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​by C. Edward Chang, Ph.D.; Thomas M. Krueger, DBA; and H. Doug Witte, Ph.D.

Executive Summary

  • Millennial investors are at the forefront of burgeoning interest in socially responsible investing, or SRI, which has evolved to stand for sustainable, responsible, and impact investing.
  • Hundreds of mutual funds now carry some sort of SRI label, but many of these funds are socially conscious in name only.
  • This study reveals the correlation between Morningstar’s GLOBE-denoted sustainability rating and its star rating, which provides an estimation of the relative investment performance of these selections.
  • Risk-adjusted return measures and sustainability metrics were found to be uncorrelated. Self-proclaimed socially responsible funds (SPSRFs) do not materially differ from non-SPSRFs in terms of their sustainability measures or return performance.
  • Within the sustainability funds universe, it is possible to earn better returns by simply avoiding those funds with higher expense ratios.
  • Investors should be aware that about 20 percent of SPSRFs don’t live up to their self-proclamation. Furthermore, both SPSRFs and non-SPSRFs with lower expense ratios have higher Morningstar star ratings.
  • Financial planners can better serve millennial investors by understanding the financial merits of SRI in general and understanding the potential pitfalls in viewing SRI funds as homogeneous and substitutable.

C. Edward Chang, Ph.D., is a professor of finance in the College of Business at Missouri State University. His current research interest is performance measurement of investment vehicles. His research has been published in the Journal of Wealth Management, Managerial Finance, Journal of Investment ManagementJournal of Investing, American Journal of Business, and Journal of Financial Planning.

Thomas M. Krueger, DBA, is the J.R. Manning Endowed Professor of Innovation in Business Education at the College of Business Administration at Texas A&M University-Kingsville. He chairs the Department of Accounting and Finance and is a member of The Texas Board of Higher Education-Graduate Education Advisory Council. His current research interests focus on financial market efficiency and academic accreditation standards. Prior research has appeared in the Journal of Finance, Journal of Investing, and Journal of Financial Planning.

H. Doug Witte, Ph.D., is an associate professor of finance in the College of Business at Missouri State University. His current research interests are financial market anomalies and sustainable investing. His recent articles have been published in Managerial Finance, American Journal of Business, and International Review of Financial Analysis.

Socially responsible investing, and specifically ESG (environmental, social, and governance) investing restrictions, is the explanation given for the underperformance of the TIAA-CREF Social Choice Equity Fund during 2017. Page 34 of the TIAA-CREF annual report1 states:

“The CREF Social Choice Account returned 13.88 percent for the year [2017] compared with the 14.34 percent return of its composite benchmark … Because of its ESG criteria, the Account did not invest in a number of stocks and bonds ... the net effect was that the Account underperformed its benchmark.”

The annual report goes on to state that although the Social Choice Account benefited from the exclusion of some companies (i.e., General Electric and Exxon Mobil), the benefit was offset by the omission of Apple,, and other firms. In the foreign market, underperformance was due to “exclusion of pan-Asian life insurance firm AIA Group, luxury products company LVMH, and British bank HSBC Holdings.” Regardless of the reasons, the underperformance on this fund with $14.4 billion in assets resulted in $66.2 million less in the hands of its investors. A 10-year performance graphic in the annual report shows $10,000 invested in the Social Choice Account would have grown to $17,801 versus $22,822 in the Russell 3000 Index, which equates to a 5.9 percent compound return on the TIAA-CREF offering, versus an 8.6 percent compound return on the benchmark.

Socially responsible investors want to earn a financial return while making a difference in the common welfare of the world. From 1995 to 2015, the number of funds using SRI strategies grew from 55 funds with $12 billion under management to 1,002 funds with $2.6 trillion in assets.2 The SRI trend is not likely to abate any time soon. The 2018 “U.S. Trust’s Insights on Wealth and Worth” report indicated that 87 percent of millennials consider a company’s social, political, or environmental impact important when investing.3 And, according to an Accenture report, an estimated $30 trillion in financial and non-financial assets will pass from baby boomers to their heirs in the next few decades.4

In light of the current and anticipated growth in SRI, financial planners will need to immerse themselves in the landscape of investments that provide both social and financial return. For now, it is important for financial planners to have an understanding of the overall merits or drawbacks of SRI to best provide guidance for those seeking advice within the space. This study investigated the relative return to socially responsible investing and identified a path to earning higher returns within the SRI universe.

