Jin, Henry Hongbo, Olivia S. Mitchell, and John Piggott. "Socially Responsible Investment in Japanese Pensions." Working Paper 11747, National Bureau of Economic Research. November, 2005.

A backtest of stocks in the Morningstar SRI Japan and FTSE4GOOD Japan indexes (launched 5/03 and 9/04, respectively) for the 1997-2005 time period shows that equal-weighted portfolios achieved large positive price-only returns while the broad TOPIX index "lost about 20% in this span." The social portfolios achieved this while also having less risk (as measured by Beta).

The authors correctly note that "it must be recognized that because the SRI indices are quite new in Japan, restrospective analysis runs the risk of cherry-picking and other bias," notably survivorship. They seek to address this by constructing a 'hypothetical market portfolio' constructed from current TOPIX constituents (the 'JMP index'), and an SRI version (the 'JPM SRI index') which includes all stocks in both the Morningstar and FTSE4GOOD indexes. Finds that "the JMP and the JMP-SRI portfolios tack each other closely over the sample period...the apparently superior performance of the SRI portfolio detected in the previous section...evaporates when we use our alternative all-Japan market benchmark.

A basic regression analysis using a Fama/French-type model finds that "the SRI flag is not informative about a stock's performance before the concept of SRI was officially introduced to Japan." Analysis of the very brief period that the indexes were live suggests the SRI flag was negatively associated with returns during that time.

Although it covers a short time period, this is the first formal analysis we have seen of social index returns in Japan. The study also illustrates the considerable impact survivorship bias can have on backtested returns.