Dimtcheva, Morrison, and Marsland (2002a)
Dimtcheva, Ludmila, Gordon Morrison, and John Marsland. "Boxing against Green Shadows." Commerzbank Securities. July 19, 2002a.
Uses proprietary risk tools to study and optimize the DJ Stoxx Sustainability Index (DJSI). Finds DJSI tracking error of 2.75% vs. the broader DJ STOXX 600 (56% of this is attributable to common factors, the remainder to stock-specific effects). Beta is measured at 1.08, "correlation" (presumably r-squared) at 99%. Then, using proprietary portfolio management tools, creates a "shadow benchmark" based on the DJSI with tracking error of just 1.45%. Factor risk is virtually eliminated in the shadow benchmark.
Argues that optimizing screened benchmarks to broader benchmarks fills an important need. "Very few SRI investors use the corresponding SRI index as a benchmark," preferring broad market benchmarks instead. Given the relatively high tracking error of the unadjusted DJSI, "the SRI manager is placed at an immediate disadvantage since the tracking error (2.75%) is already significant," and warns that "risk taken without the expectation of incremental return is a bad idea."