Over time, SRI practice has evolved from an exclusion of companies in the “sin” or “vice” industries (i.e., alcohol, gambling, and tobacco) to selecting firms based on sustainable, responsible, and impact criteria. A subset of all SRI funds, referred to as self-proclaimed socially responsible funds (hereafter SPSRFs), frequently have words such as “sustainable” or “impact” in their name. Examples include the Dreyfus Sustainable U.S. Equity Fund (DTCAX) and BlackRock’s Impact U.S. Equity Fund (BIRAX). SRI can occur on a global scale, with the Hartford Global Impact Fund (HGXAX) as an example. These funds have indicated an aim to invest in companies that have strong ESG practices and avoid investing in objectionable companies or industries. The SPSRFs analyzed here have indicated to Morningstar, without verification, they are a “socially responsible fund.” These funds represent 2.6 percent (738 of 28,170) of the U.S. fund universe as of March 10, 2018, according to Morningstar Advisor Workstation 2.0.

Sustainable investing incorporates environmental (e.g., energy efficiency), social (e.g., diversity), and governance (e.g., executive compensation) factors into investment decisions. Investors wanting a sustainable portfolio must evaluate the ESG profile of companies or mutual funds during the security selection process. Recently developed ratings for mutual funds have simplified this task and have facilitated expansion of the SRI fund universe beyond only SPSRFs. For instance, Morningstar’s sustainability ratings (hereafter referred to as GLOBE ratings) are available on approximately 20,000 funds worldwide. GLOBE ratings are based on the ESG scores compiled by Sustainalytics, which evaluates a firm’s ESG risks and how well the firm is managing those risks.

With the advent of ESG ratings, investors have the ability to identify additional highly sustainable funds beyond SPSRFs and perhaps obtain a more objective ESG assessment for SPSRFs. These newly identified funds, along with SPSRFs, allow the following three hypotheses to be tested:

H1: Funds with higher GLOBE ratings provide investors a higher risk-adjusted return.

Alternatively, funds investing in firms paying little attention to sustainability may be incurring fewer ESG-related costs and may, consequently, perform better.

H2: Within ESG levels, funds with higher expenses provide higher risk-adjusted return.

Alternatively, paying progressively higher expenses to have fund managers screen investments for their sustainability and assess the costs of deeper engagement by SPSRFs may overwhelm any potential advantage of sustainable investment.

H3: Funds that self-proclaim sustainability and an intent to focus on ESG factors will: (1) have a higher GLOBE rating; (2) perform worse than other funds in their category; and (3) earn risk-adjusted returns that rise with fund expenses.

Alternatively, the inclusion of words implying a concern for sustainable practices may be primarily a marketing ploy.

The remainder of this paper consists of a literature review highlighting the development of SRI and motivating this study, followed by a methodology section documenting the availability of Morningstar star ratings for funds sorted based on GLOBE values. Findings for the 60 categories of funds with GLOBE ratings are reported, followed by results for the 32 categories of funds with SPSRFs. The conclusion addresses the findings in terms of the research hypotheses given above and proposes areas of future research.

Literature Review

Increasing investor interest in social responsibility. The rise in socially responsible investment has been dramatic over the last 25 years, with investors seeking to make money and generate positive environmental, social, and governance impact. Heinkel, Kraus, and Zechner (2001) showed that as socially responsible investment grows, firms can actually become financially motivated to behave in a more socially responsible manner. Essentially, the exclusion of firms from ethics-focused portfolios raises their cost of capital and lowers their stock prices.

Companies are responding to the social responsibility mandate. ESG ratings and data firm, ISS-oekom, reported that an overwhelming majority of companies deem it at least “fairly important” to have a good sustainability rating and be included in sustainability funds or indexes.5 A 2016 Governance and Accountability Institute report6 revealed that in 2011, 20 percent of the S&P 500 companies issued corporate social responsibility reports; by 2015, 81 percent of the S&P 500 companies were creating this type of report.

