Review of Financial Economics

1997. Vol. 6. No. 2, 137-149

The Impact of Social-Responsibility

Screens on Investment Performance:
Evidence from the Domini 400 Social
Index and Domini Equity Mutual Fund
David A. Sauer
University of Dayton

Socially responsible investors apply both financial and social

criteria when evaluating investments in order to ensure that the securi-
ties selected are consistent with their personal value system and beliefs.
This paper examines the potential impact these additional restrictions
have on investment performance by comparing the performance charac-
teristics of a carefully constructed, well diversified portfolio of socially
screened stocks with two unrestricted benchmark portfolios. In contrast
to prior research, the performance of the socially responsible portfolio
examined in this paper is not subject to the confounding effects of trans-
action costs, management fees, or differences in investment policy that
are associated with actively managed mutual funds. Therefore, it is
possible to more clearly isolate the potential performance implications
associated with subjecting the investment opportunity set to social
screening. Contrary to expectations, our findings indicate that applica-
tion of social-responsibility screens does not necessarily have an
adverse impact on investment performance.

Socially responsible investors subject their investment universe to a series of

financial and social criteria in order to ensure that the investments they select are
consistent with their personal value system and beliefs. The application of social-
responsibility screens is not a new concept (Owen, 1990; Kinder, Lydenberg and
Domini 1992, 1993). In the early 1900’s, socially responsible investors avoided
companies that were involved in the production of alcohol, tobacco, and gam-
bling. During the early 1970’s, socially responsible investors excluded firms asso-
ciated with the Vietnam War and in the late 1970’s and early 1980’s, their

Direct all correspondence to: David A. Sauer, Department of Economics and Finance, University of Dayton, 300
College Park, Dayton, Ohio 45469-2240.

Copyright 0 1997 by JAI Press Inc. 1058-3300

137
138 SAUER

attention shifted towards avoiding firms with business ties to South Africa. More
recently, social concerns have expanded to include the area of corporate citizen-
ship where socially responsible investors evaluate corporate responsiveness to the
needs of the environment, customers, employees, minorities, women, suppliers,
and the community.
According to the Social Investment Forum (1995), almost one out of every
ten dollars invested in the United States are subject to some form of social criteria.
Between 1984 and 1995, the total amount of socially screened investments in the
United States has grown from a $40 billion to a $639 billion industry (Kinder et
al., 1993; Social Investment Forum, 1995). While the focus of social-responsibil-
ity screens continues to evolve as new issues become important, it is reasonable to
expect interest in socially responsible investments to continue (Conover, 1991;
Sullivan, 1993). Socially responsible investing, however, is not without its critics.
The primary objective of this paper is to gain further insight into the potential
impact these additional social-responsibility screens have on investment perfor-
mance.
There are essentially two opposing views regarding the economic viability of
social-responsibility investing. Advocates of social-responsibility investing argue
that it makes good social and economic sense to evaluate potential investments
with both financial and social screens. By screening potential investments,
socially responsible investors ensure that the investments they select are consis-
tent with their personal values, while also raising an awareness to firms that are
not responsive to social concerns. As socially responsible investors become aware
of a firm’s non-responsiveness to social concerns, they can place pressure on
those firms to change. In addition, they argue that the resulting set of firms may be
stronger financially and more profitable than those firms that are eliminated
through the screening process (Herremans, Akathapom and McInnes, 1993). To
illustrate this point, proponents suggest that environmentally responsive firms are
less likely to be subjected to environmental fines and lawsuits. Similarly, firms
that are responsive to product quality and customer needs are less likely to
encounter product liability suits and costly settlements. Further, good corporate
citizenship is likely to create solid firm loyalty, and as a result, responsible firms
may experience increased product sales. The benefits of good corporate citizen-
ship need not end with the customer, rather, a firm with good employee relations
may also be in a better position to attract and retain good employees. Advocates of
social-responsibility investing argue that employee loyalty benefits a firm by
improving productivity, innovation, lowering production costs, and thereby
enhancing profitability (McGuire, Sundgren and Schneeweis, 1988).
In contrast, opponents of social-responsibility investing highlight the poten-
tial adverse side effects that might result from using social screens to limit the
investment universe. Major concerns include the potential increase in volatility,
lower returns, reduced diversification, and the additional screening and monitor-
ing costs that result from implementing social-responsibility screening (Currier,
1993; Temper, 1991). In particular, social screens tend to eliminate larger firms
from the investment universe and, as a result, remaining firms tend to be smaller
and have more volatile returns. Lower returns are also possible as social screens

