggests that an allocation scheme which selects neglected constituents could be the right strategy to adopt if financial outperformance is the objective. In addition this interaction can help in explaining the various results obtained by empirical studies interested in the performance of SRI portfolios which do not control for visibility of constituents.