Bollen (2007) asserted that investors derive utility from investing in SRI, with lesser concern for financial returns. Both Bollen (2007) and Benson and Humphrey (2008) found lagged cash outflows were less sensitive to negative returns for socially responsible funds than for conventional funds. Nilsson (2008) reported that investors with pro-social attitudes regarding SRI issues and a belief that their investment can help solve social and environmental issues were more likely to practice SRI. A majority of investors surveyed by Riedl and Smeets (2017) were willing to pay higher fees to invest in SRI and expected SRI to underperform. However, Nilsson (2009) documented a tendency of investors who believe financial returns to SRI will be at least as good as conventional investment returns to invest a greater proportion of their portfolio in SRI.

Most research suggests the financial performance of SRI funds is not significantly different from that of conventional funds. Hamilton, Jo, and Statman (1993) examined the excess returns of 32 socially responsible funds relative to conventional mutual fund returns and found that socially responsible funds had negative excess returns, though not significantly below those of conventional funds. Other papers that reported little or no cost to socially responsible fund investment include Kempf and Osthoff (2008) in the U.S.; Kreander, Gray, Power, and Sinclair (2005) in Europe; and Christensson and Skagestad (2017) in emerging markets.

Some studies even suggest that investment in socially responsible funds can be more financially rewarding than investing in conventional funds. Statman (2000) computed an alpha for socially responsible funds approximately 2.5 percent higher than matching conventional funds, with significance just outside the 5 percent level. Gil-Bazo, Ruiz-Verdú, and Santos (2010) found that over the 1997 to 2005 period, U.S. socially responsible funds had better before-fee and after-fee performance than conventional funds. Their sample of 86 socially responsible funds has a four-factor alpha 1.44 percent higher than a benchmark. Derwall and Koedijk (2009) estimated that socially responsible funds that invested in a balanced mix of stocks and bonds outperformed their conventional peers by 1.3 percent per year over the 1987 to 2003 period.

Nofsinger and Varma (2014) and Peylo and Schaltegger (2014) found socially responsible funds to be defensive investments, performing better in economic downturns at a cost of underperforming during normal economic times. However, in a study of “vice stocks,” Richey (2016) reported that these stocks provided significantly higher returns during market advances. Chang and Krueger (2016) determined that the VICEX fund consistently beat the market, accentuating market advances and softening market declines.

Laermann (2016) listed more than 100 providers of ESG ratings, rankings, or indices worldwide. Filbeck, Holzhauer, and Zhao (2014) used KLD Research & Analytics data (, and Krueger and Wrolstad (2014) employed Rittenhouse Rankings ( to show that going long in top-rated stocks and shorting stocks with low ratings generated additional abnormal returns. The Harris Interactive Reputation Quotient was used to explain contemporaneous price swings (Krueger, Wrolstad, and Van Dalsem 2010) and predict future price movements (Krueger, Wrolstad, and Van Dalsem 2009).

Studies have also examined how ESG information can best be used. Ameer (2016) found that a portfolio of stocks demonstrating responsiveness to shareholder concerns regarding social and environmental problems outperformed a portfolio based on the widely reported ASSET4 ESG ratings. Nagy, Kassam, and Lee (2016) documented benefits to various ESG tilt and momentum strategies. Similarly, this paper assessed the importance of self-proclamation of social responsibility.

Perhaps the most comprehensive study of SRI is Von Wallis and Klein’s (2015) analysis of motives, history, and concurrent best practices. However, they provided scant attention to Morningstar’s GLOBE measurement, risk-adjusted returns, and self-proclamation.

This research contributes to the existing literature by examining a period that ends six years later than Von Wallis and Klein’s (2015) work. Over those six years, there has been a significant increase in socially responsible investing, as millennial investment has become a larger portion of all investment. During the interim, Morningstar instituted its GLOBE system of measuring sustainability, which is the vehicle by which socially responsible investing is studied in this report.

Sustainability. Corporate social responsibility and sustainability have been viewed as means to enhance firm valuation and mutual fund manager interest (Smith, 2011). The hiring of a sustainability officer can lead to significant increases in shareholder wealth (Cavazos-Garza and Krueger 2014), and have a positive impact in financial ratios (Cavazos-Garza and Krueger 2015).

