The Cost of the Oil Fund's Socially Responsible Investing

Abstract

Based on violations of ethical guidelines, a number of companies are excluded from the Norwegian Government Pension Fund Global’s investment universe. There are both sector-based and norm-based reasons for exclusions. Among other things, exclusions can be due to excessive contamination, child labour, and production of nuclear weapons.

In this paper, we are constructing a portfolio that captures the returns of the excluded firms. This portfolio will be examined through an empirical analysis. If these exclusions represent a major cost for the oil fund, the return of the portfolio will show superior performance. We predict that the returns of the excluded firms are higher than the comparable portfolios. Excluding these companies therefore may reduce the returns of the oil fund’s portfolio. We will test this prediction by executing several regressions, including the Capital Asset Pricing Model and the Carhart 4-factor model.

We implement a number of tests for superior performance of the constructed portfolios and we find a performance effect, although for the equal-weighted portfolio it is not significant. These findings suggests that by investing in unethical companies, it doesn’t seem to have a sufficiently high effect on the financial returns, but we don’t have enough evidence to give a definite conclusion.