Socially Responsible and Conventional Finance During Covid-19 Pandemic

Risk and Return and Diversification between Socially Responsible Finance and Conventional Finance During Covid-19 Pandemic
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Risk and Return and Diversification between Socially Responsible Finance and Conventional Finance During Covid-19 Pandemic
Background of the Study/Introduction
The novel coronavirus pandemic is a devastating global event affecting financial markets since the 2008 global economic crisis and the Great Depression. The financial and economic implications of the current crisis have culminated in new financial and economic order globally, thus posing a significant challenge to the sustainability of the traditional financial markets. For example, the pandemic has had disastrous impacts on stock markets globally, including the United States stock market, resulting in rising fears as well as evolving cross-market connections. In this way, the conventional financial market has plummeted because of growing uncertainties and reduced economic activity, posing significant challenges to financial stability, risk management, and asset allocations (Arif et al., 2021). More specifically, the Covid-19 pandemic has had unprecedented consequences on economies globally. In this context, the socially responsible finance concept has gained prominence among investors, policymakers, and the general public as companies seek to achieve the expectations and demands of different stakeholders within the financial system. Socially responsible finance affects investor returns since it affects the revenue, production costs, cash flows, earnings, cost of capital, and ultimately the firm’s share price and market capitalization. Socially responsible asset allocation fosters investments in firms that emphasize financial and social performance. From an investment management perspective, it is crucial to evaluate the risk-return characteristics of an asset portfolio allocated to corporate social responsibility (CSR) investments and assess its implications for efficient portfolio management approaches. With an efficient market, Capital Asset Pricing Model (CAPM) proponents maintain that allocating assets to CSR shares might result in meager returns in the long run because of the costs of diversification.
Socially responsible investing is focused within the mutual funds’ investment industry. It follows the utility function of conventional finance that investors aim to maximize and consider non-financial parameters coinciding with personal and societal values. Although socially responsible finance primarily drives sustainability practices in the financial system, conventional finance managers typically incorporate environment, social, and governance (ESG) variables into their portfolio construction, decision-making, and investment analysis. There is a vast consensus in research that non-financial characteristics of investment decisions generate value. Simultaneously, it is widely debated that an investor’s net worth can be increased by ensuring better performance of socially responsible investments. Although there is evidence on whether investors incur costs investing in socially responsible portfolios or get more returns, this project...