Is there a trade-off between social responsibility and financial performance?

There is growing evidence that institutional investors are willing to incorporate social and environmental goals in their investment decisions. Many of these social investors use social screens, engagement and/or community involvement to put into practice that socially responsible behavior. However, the question is whether these social responsible investors (SRIs) perform better or worse financially in terms of profits, is still unclear. The objective of this study is to examine the existence of a trade-off between social responsibility and corporate financial performance (profitability). In this research SRI is taken as a dummy variable (0,1) - an investor is socially responsible or not - to test the relationship between SRI and corporate financial performance, controlling for company size, risk, growth and company age. To put this into practice, this study employs panel data analysis using regression estimations with different specifications on a small sample of European and North-American companies (institutional investors) in the financial sector for the period 2000-2009. In general, social responsibility is found to be significant and negatively related to corporate financial performance, supporting the theory that there is a trade-off. More specifically, the empirical results show that socially responsible investors are less profitable than their conventional counterparts. In addition, the control variables size and risk appear to be significantly related to corporate financial performance in most cases, while growth and company age do not seem to matter.