Socially Responsible Investing and the Performance of European Bond Portfolios

This paper investigates the performance of socially screened bond portfolios of 189 Eurozone companies between 2003 and 2016. Bond portfolios are formed on the basis of an aggregate measure of corporate social responsibility (CSR) as well as on specific dimensions of CSR: Environment, Social and Governance dimensions. Our results suggest that the performance of high socially rated bonds is not statistically different from that of low-rated bonds. We further analyze the evolution of bond portfolio performance over time. The results indicate that in an earlier stage portfolios of high-rated bonds outperformed portfolios of low-rated bonds. Yet, over time this outperformance disappears. These results suggest that the errors-in-expectations hypothesis and the shunned-security hypothesis are not only useful to explain the performance of socially responsible equity portfolios but they are also useful in explaining the performance of socially screened bond portfolios over time.