Prior to ratings agencies, investors essentially identified socially responsible funds by using the funds’ self-proclaimed mandate of social responsibility. Bloomberg and the US SIF ( publish lists of socially responsible funds, and Morningstar allows funds to self-report as a socially responsible fund. However, Dolvin, Fulkerson, and Krukover (2017) noted that many conventional funds invest in a “sustainable” manner comparable to self-proclaimed socially responsible funds. In October 2016, Barron's examined the performance of 200 sustainable funds (including both self-proclaimed and undesignated SRI funds) and found that 50 of these funds beat the market over the prior year.7 Just one of the 50 funds was a self-proclaimed sustainable fund; the others had not identified themselves as such.

Morningstar ratings have substantial credibility in the investment community as evidenced by a history of impacting aggregate investment decisions. Armstrong, Genc, and Verbeek (2017) documented relatively higher cash flows to higher-rated funds following Morningstar’s 2011 introduction of their analysts’ ratings. Following the March 2016 release of Morningstar’s first sustainability ratings,8 Hartzmark and Sussman (2018) found high sustainability funds in the U.S. experienced significant inflows, and low sustainability funds saw significant outflows. Domingues (2017) reported similar findings for European equity funds. According to Dolvin, Fulkerson, and Krukover (2017), funds with high sustainability scores have about the same risk-adjusted returns as conventional funds, but high sustainability funds are essentially confined to investing in large-cap stocks.

The use of Morningstar data, however, is not without skeptics. A 2017 Wall Street Journal article critical of the Morningstar rating system9 argued that a high percentage of top-rated funds do not maintain their 5-star rating over time, yet the high rating attracts investors. Another article from Advisor Perspectives10 reviewed the relevant data and suggested The Wall Street Journal did its readers a disservice and that more attention should be paid to the cost of active fund management.

Recently, Sheng, Simutin, and Zhang (2017) reported that after controlling for a large set of exposures, high-fee conventional funds significantly outperformed low-fee conventional funds before expenses. With primary concern for the investor experience, this study focused on the returns generated by socially responsible funds after expenses. The effect of expense ratios has not been an important focus in the literature. Although substantial dispersion in expense ratios has been noted, SRI studies that reported expense ratios typically did not analyze how expenses impact fund performance. Rather, the studies compared socially responsible fund expense ratios to those of conventional funds (Gil-Bazo, Ruiz-Verdú, and Santos 2010; and Benson and Humphrey 2008). Chang, Krueger, and Witte (2018) did, however, determine that self-proclaimed socially responsible funds with expense ratios in the lowest quartile of their respective category had significantly higher risk-adjusted returns and significantly lower turnover than category averages. Whether high-cost sustainable funds provide performance justifying their expenses is examined in this study.

Research Methods and Data

Mutual funds were grouped by Morningstar category and then sorted based upon expense ratio and sustainability scores. Expense ratios were segmented at the median within the Morningstar category. “Low-cost” funds refer to those funds whose prospectus net expense ratio percentile rank in category is less than or equal to 50 percent, while high-cost funds’ rank is greater than 50 percent. Two-tailed t-tests were used to assess the significance of any difference in Morningstar ratings.

Fund GLOBE ratings range from 1 to 100, with 1 assigned to the funds with the highest sustainability levels. Within each category, funds were ranked by GLOBE ratings from 1 to 100 on a percentage basis. Funds ranked from 1 to 50 were deemed to have high GLOBE rating, while low GLOBE funds had a ranking of 51 to 100.

Category GLOBE ratings were assigned based on average GLOBE values for mutual funds within each category; this is consistent with mutual fund GLOBE classifications being based on the GLOBE measures of fund investments’ issuers. Morningstar applies a five-globe designation, which is consistent with the distribution found in its well-known star ranking. Specifically, 10 percent of funds received five globes; 22.5 percent received four globes; 35 percent received three globes; 22.5 percent received two globes; and 10 percent received one globe.

For example, the TIAA-CREF Social Choice Fund (TISCX), mentioned at the beginning of this paper, was rated in the top 7 percent in its category and designated as a five-globe fund as of January 31, 2018. A Morningstar category can have a GLOBE rating from 1.0 to 5.0, should all funds in the given category have either one to five globes, respectively. Funds self-proclaim as socially responsible by notifying Morningstar of this orientation.


