Usefulness of ASSET4 ESG for Socially Responsible Investing in a Small Economy

Abstract

This article examines the risk–return trade-offs of socially responsible investing (SRI) by using the ASSET4 ESG rating for the small economy of New Zealand. The author explores the idea of developing a new typology of CSR communication strategies for stock selection and tests its usefulness for an SRI investor in a small economy, where less-well-known stocks are often not included by ASSET4 ESG. He finds that a portfolio comprising stocks that demonstrate their responsive to stakeholder concerns about social and environmental issues in their CSR communication, rather than actively engaging stakeholders to solve the social and environmental problems, outperform an ASSET4 SRI portfolio in the short and long run. The results provide evidence that an SRI portfolio formed using the idea of a readability score of a company’s CSR information offers ex post higher returns to SRI investors in smaller economies.