Statman, Meir. "Socially responsible indexes: Composition, performance, and tracking errors." Working paper, Santa Clara University, May 2005.
One purpose of this study is to explore the characteristics that define socially responsible companies by comparing the content of the S&P 500 Index of conventional companies to the contents of four indexes of socially responsible companies, the Domini
400 Social Index (DS 400 Index), the Calvert Social Index, the Citizens Index, and the U.S. portion of the Dow Jones Sustainability Index. A second purpose of the study is to compare the returns of the four SRI indexes to those of the conventional S&P 500 Index, and to examine the tracking errors of the SRI indexes relative to the S&P 500 Index.
We find that SRI indexes vary in composition and social responsibility scores but the mean social scores of each is higher than that of the S&P 500 Index. Socially responsible indexes differ in the emphasis they place on social characteristics. For
example the DS 400 Index is the strongest among all indexes on the environment while the Calvert Index is strongest on corporate governance.
We find that the returns of the DS 400 Index were higher than those of the S&P 500 Index during the overall May 1990 – April 2004 but not in every sub-period. In general, SRI indexes did better than the S&P 500 Index during the boom of the late 1990s
but lagged it during the bust of the early 2000s.
The correlations between the returns of SRI indexes and those of the S&P 500 Index are high, ranging from 0.939 of the DJ Sustainability Index during January 1995 – April 2004 to the 0.985 of the DS 400 Index during September 1999 – April 2004. But
tracking errors are substantial. For example, the expected difference between 12-month returns of the DS 400 Index and the S&P 500 Index, based on correlation and standard deviations during May 1990 – April 2004, was 2.84% and the realized mean difference was 2.49%.
LK comment: This paper won a Moskowitz Prize Honorable Mention in 2005.