Jun 13, 2011
Are expected returns for "socially responsible" strategies lower compared to a conventional approach?

EFF/KRF: Our paper, "Disagreements, Tastes, and Asset Pricing," addresses this issue. Like all prices, asset prices are determined by supply and demand. If some investors overweight the stocks of "socially responsible" firms, they push up prices and reduce expected returns. Similarly, they push down the prices and push up the expected returns of the socially irresponsible firms they underweight. Presumably that is their goal—to reduce the cost of capital of firms they like by reducing the "good" firms' expected stock returns and to increase the cost of capital of firms they don't like by increasing the "bad" firms' expected stock returns. These changes in expected returns induce other investors to underweight the "good" firms and to overweight the "bad" firms. Socially responsible investing has not been around long enough to measure the magnitude of these effects. We can be sure, however, that if socially responsible investors have any real impact, they push down the expected return on the stocks they overweight and increase the expected return on the stocks they underweight.

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
This information is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Dimensional Fund Advisors and does not represent a recommendation of any particular security, strategy or investment product. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.