As of January 31, 2018, there were 28,139 mutual funds in the U.S. Approximately half of these funds (14,182) had Morningstar sustainability ratings, which is about 70 percent of the worldwide total reported by Morningstar. Mutual funds with GLOBE ratings can be found in 60 out of 110 total U.S. categories,11 identified by Morningstar, while SPSRFs can be found in only 34 categories. Of the 14,182 funds with GLOBE ratings, excluding categories without a SPSRF reduces the sample to 11,828 funds, which is 83 percent of all funds with GLOBE ratings.

The total number of mutual funds within broad asset classes, as of January 31, 2018, is shown in the first two columns of Panel A in Table 1. Most of the mutual funds invest in equities. Eighty-six percent (6,112 of 7,124) of funds with high GLOBE ratings are equity funds. Eighty-seven percent (6,054 of 6,982) of funds with low GLOBE ratings are equity funds. Allocation funds are frequently referred to as balanced funds. This broad asset class makes up 7 percent of funds with high GLOBE ratings, and about 6.5 percent of funds with low GLOBE ratings. Alternative funds (which include assets that are not primarily stocks, bonds, or cash) account for 4 percent of mutual funds with high GLOBE ratings and 3 percent of funds with low GLOBE ratings. The least common set of funds to receive a GLOBE rating are fixed-income funds, which account for only 3 percent of the high GLOBE and just over 3 percent of low GLOBE rated funds. This is the only category where the number of low GLOBE funds exceeds the number of high GLOBE funds (240 versus 214), but this outlier is not unexpected given income fund investments have a maturity date.

Also shown in Panel A of Table 1, 84 percent of low-cost funds with high GLOBE ratings are equity funds, and equity funds account for 86 percent of low-cost funds with low GLOBE ratings. The tendency of equity funds to have higher expenses is illustrated by the rise in their proportion to 88 percent, whether one considers either high GLOBE-rated or low GLOBE-rated funds. Meanwhile, fixed-income funds account for only 2 percent of the costly funds with high GLOBE ratings, and 3 percent of the low GLOBE-rated funds. The shift toward equity funds is consistent with the higher cost of equity management versus debt management.

Panel B of Table 1 adds the requirement that the funds also have a Morningstar star rating. Of the 14,106 total funds (7,124 and 6,982) with a GLOBE rating, 12,786 (6,448 and 6,338) funds also have a Morningstar rating. As a result, 90.6 percent of the funds with GLOBE ratings remain in the sample if the Morningstar star requirement is enforced. Approximately 89 percent of the low-cost funds have both a GLOBE rating and a star rating (i.e., risk-adjusted return performance), while the percentage is higher (92 percent) among the high-cost funds.

The largest decline in any cell in Panel B of Table 1 is the number of high-cost alternative funds, which have low GLOBE ratings. However, the sample with the Morningstar star rating is over 70 percent of the 178 found in Panel A. Therefore, the sample is largely intact when the requirement that the sample have Morningstar star ratings is added.

Research Findings

Impact of sustainability level on performance. Table 2 addresses the first research question: does a higher sustainability rating imply better performance, measured by risk-adjusted return?

Using Morningstar’s star rating as the performance measure, there was only a 0.01 (3.10 – 3.11) difference in the number of stars in the bottom row of the first set of columns of Table 2. Only the allocation category had a difference exceeding 0.10. The lack of significant difference carried over to the low-cost set of funds and high-cost set of funds. The lack of significance indicates that fund performance was uncorrelated with the extent to which funds considered ESG factors when making selections.

Impact of expenses on performance. Comparing the columns in Table 2 reveals that low-cost funds always had more Morningstar stars than high-cost funds. The difference applied whether one considered high GLOBE ratings or low GLOBE ratings. In fact, the low-cost funds with a low GLOBE rating had a higher average number of Morningstar stars than the high-cost funds with high GLOBE values. Table 3 reorganizes the information in Table 2 and tests for the impact of expenses on fund performance.

Across all Morningstar categories is an average of 0.51 more performance stars (3.36 – 2.85) for funds with expense ratios that are in the lower half. The difference in performance was significant at the 0.01 level in all broad asset categories, except the one based on alternative mutual funds. Nonetheless, in this category, low expense ratio funds still outperformed high-cost funds by 0.25 stars, a difference almost significant at the 0.05 level.