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 SOCIAL-RESPONSIBILITY SCREENS 139

eliminate stable blue chip and otherwise attractive investment opportunities from
further consideration. In addition, diversification may be hindered to the extent
that social criteria eliminates or favors certain industries. Opponents argue that the
potential hidden costs associated with implementing social-responsibility screens
adversely impact investment performance and therefore should not be ignored.
Existing empirical evidence regarding the impact of social-responsibility
screens on investment performance is mixed and, therefore, inconclusive. For
example, the CDAlWiesenberger Mutual Funds Update of January 31, 1993
examined the performance of 10 socially responsible mutual funds over the 5 and
10 year periods ending in 1992 and found the average socially responsible mutual
fund returned 15.1% and 12.7% respectively, as compared to the average long-
term growth mutual fund 5 and 10 year returns of 15.0% and 13.1% respectively.
While the average performance of the socially responsible mutual funds were
comparable to their respective fund averages, their performance was below that of
the Standard and Poor’s 500 Index (S&P 500) with average 5 and 10 year returns
of 15.8% and 16.1% respectively. Momingstar also reported that socially respon-
sible mutual funds earned approximately 1% less annually than the average
mutual fund over the period 1988 through 1993 (Goldberg, 1993). However, with-
out controlling for differences in risk across classes of investments, this empirical
evidence is difficult to interpret.
Mueller (1991) examined the risk-adjusted returns of 10 socially responsible
mutual funds over the period 1984 through 1988, and found that socially responsi-
ble mutual funds earned an average of 1.03% less (t-value of -3.83) than compa-
rable, unrestricted investments. A more recent study by Hamilton, Jo and Statman
(1993) used Jensen’s alpha to examine the risk adjusted performance of all
socially responsible mutual funds listed in the Lipper Analytical data bank as of
December 1990. When they examined the performance of all socially responsible
mutual funds that had been in existence for 5 or more years, they found that 9 of
the mutual funds exhibited negative alphas while the other 8 exhibited positive
alphas. While only one of the positive alpha coefficients and one of the negative
alpha coefficients were statistically significant, this group of socially responsible
mutual funds earned average excess returns of -0.76% per year. The authors indi-
cate that the alphas for the socially responsible mutual funds established after
1985 are similar; however, these funds earned average excess returns of -3.33%
per year. Further, the difference in mean monthly excess returns for the 17
socially responsible mutual funds in existence for at least 5 years (-0.063%) and a
corresponding set of conventional mutual funds (-0.140%) was not statistically
significant (t-value of -0.92). Similarly, the difference in mean excess returns for
the 15 socially responsible mutual funds established after 1985 (-0.277%) and a
corresponding set of conventional mutual funds (-0.042%) was not statistically
significant (t-value of 0.85). The existing empirical evidence suggests that
socially responsible mutual funds tend to exhibit similar or less performance rela-
tive to comparable unrestricted mutual funds on a risk adjusted basis.
The primary objective of this paper is to determine what impact application
of social-responsibility screens have on investment performance. Previous
research in this area has primarily focused on comparing the performance of

