Kempf and Osthoff (2007)

Kempf, Alexander and Peer Osthoff. “The Effect of Socially Responsible Investing on Financial Performance.” European Financial Management, October 2007.

According to Derwall et al (2010) - “Kempf and Osthoff (2007) use various social investment indicators from KLD to form U.S. portfolios that score high and low on CSR characteristics. They find that over the period 1991-2004, several high-ranked portfolios earn a higher four-factor alpha than do their lowest-ranked counterparts. A portfolio comprising the 10 percent of companies with the strongest “employee relations” earns an abnormal return of 3.5 percent annually and outperforms the 10 percent of stocks with worst scores by almost 6 percent. A portfolio composed of stocks with best “community involvement” scores delivers an abnormal return of about 3 percent and outperforms its worst-ranked counterpart by 4.5 percent. These results continue to be significant under various transaction-costs scenarios. Other CSR dimensions that KLD covers in their assessment of companies, such as “environment”, “diversity”, “human rights”, and “product quality”, lead to performance differences between the best- and worst-scoring portfolios that are generally positive but are not always statistically significant. Kempf and Osthoff conclude that the largest abnormal returns are achieved when investors adopt best-in-class screening by using a combination of several screens at the same time, and when they restrict themselves to stocks with most extreme ratings.”

Link: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-036X.2007.00402.x