Among funds with high GLOBE ratings (middle columns of Table 3), the Morningstar performance rating of funds with low expense ratios was uniformly better than the rating of funds with high expense ratios. With the exception of the alternative mutual funds, the difference was significant at the 0.01 level. Even among alternative mutual funds, low expenses appear to lead to higher Morningstar star ratings. The 0.40 (3.33 for low-cost funds to 2.93 for high cost funds) difference was almost significant at the 0.05 level.

Likewise, the difference in Morningstar’s performance ratings among funds with low GLOBE ratings was significant at the 0.01 level overall, as shown in bottom row of the right pair of columns in Table 3. On a broad asset class basis, the difference was significant at the 0.05 level for all categories except alternative mutual funds. Although the high-cost low GLOBE funds in the alternative category had a desirable Morningstar rating above the mean of 3.0, the Morningstar rating of the low-cost low GLOBE funds was still higher by 0.14 stars (i.e., 3.28 – 3.14). Investors would be well-advised to factor expense ratios into their fund selection criteria, regardless of the level of fund sustainability. Although this finding may seem logical, individuals commonly spend a little more on brand-name items to get a perceived higher level of quality. With the quality of performance being easy to quantify in terms of return, one would not expect investors to pay a higher expense unless they are at least fully compensated with a higher gross return.

Effect of fund self-proclamation and performance. As of January 31, 2018, there were 716 SPSRFs, with 520 of these having a Morningstar GLOBE rating. Demonstrating that calling yourself an SRI choice does not automatically earn you a Morningstar rating, only 410 of 520 SPSRFs funds (79 percent) earned high GLOBE ratings from Morningstar. The remaining 110 SPSRFs did not live up to their self-proclamation.

Requiring at least one fund in a Morningstar category to be an SPSRF results in the number of Morningstar categories dropping and a total of 12,348 funds (11,828 being non-SPSRFs) being studied. Adding the requirement that the funds have a Morningstar rating drops the number of SPSRFs to 385 and non-SPSRFs to 10,849 as shown in Panel B of Table 4. Therefore, the adjusted sample is 74 percent (385 ÷ 520) of the total number of SPSRFs, and 91.7 percent of the non-SPSRFs (10,849 ÷ 11,828).

The domination of equity funds is clear, representing 92 percent of the SPSRFs with both a Morningstar GLOBE rating and a star rating. Among the non-SPSRFs, equity funds account for 91 percent. Due to the presence of only one fund, alternative SPSRF was eliminated from subsequent analysis.

The only observed statistical significance in performance arose when considering the impact of expense ratios. Table 5 focuses on mutual funds with Morningstar’s GLOBE ratings in the higher half (which would be of interest to SRI investors). As shown in Table 5, the funds with the lower expense ratio had a higher number of Morningstar stars. Scanning across the bottom two, all-category rows of Table 5, one can see that whether considering SPSRFs, non-SPSRFs, or combining these funds, the average number of Morningstar stars was always higher in the low-cost column. The difference was consistently significant at the 0.01 level. In fact, the lowest Morningstar rating in the low-cost column was 3.13 stars in the SPSRFs column, while the highest star rating in a high-cost column was the 2.86 stars average of non-SPSRFs.

Similar results were obtained on the asset class level. Considering equity funds with high GLOBE ratings, the portion assigning low expenses had an average of 3.24 Morningstar stars, while the portion charging high expenses had an average of 2.88 Morningstar stars. This difference was significant at the 0.01 level. As was found in Table 3 for the universe of mutual funds with alternative investments, the performance difference was not significant, though the low expense funds again had higher average Morningstar star rating.

Conclusion and Findings

Socially responsible investing continues to grow in popularity. US SIF reports that $1 out of every $5 placed in mutual funds is invested with consideration of the underlying sustainability of fund choices.12 Considering the importance of SRI within millennial 401(k)s,13 it appears likely that social responsibility and sustainability in investment will be an even more popular theme in years to come.

The question that arises is whether impact investing, as the SRI/sustainability movement is now frequently called, comes at a cost to investors. Simultaneously, identification of two means by which impact investors can enhance their return is sought. Specifically, this study attempted to provide an answer to the following three hypotheses:

H1: Funds with higher GLOBE ratings provide investors a higher risk-adjusted return.