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140 SAUER

socially responsible mutual funds with the performance of alternative, unre-

stricted benchmark portfolios. While this research is interesting, the nature of
mutual funds inhibits our ability to use a comparison of mutual fund performance
as a means for isolating the additional costs that result from applying social
responsibility screens. To illustrate the nature of this problem further, recognize
that mutual fund performance does not merely reflect the returns to its underlying
securities, but rather, also reflects differences in management fees and transac-
tions costs which can vary widely across mutual fund families and stated invest-
ment objectives. In addition, mutual fund performance reflects a fund manager’s
ability to make appropriate decisions concerning asset allocation, sector selection,
and security selections within each sector. Together, these confounding effects
make it extremely difficult to rely upon the differences in mutual fund perfor-
mance to establish the impact that application of social responsibility screens has
on investment performance.
In contrast to prior research, we attempt to gain further insight into the per-
formance implications of using social screens by examining the performance
characteristics of a well diversified portfolio of socially screened stocks that is not
subject to the confounding effects that impact the performance of actively man-
aged socially responsible mutual funds. A comparison of the performance charac-
teristics of this carefully constructed socially screened portfolio with the
performance characteristics of two unrestricted benchmark portfolios should pro-
vide a better indication of the potential costs associated with subjecting the invest-
ment universe to social screening. The remainder of the paper is outlined as
follows: the Data section provides a description of the primary data set, the Meth-
odology section discusses the test methodology and empirical results, the Imple-
mentation section examines the feasibility of implementation, and the last section
concludes.

Data
The Domini 400 Social Index (DSI) represents a carefully constructed port-
folio of socially responsible stocks that is not subject to the confounding effects
that impact socially responsible mutual fund performance. As an index, perfor-
mance of the DSI does not reflect management fees, transactions costs, or changes
in investment policy. No attempts are made to shift the portfolio’s composition in
response to a changing market, rather, composition of the DSI is only affected by
changes in social concerns and by changes in corporate responsiveness to those
concerns. Consequently, performance of the DSI merely reflects the returns to its
underlying securities of socially screened stocks.
Established in May of 1990, the DSI was carefully constructed to be a well
diversified portfolio of socially screened securities that reflect mainstream social
concerns (Kinder et al., 1992, 1993). During the period of this study, the DSI
excluded firms engaged in the manufacture of alcohol or tobacco, gambling, mili-
tary weapons, nuclear power, and business ties to South Africa. Firms were also
evaluated on their responsiveness to the environment, product quality, consumer
needs, employees, minorities, women, vendors, and the community. The DSI was

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 SOCIAL-RESPONSIBILITY SCREENS 141

constructed by first applying their social screens to firms in the S&P 500. This ini-
tial screening resulted in 255 companies. The next 45 firms were chosen based
upon their outstanding social and financial performance records. The last 100
firms were then selected from the remaining largest 1,000 firms, with an attempt
to identify acceptable firms in sectors with inadequate representation. By design,
securities in the DSI are selected to minimize the potential negative side effects
associated with the implementation of socially responsible investment. Conse-
quently, the DSI represents an ideal proxy for the restricted investment universe
of socially screened stocks.
Performance implications resulting from the use of social responsibility
screens will be isolated by comparing the performance characteristics of the DSI
with two unrestricted, well diversified, broad based benchmark portfolios. Specif-
ically, performance of the DSI will be compared to the performance of the S&P
500 and Chicago Center for Research in Security Prices (CRSP) Value Weighted
Market Indexes.’ Neither of these benchmark portfolios are actively managed
and, therefore, their performance is not impacted by transaction costs, manage-
ment fees, or changing investment policy. In effect, these benchmark portfolios
represent two ideal proxies for the unrestricted investment universe of equity
securities traded in the United States.

Methodology and Empirical Evidence

The potential performance implications that result from subjecting invest-
ment decisions to social-responsibility screens will be examined by comparing
the: 1) average monthly raw returns and variability, 2) Jensen’s alpha, and 3)
Sharpe’s performance index for the socially screened portfolio (i.e., DSI) with
two unrestricted benchmark portfolios (S&P 500 and CRSP Value Weighted Mar-
ket Indexes). While the DSI was launched in May of 1990, a hypothetical back-
dated monthly return series is also available for the index from 1986 through May
I, 1990. Since it is not clear to what extent historical returns may have influenced
construction of the DSI, three time periods will be examined independently. The
first period to be examined extends from 1986 through 1994 which represents
both the hypothetical back-dated and live return series for the DSI. The second
and third time periods represent the hypothetical back-dated return series and live
return series for the DSI respectively. The tradeoff in using the longer investment
horizon is between increasing the statistical significance of the analysis at the risk
of introducing potential biases into the return series. An analysis of each subpe-
riod will provide additional evidence regarding the persistence of the relative per-
formance between the socially screened and unrestricted equity investments.
Monthly Returns and Variance Comparison
Critics of socially responsible investment argue that there are two major
potential costs associated with subjecting investments to both financial and social-
responsibility screens. Specifically, they argue that by restricting the investment
universe in this way, investors are left with firms that may be more volatile and
have less return potential. In contrast, advocates of socially responsible invest-

