Socially Responsible Investment in Market Downturns: Implications for the Fiduciary Responsibilities of Investment Fund Trustees

Abstract

In the past, Socially Responsible Investment (SRI) has been justified largely by empirical evidence showing SRI returns to be broadly similar to returns on conventional (non-SRI) investments. There are exceptions, however, and in any case this empirical evidence is based on returns in normal economic times. The extent to which it applies in recessions such as the current global financial crisis (GFC) has so far been unclear. Our empirical analysis shows that, before the GFC, SRIs internationally yielded even higher risk-adjusted returns than conventional investments, although SRIs in Australia significantly under-performed conventional investments in terms of risk-adjusted returns. Since the GFC, both in Australia and world-wide, SRIs have significantly under-performed conventional investments in terms of risk-adjusted returns. These results confirm that traditional investment fund trustees and managers risk breaching their fiduciary duties if they invest in SRIs during times of economic downturn, suggesting perhaps a need for statutory reform if SRI is to be encouraged within the investment community. Reform could include the introduction of a business judgment rule, greater disclosure for SRI, a statutory indemnity for trustees investing in SRIs, and tax breaks and subsidies.