How competitive is SRI in developing financial markets: The case of Central and Eastern Europe

Abstract

This study investigates the competitiveness of sustainable and responsible investment (SRI) in Central and Eastern European (CEE) financial markets. Specifically, we examined whether a statistically significant measurable difference in the return and volatility between an SRI index and two conventional benchmark indices in the CEE region exists. To test whether the market volatility may affect the results, we applied a Markov regime-switching model to examine the performance in high and low volatility environments. We also used the Fama-French three-factor model to analyse the potential sources of outperformance and verify the initial analysis results. The analysis covered an eleven-year period (January 2011–December 2021) and was based on monthly returns of indices available on the Vienna Stock Exchange: CECE SRI, CECE Composite and CECE MID. Our findings showed that the SRI phenomenon in developing financial markets of the CEE countries followed performance patterns similar to ones in developed financial markets. Sustainable and responsible investment is competitive with conventional investment in the CEE region. However, the differences in returns between the SRI index and conventional benchmarks were statistically insignificant. Although a statistically significant difference in volatility between the SRI index and the large-cap CECE Composite index was reported, we did not find any evidence of exposure to the SRI factor regarding the analysed returns of the CECE SRI index. Our analysis of SRI returns pointed to the statistical significance of the common risk factors, such as the market and the size, which is similar to the analysed conventional benchmarks, with alpha not being statistically significant.