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Table 1. Average Monthly Return and Variance Comparison:

The Domini 400 Social Index versus the Standard and Poor’s 500 Index and
CRSP Value Weighted Market Index Respectively
DSI 400 S&P zoo CRSP VW Market
Panel A: January 1,1986 through December 31,1994
?’ 0.0116 0.0109 0.0102
? 0.11 0.22
Prob > Itl 0.91 0.83
(T 0.0483 0.0454 0.0447
F3 1.13 1.17
Prob > F 0.52 0.43

Panel B: January 1,1986 through April 30,199O

r’ 0.0130 0.0130 0.0114
? 0.00 0.15
F’rob> lrl 1.oo 0.89
0 0.0565 0.0538 0.0529
F3 1.10 1.14
Prob > F 0.74 0.65

Panel C: May 1,19W through December 31,194

r’ 0.0104 0.0090 0.0091
? 0.20 0.17
F’rob> Id 0.85 0.86
0 0.0395 0.0359 0.0357
F3 1.21 1.22
Prob>F 0.49 0.46

Notes: 1. Average monthly return.

2. t-test for the difference in average monthly returns between the DSI 400 and competing index.
3. F-test For the difference in volatility between the DSI 400 and competing index.

ment contend that responsible firms may actually outperform their less responsi-
ble competitors by building loyalty with their customers, vendors, and employees.
The validity of these two propositions will be examined by comparing the average
monthly raw returns and variability of the DSI with two unrestricted benchmark
portfolios. The results for the entire period and two subperiods are summarized in
Table 1, Panels A, B, and C respectively.
In the first set of tests, we compare the average monthly returns, ?, for the
DSI with the S&P 500 and CRSP Value Weighted Market Indexes to establish
what impact social screens have on investment performance. In Panel A of Table
1, the 1.16% average monthly return for the DSI over the period 1986 through
1994 is larger than the average returns to both unrestricted benchmark portfolios.
However, the observed differences in average performance between the socially
screened and unrestricted benchmark ortfolios are not statistically significant (t-
values of 0.91 and 0.83 respectively). Is The average monthly returns for the DSI
over the two subperiods as summarized in Panels B and C of Table 1 are also
insignificantly different from the corresponding average monthly returns to the

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 SOCIAL-RESPONSIBILITY SCREENS 143

two unrestricted benchmark portfolios.3 This initial empirical evidence tends to

contradict both arguments regarding the expected impact that social-responsibility
screens have toward investment performance. Specifically, application of social-
responsibility screens does not appear to consistently increase or decrease invest-
ment performance relative to the unrestricted benchmark portfolios.
In the second set of tests, we compare the variability of the DSI with the vari-
ability of the unrestricted benchmark portfolios. The 4.83% standard deviation of
monthly returns for the DSI in Panel A of Table 1 is greater than the standard
deviation of returns for both benchmark portfolios (4.54% and 4.47%). However,
the F-tests indicate that the observed differences in variance are not statistically
significant (F-values of 1.13 and 1.17 respectively). Similarly, none of the differ-
ences in standard deviation between the DSI and the unrestricted benchmark port-
folios as presented in Panels B and C of Table 1 are statistically significant. This
result is quite interesting as it contradicts the popular perception that socially
responsible investing necessarily results in greater risk to the investor.
Clearly, an independent comparison of raw mean monthly returns and vari-
ances between the socially screened and alternative unrestricted benchmark port-
folios ignores possible interaction between risk and return. Therefore, we also
examine the performance of the DSI relative to the unrestricted benchmark portfo-
lios using Jensen’s alpha and the Sharpe performance index.
Jensen’s Alpha
Jensen’s alpha represents the average risk premium per unit of systematic
risk. Consequently, Jensen’s alpha is an appropriate risk-adjusted measure of port-
folio performance for investors that are well diversified and, therefore, primarily
concerned with their exposure to systematic risk. If the capital asset pricing model
represents the correct equilibrium pricing model, then a statistically significant
positive alpha would imply superior investment performance and a statistically
significant negative alpha would imply substandard investment performance rela-
tive to a naive buy-and-hold investment strategy that includes combinations of the
market portfolio and the risk free asset. Jensen’s alpha is calculated as:

