Investment Performance

Published Author  Title 
February 2018 Soh Young In, Ki Young Park & Ashby Monk Is “Being Green” Rewarded in the Market? An Empirical Investigation of Decarbonization and Stock Returns
  This study seeks to remedy the unclear relationship between environmental and financial performance by empirically investigating the risk-return relationship of low-carbon investment and characteristics of carbon-efficient firms. Based on 74,486 observations of U.S. firms from January 2005 to December 2015, the authors construct a carbon efficient-minus-inefficient (EMI) portfolio by carbon intensity, revenue-adjusted GHG emissions at firmlevel. They find that the EMI portfolio generates positive abnormal returns since 2010, which cannot be explained by well-known risk factors. The findings demonstrate that an investment strategy of “long carbon-efficient firms and short carbon-inefficient firms” would earn abnormal returns of 3.5–5.4% per year.
November 2017 MSCI ESG Research LLC Foundations of ESG Investing – Part 1: How ESG Affects Equity Valuation, Risk and Performance
  In this research insight paper MSCI proof that ESG metrics and financial performance do not only have a correlation, but also a causal relationship. It does this by examining how ESG information embedded within companies is transmitted to the equity market. Using a standard discounted cash flow model, the authors provide evidence for a causal relationship ESG and financial performance. The reason is that changes in ESG ratings accurately predicted changes in financial variables. All in all, ESG-rated companies tended to show higher profitability, higher dividend yield, less systematic volatility and lower values for beta.
November 2017 Timo Busch ESG and Financial Performance

This analysis illustrates the clear business case of a good ESG performance of companies. Roughly 90 % of academic studies find a non-negative relation between ESG criteria and financial performance with an overwhelming share of studies showing positive results.

August 2017 David Blitz & Frank J. Fabozzi Sin Stocks Revisited: Resolving the Sin Stock Anomaly
  Various studies report that investing in “sin stocks”, that is firms producing alcohol, tobacco, gambling and weapons, has historically delivered significantly positive abnormal returns. This finding has inspired the hypothesis that sin stocks are being shunned to such an extent that they end up being systematically underpriced, enabling other investors, to earn a return premium. In this article, the authors further investigate this notion, finding that the performance of sin stocks can be fully explained by the two new quality factors in the recently introduced Fama-French 5-factor model: profitability and investment. Their finding is robust over time and across different markets. In short, there is no evidence that sin stocks provide a premium for reputation risk after controlling for their exposure to factors in today’s asset pricing models.
 May 2017 Ioannou & Serafeim The Consequences of Mandatory Corporate Sustainability Reporting
  A key aspect of the governance process inside organizations and markets is the measurement and disclosure of important metrics and information. This paper examines the effect of sustainability disclosure regulations on firms’ disclosure practices and valuations. Specifically, it explores implications of regulations mandating the disclosure of environmental, social, and governance (ESG) information in China, Denmark, Malaysia, and South Africa. The results suggest that even in the absence of a regulation that mandates the adoption of assurance or specific guidelines, firms seek the qualitative properties of comparability and credibility. It is further shown that increases in sustainability disclosure driven by the regulation are associated with increases in firm valuations, as reflected in Tobin’s Q. Collectively, the evidence suggest that current efforts to increase transparency around organizations’ impact on society are effective at improving disclosure quantity and quality as well as corporate value.
February 2017 McKinsey Global Institute (MGI) Measuring the Economic Impact of Short-Termism
  Corporate short-termism has been the subject of ongoing debate among leaders in business, government, and academia for more than 30 years, with much of the discussion focusing on whether it destroys value. This discussion document aims to provide a fact base for this ongoing debate through a systematic measurement of long- and short-termism at the company level. The findings show that companies classified as “long term” outperform their shorter-term peers on a range of key economic and financial metrics.
November 2016 CSSP, south pole group

Climate-friendly investment strategies and performance (Summary)

Full report (German)

