Item Response Models to measure Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a multidimensional con- cept that involves several aspects, ranging from Environment, to Social and Governance. Companies aiming to comply with CSR standards have to face challenges that vary from one aspect to the other and from one industry to the other. Latent variable models may be use- fully employed to provide a unidimensional measure of the grade of compliance of a firm with CSR standards that is both understand- able and theoretically solid. A methodology based on Item Response Theory has been implemented on the multidimensional sustainability rating as expressed by KLD dataset from 1991 to 2007. Results sug- gest that companies in the industry Oil & Gas together with firms in Industrials, Basic Materials and Telecommunications have a higher difficulty to meet the CSR standards. Criteria based on Human rights, Environment, Community and Product quality have a large capacity to select the best performing firms, as they are very discriminant, while Governance does not exhibit similar behavior. A stock selection based on the ranking of the firms according to the proposed CSR measure supports the hypothesis of a positive relationship between CSR and financial performanc

On the price of morals in markets: an empirical study of the Swedish AP-Funds and the Norwegian Government Pension Fund

This study empirically analyses the exclusion of companies from investors’ investment universe due to a company’s business model (sector-based exclusion) or due to a company’s violations of international norms (normbased exclusion). We conduct a time-series analysis of the performance implications of the exclusion decisions of two leading Nordic investors, Norway’s Government Pension Fund-Global (GPFG) and Sweden’s AP-funds. We find that their portfolios of excluded companies do not generate an abnormal return relative to the funds’ benchmark index. While the exclusion portfolios show higher risk than the respective benchmark, this difference is only statistically significant for the case of GPFG. These findings suggest that the exclusion of the companies generally does not harm funds’ performance. We interpret these findings as indicative that with exclusionary screening, as practiced by the sample funds, asset owners can meet the ethical objectives of their beneficiaries without compromising financial returns