ap = (R,,,-R~t)-Pp(Rm,I-R~~)

where R t is the monthly return to the DSI, and Rf t is the monthly return to three-
month I&. Treasury Bills as reported in Ibbotson’s 1995 yearbook. Both of the
unrestricted benchmark portfolios are used to represent the monthly return to the
market portfolio, R,,,, in order to establish how robust the results are to the market
proxy selected.
Table 2 summarizes the Jensen alphas obtained for the DSI over the entire
period 1986 through 1994 and the two subperiods respectively. An examination of
Table 2 reveals that the alphas are insignificantly different from zero, regardless
of the benchmark portfolio used or time period examined. This result is consistent
with the empirical evidence presented by Hamilton et al. in their examination of
all socially responsible mutual funds that were in the Lipper Analytical data base
as of December 1990. These findings suggest that social-responsibility screens do

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Table 2. Jensen’s Alpha for the Domini 400 Social Index using the Standard and Poor’s
500 Index and CRSP Value Weighted Market Index as Proxies for the Market Return

Model: R,, - Rft = aP + P,,(Rmr - Rft) + ept

Market 1/86-l 2/94 l/86-4/90 5/90-l 2/94

Proxy aP
aP PP PP aP PP

S&P 500 0.0004 1.0491 -0.0003 1.0381 0.0013 1.0260

t 0.49 59.69 -0.29 51.17 1.os 23.60
p-value 0.62 0.00 0.77 0.00 0.30 0.00
CRSP VW Market 0.0010 1.0658 0.0012 1.0557 0.0007 1.0624
t 1.40 65.26 1.12 51.01 0.66 27.94
p-value 0.17 0.00 0.21 0.00 0.51 0.00
Norex R,+ R,n,,
and Rp, are the monthly returns to three month U.S. Treasury Bills, market proxy, and Domini 400 Social Index
respectively.

not necessarily have an adverse impact on the risk-adjusted returns for the well
diversified investor.

Sharpe ‘s Index
It can be argued, however, that a more appropriate measure of risk exposure
for a socially responsible investor might be total risk, rather than market risk. Spe-
cifically, if implementing social-responsibility screens restricts the investment
universe, and to the extent that these restrictions are binding, then investors may
inadvertently subject themselves to otherwise diversifiable risk. The Sharpe per-
formance index represents the average risk premium per unit of total risk and,
therefore, represents a more relevant risk-adjusted measure of performance for
investors that are less than well diversified. Sharpe’s performance index is calcu-
lated as:

(RP - Q)
Sharpe Index =
OR,

where R, and are the average monthly return to the portfolio of interest and
three-month U.S. Treasury Bills respectively, and oRp is the standard deviation of
monthly returns over the period being examined. One limitation in using the tradi-
tional Sharpe Index arises when attempting to establish the statistical significance
of observed differences in performance between two portfolios. We overcome this
potential limitation by using the Jobson and Korkie (198 1) transformed difference
of the Sharpe Index as given by:

SIah = Sh’a-SaYb

where:

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 SOCIAL-RESPONSIBILITY SCREENS 145

and T is the number of months in the return series being examined. Jobson and
Korkie demonstrate that the asymptotic distribution for the transformed difference
of the Sharpe Index is normal with mean ,SZQband variance given by:

The approximate Z statistic

is used to test the null hypotheses H,: S&b = 0.

