Abstract

This article examines the theoretical motivations underlying the conflicting beliefs in support of and against responsible investment and presents unique quantitative evidence to illustrate how such conflicting logics produce a curvilinear relationship between screening intensity and two measures of risk. First, I argue that, whereas limiting the investable universe by using RI screening criteria increases the risk specific to the portfolio, very high screening intensity can reduce this risk. This is due to the fact that information benefits enable fund managers to be more selective, allowing them to select less risky firms. Second, by drawing on behavioral studies, I argue that this same curvilinear relationship occurs when examining the flow of money coming in and out of a fund. That is, high RI screening makes ethical investors “stickier” and less likely to pull money out of a fund because they are attracted to its ethical properties. I test my hypotheses using a data set of all known European RI screening equity mutual funds. I generally find strong support for both hypotheses. This has an important implication for investors: For high screening intensity and meaningful RI practices, RI is associated with a significant risk reduction.