Do socially responsible indices outperform conventional indices? Evidence from before and after the onset of Covid-19

Abstract

According to traditional portfolio theories constraints, restrictions, and screens applied in portfolio selection reduces the diversification opportunities which can impact financial performance. Is this true in the case of socially responsible investment (SRI)? To answer this, present study analyzes the performance of Socially Responsible (SR) indices in comparison to conventional indices in an emerging economy. The uniqueness of the study is that it analyses the performance of Shariah, ESG, and thematic indices in a single study. Further, the study measures the impact of Covid-19 on them. Comparative performance evaluation was conducted by using absolute return analysis and risk-adjusted measures namely, Sharpe ratio, Treynor ratio, tracking error, information ratio, capital asset pricing model (CAPM), Fama–French three-factor, and Carhart's four-factor models. The Structural break was identified, hence analysis was conducted for the total period (January 2017–March 2023) and two sub-periods, that is, pre and post-Covid-19 period. No significant difference was found between the returns of SR indices and conventional indices as against the benchmark index on the basis of absolute return analysis. Sharpe ratio and Treynor ratio both were having negative values for all the SR and conventional indices. Tracking error for all the SR and Conventional indices were very low. The CAPM and both multi-factor models univocally pointed toward the underperformance of all the SR (except S&P BSE 100 ESG index which had equal performance) and both conventional indices against the benchmark index. Noteworthy point is that only Shariah indices gave the highest returns during post-Covid period. This research will help in deepening the SRI in the capital market. Companies should increase their ESG scores and make efforts to be listed on the SR indices. Policymakers should announce some kind of rebates, or recognition for star-performing companies in the field of sustainability to encourage other companies to adopt SR practices in their business operations. The novelty of the current study is that it adds to the socially responsible literature by analyzing the performance of Shariah, ESG, and Thematic indices and conventional indices in a single study in the fastest-growing economy of India and analyses the impact of Covid-19 on this performance.