Table 3 summarizes the transformed difference of the Sharpe Index between
the DSI and two unrestricted benchmark portfolios over the period 1986 through
1994, and the two subperiods respectively. The transformed differences in the

Table 3. Sharpe Performance Index Comparison: The Domini 400 Social Index versus
the Standard and Poor’s 500 Index and CRSP Value Weighted Market Index

H,: SI(DSf) - N(P) = 0

SI(DSI) - SI(SP500) Sl(DSI) - SI(CRSP VW)
Panel A: January 1,1986 through December 31,1994
A Sharpe Index I 0.00001 0.00004
22 0.372 1.297
Prob > IZI 0.710 0.195

Panel B: January 1,1986 through April 30,199O

A Sharpe Index’ -0.00002 0.00006
22 0.376 1.096
Prob > IZI 0.707 0.273

Panel C: May I,1990 through December 31,1994t

A Sharpe Index’ 0.00003 0.00002
22 0.758 0.688
Prob > IZI 0.448 0.49 1
Nores: 1. Jobson and Korkie (1981) transformed difference for the Shape Index.
2. ‘i-test for the difference between the Sharpe Index of the Domini 400 Social Index and the competing Index.

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146 SAUER

Sharpe Index between the DSI and the S&P 500 are O.OOl%, -0.002%, and
0.003% for the full, hypothetical back-dated, and live return series. However,
none of the differences are statistically significant (Z-values of 0.37, 0.38, and
0.76). The transformed differences in the Sharpe Index between the DSI and the
CRSP Value Weighted Market Index are 0.004%, 0.006%, and 0.002% for the
full, hypothetical back-dated, and live return series. Again, none of the differences
are statistically significant (Z-values of 1.30, 1.10, and 0.69). In all cases, over all
periods, the Sharpe Indexes for the DSI are indistinguishable from the Sharpe
Indexes for the competing, unrestricted benchmark portfolios. This result is some-
what surprising since it is reasonable to expect that the CRSP index would be
more efficient in eliminating diversifiable risk through a passive diversification
strategy. Once again, the empirical evidence indicates that the use of social-
responsibility screens does not necessarily have an adverse impact on the risk-
adjusted returns for the less than well diversified investor.

Implementation
The empirical evidence presented in this paper clearly indicates that the
application of social-responsibility screens alone does not necessarily have an
adverse impact on performance. This result maintains from the perspective of
both a well diversified and less than well diversified investor as reflected in the
performance of the DSI relative to the S&P 500 and CRSP Value Weighted Mar-
ket Indexes respectively. The relative performance comparison between these
indexes complements the existing empirical evidence by providing performance
comparisons that avoid the confounding effects that are associated with actively
managed mutual funds. In contrast to the concerns put forth by opponents to
social-responsibility investing, the application of social-responsibility screens
does not necessarily result in higher volatility or reduced returns. The remaining
issue to be examined is the additional screening and monitoring costs that may
adversely impact the net performance available to the socially responsible inves-
tor.
To address this issue further, we examine the performance of the Domini
Social Equity Mutual Fund (DSE) relative to the Vanguard Index 500 Mutual
Fund and the Vanguard Extended Market Mutual Fund. These mutual funds were
selected for several reasons. Specifically, the DSE represents a mutual fund that is
designed to reflect the social values, composition, and performance characteristics
of the DSI. Consequently, performance of the DSE reflects the additional screen-
ing and monitoring costs associated with maintaining a socially responsible
mutual fund. However, the DSI and DSE differ from other socially responsible
mutual funds in the sense that neither the DSI or the DSE are actively managed.
No attempts are made to change the composition of either portfolio in response to
a changing market. Rather, composition of the DSI and DSE only change in
response to changes in social criteria and changes in the responsiveness of firms to
those criteria. The Vanguard Index 500 and the Vanguard Extended Market
Mutual Funds reflect the characteristics of the S&P 500 and CRSP Market
Indexes respectively. A comparison of performance between the DSE and the two

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 SOCIAL-RESPONSIBILITY SCREENS 147

Table 4. Comparison of the Domini Social Equity Mutual Fund

with the Vanguard Index 500 Mutual Fund and the
Vanguard Index Extended Mutual Fund for the Period July 199 1 through 1994
DSE VI-500 VI-Extended

