Performance analysis of an SRI screen based on employment quality in high and low capital industries - International evidence

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics and Maastricht University School of Business and EconomicsThis research focuses on the performance analysis of a positive socially responsible investment (SRI) screen based on employment quality. The screen is applied to two different industry portfolios, of which one is human capital intense and the other is less human capital intense. A scoring is created in order to assess the employment quality in each company of the sample and to form best-in-class portfolios. The database used to create the scoring is Thomson Reuters Asset4 ESG. The analysis is conducted for three distinct regions: the US, Europe and Japan. The sample period for the US is from January 2002 to December 2012, for Europe from January 2004 to December 2012 and for Japan from April 2003 to March 2013. Monthly risk-adjusted returns using the Carhart (1997) four-factor model result in mostly negative and insignificant alphas. The results show that this type of SRI screen does not seem to enhance portfolio performance, independent of certain weighting methods for the portfolios (equal- and value-weighted) or benchmarks (risk-free rate and industry returns) used. Overall, the findings are in line with a learning effect of investors and stock markets in incorporating employment related information in their stock evaluations. Abnormal returns from the usage of this kind of SRI screen seem to have vanished as a result of this learning in the recent past