Findings: Funds with higher sustainability ratings had no material performance difference relative to funds with low sustainability ratings. Critics of the SRI approach may assert that SRI does not enhance returns and can be ignored. In contrast, proponents of SRI may gain comfort from the finding that SRI does not lead to worse performance and that doing good does not have a price tag.

Implication: The key impact this has on financial practice is that it is possible to help clients make selections on an SRI basis, without negatively impacting returns.

H2: Within ESG levels, funds with higher expenses provide higher risk-adjusted return.

Findings: Contrary to the hypothesis, funds charging lower expense ratios consistently earned higher risk-adjusted returns. Despite the common inclination to pay more in the hopes of getting a better investment option, the research presented here shows that risk-adjusted returns were higher for both funds in the upper half and lower half of Morningstar’s sustainability metric when expense ratios were lower. The lone exception to this finding occurred within the alternative fund asset class, which included funds investing in real estate, options, futures, and other nontraditional assets.

Implication: The implication of the overall findings for financial planners is that fund expense ratios should be considered before making investment selections.

H3: Funds that self-proclaim sustainability and an intent to focus on ESG factors will: (1) have a higher GLOBE rating; (2) perform worse than non-proclaimed funds in their category; and (3) earn risk-adjusted returns that rise with fund expenses.

Findings: Consistent with the hypothesis, SPSRFs were likely to have higher sustainability values. Whereas non-SPSRFs tended to have a slight bias toward lower sustainability values, almost 80 percent of SPSRFs had high GLOBE values. Investors should be aware that about 20 percent of SPSRFs don’t live up to their self-proclamation. Inconsistent with this hypothesis, SPSRFs and non-SPSRFs had similar performance when using the Morningstar metric to assess risk-adjusted return performance. The null hypothesis regarding fund expenses was not supported. Both SPSRFs and non-SPSRFs with lower expense ratios had higher Morningstar star ratings.

Implication: The implication of these findings for financial planners is that it is possible to increase the social responsibility of portfolios by selecting those that are self-proclaimed socially responsible funds, without the fear of worse returns, and with the understanding that the higher the expense ratios result in worse risk-adjusted returns.

This analysis suggests avenues for future research. Values shown here were based upon the number of mutual funds within each category without consideration of the amount of money invested in each mutual fund. For instance, the 3 percent of fixed-income mutual funds may have a much larger percentage of total invested dollars. Adjusting fund performance for the percentage of aggregate dollars invested would give a clearer view regarding the impact of sustainability and expense factors on the typical investor’s portfolio. It may not be the given level of sustainability, but changes in GLOBE values that drive price reaction, making the study of sustainability over time intriguing.

Although this study used Morningstar’s metric of relative performance as a means to​ gauge performance, analysis of actual returns and their statistics (i.e., beta, standard deviation, Sharpe, Treynor, and Jensen measures) would provide additional insight regarding the actual impact of SRI, including its associated costs. Finally, given these funds’ interest in sustainability, it would be interesting to compare performance during market declines. All of which would put the losses earned on the TIAA-CREF Social Choice Fund into clearer perspective.


  1. See the 2017 TIAA-CREF College Retirement Equities Fund Annual Report available at

  2. See “US SIF Foundation Releases 2018 Biennial Report On US Sustainable, Responsible, and Impact Investing Trends” available at

  3. Access the report at

  4. See “The ‘Greater’ Wealth Transfer,” at​.

  5. See “The Impact of SRI: An Empirical Analysis of the Impact of Socially Responsible Investments on Companies,” from ISS-oekom research available at

  6. See the Flash Report available at

  7. See “The Top 200 Sustainable Mutual Funds,” by Leslie P. Norton and Crystal Kim available at

  8. See Morningstar’s 2016 Special Report: Morningstar Sustainability Rating, available at

  9. See “The Morninstar Mirage,” by Kirsten Grind, Tom McGinty, and Sarah Krouse, published October 25, 2017 at​.

  10. See “Morningstar Versus the Wall Street Journal: Who Won?” by Robert Huebscher on behalf of IMCA at

  11. See the 2014 Morningstar category classifications at

  12. See Endnote No. 2.

  13. See “Millennial 401(k)s: A Peek Inside Their “Socially Responsible” Investments,” by Adam Schell (updated May 13, 2018) at​.


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