A. Raw Returns:
:I 0.0077 0.02
0.0076 -0.34
0.0101

Prob > Itl 0.99 0.73

0 0.0301 0.0296 0.0317
F* 1.03 1.11
Prob > IFI 0.92 0.74

B. Jensen’s Alpha: (f$,, - f$) = cc,, + &,(R,r - Rf)

aP PP ClP PP

Parameter 0.0002 0.9755 -0.0012 0.8347

t 0.16 21.41 -0.50 11.54
Prob > Itl 0.87 0.00 0.62 0.00

C. Sharpe Index: H,: SI(DSI$ - SI(VI) = 0

A Sharpe Index3 0.00000 -0.00006
.z? 0.02 0.84
Prob > IZI 0.98 0.40
Notes: ’ t-test for the difference in average monthly returns between the Domini Social Equity Mutual Fund and competing
mutual fund.
* F-test for the difference in volatility between the Domini Social Equity Mutual Fund and the competing mutual fund.
’ Jobson and Korkie (1981) transformed difference for the Shape Index.
4 Z-test for the difference between the Sharpe Index for the Domini Social Equity Mutual Fund and the competing
mutual fund.

market index mutual funds will provide insight into the additional costs associated
with implementing the social responsibility screens.
Table 4 summarizes the performance comparisons of the DSE with the
Vanguard Index 500 and the Vanguard Extended Market Mutual Funds. Panel
A of Table 4 summarizes the average monthly return and variance comparison
between these mutual funds. The difference in the average monthly return
between the DSE (0.77%) and the Vanguard Index 500 Mutual Fund (0.76%)
and the Vanguard Extended Market Mutual Fund (1 .Ol%) are not statistically
significant (t-values of 0.02 and 0.73). Likewise, the corresponding Jensen
alphas (0.02% and -0.12%) are insignificantly different from zero (t-values of
0.16 and -0.50). Finally, the Jobson and Korkie transformed difference in
Sharpe Index between the DSE and competing mutual funds are 0.000% and
-0.006%. Again, neither difference is statistically significant (Z-values of 0.02
and 0.84).
Combined, the empirical evidence suggests that the additional screening and
monitoring costs associated with implementing social-responsibility screening
does not necessarily have an adverse impact on performance.

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Conclusion
This paper gains further insight into the potential performance implications
that result from imposing social responsibility screens on equity investments. The
DSI is used as a proxy for the restricted universe of socially responsible equity
investments since it is carefully constructed to reflect mainstream social criteria
and maintain adequate diversification across sectors. By using the DSI, we are
able to avoid the confounding effects of transaction costs and management fees
that are prevalent when comparing individual mutual fund returns. Further, per-
formance of the DSI is not affected by management policy regarding asset alloca-
tion, sector selection, or security selections within each sector. Rather, returns to
the DSI merely reflect the returns to a well diversified, broad based portfolio of
socially screened stocks. A comparison of the raw and risk-adjusted performance
of the DSI with two unrestricted, well diversified benchmark portfolios suggests
that application of social responsibility screens does not necessarily have an
adverse impact on investment performance. Regardless of the market proxy
selected, the empirical evidence indicates that the potential performance costs of
implementing social responsibility criteria, as represented by the performance of
the DSI, are negligible. In addition, performance of the Domini Social Equity
Mutual Fund compares favorably to the performance of the Vanguard S&P 500
Index and Vanguard Extended Market Index Mutual Funds which suggests that
application of social-responsibility investing is accessible to the individual inves-
tor. The empirical evidence presented in this paper clearly indicates that investors
can choose socially responsible investments that are consistent with their value
system and beliefs without being forced to sacrifice performance.

Notes
I. The DSI is a value-weighted index of socially screened securities. Therefore, the CRSP Value
Weighted Market Index was selected in order to minimize any potential small firm size effect.
2. Non-parametric test results for the difference in returns between the Domini 400 Social Index and
the corresponding benchmark portfolios are consistent with the parametric test results presented
in Table I.
3. The difference in mean return for the DSI between the back-dated and live return series of 0.0026
(0.0130-0.0104) is not statistically significant at conventional levels (t-value of 0.27).

References
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