  This report was commissioned by the Swiss Federal Office for the Environment. It expands the knowledge about determining the climate impact of finance flows, and also examines the  performance of investment strategies that are more climate-friendly.
May 2016 Gregory Unruh, David Kiron, Nina Kruschwitz, Martin Reeves, Holger Rubel, and Alexander Meyer zum Felde Investing For a Sustainable Future
This global executive study on corporate sustainability from MIT Sloan Management Review and The Boston Consulting Group (BCG) presents an in-depth analysis of investors’ new ability to connect sustainability performance with corporate performance, discusses how investors are using sustainability performance as a key criterion for making (and leaving) investments, and identifies what corporate leaders can do to stay relevant to sustainability-oriented investors. Over 3,000 managers and investors in organizations from over 100 countries have participated in this survey.
February 2016 Willem Schramade Integrating ESG into Valuation Models and Investment Decisions: The Value Driver Adjustment Approach
  Abstract: True ESG integration means ESG factors are systematically fed into the valuation models and investment decisions of analysts and PMs. However, most ESG approaches fail to do this. As a result, sustainable investing is much less an application success than a marketing success. Our Value Driver Adjustment (VDA) approach is different: it ties into traditional valuation approaches by linking ESG issues to value drivers via their impact on business models and competitive positions. For equities, the initial results find that the average target price impact of ESG factors is 5% overall, and 10% conditional on non-zero adjustments; dispersion is wide as target price changes ranged from -23% to 71%. The investment team has experienced a pay-off in terms of more in-depth analysis of companies, a clearer view on risk and better informed decisions.
January 2016 Mozaffar Khan, George Serafeim, Aaron Yoon Corporate Sustainability: First Evidence on Materiality
  Abstract: Using newly-available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.
December 2015 Gunnar Friede, Timo Busch & Alexander Bassen, Journal of Sustainable Finance & Investment

ESG and financial performance: aggregated evidence from more than 2000 empirical studies

  Abstract: The search for a relation between environmental, social, and governance (ESG) criteria and corporate financial performance (CFP) can be traced back to the beginning of the 1970s. This study extracts all provided primary and secondary data of previous academic review studies. Through doing this, the study combines the findings of about 2200 individual studies. Hence, this study is by far the most exhaustive overview of academic research on this topic and allows for generalizable statements. The results show that the business case for ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG–CFP relation. More importantly, the large majority of studies reports positive findings. We highlight that the positive ESG impact on CFP appears stable over time. Promising results are obtained when differentiating for portfolio and nonportfolio studies, regions, and young asset classes for ESG investing such as emerging markets, corporate bonds, and green real estate.
August 2015 Elroy Dimson, Oguzhan Karakas, Xi Li Active Ownership
  Abstract: We analyze an extensive proprietary database of corporate social responsibility engagements with U.S. public companies from 1999-2009. Engagements address environmental, social, and governance concerns. Successful (unsuccessful) engagements are followed by positive (zero) abnormal returns. Companies with inferior governance and socially conscious institutional investors are more likely to be engaged. Success in engagements is more probable if the engaged firm has reputational concerns and higher capacity to implement changes. Collaboration among activists is instrumental in increasing the success rate of environmental/social engagements. After successful engagements, particularly on environmental/social issues, companies experience improved accounting performance and governance and increased institutional ownership.
July 2015 Calvert Investment Management, Inc. Perspectives on ESG Integration in Equity Investing: An opportunity to enhance long-term, risk-adjusted investment performance
  The authors use historical analysis of multiple datasets to examine several approaches for introducing ESG factors into the investment process and assess their efficacy from a portfolio management perspective. Using three approaches (negative screening, stand-alone ESG inputs for stock selection and combining ESG information with traditional investment factors) across U.S. and European stock markets, the authors demonstrate that incorporating ESG factors into investment decisions enhances risk-adjusted returns.
June 2015 Florida State Board of Administration (SBA) Valuing the Vote 2015: The Impact of Proxy Voting on SBA Portfolio Holdings

This study is an empirical analysis of an institutional investor's proxy voting decisions involving dual board nominees and the impact on portfolio value.

It was demonstrated that SBA equity value linked to proxy contest holdings increased by $572 million (or $5.3 million per vote) in the five years after a contest is announced, during the study's time frame from 2006 through 2014.

June 2015 GIIN and Cambridge Associates Introducing the Impact Investing Benchmark
  This document introduces the new Impact Investing Benchmark providing performance data on a quarterly basis. Initial findings show that private impact investment funds – specifically private equity and venture capital funds – that pursue social impact objectives have recorded financial returns in line with a comparative universe of funds that only pursue financial returns.
Feb 2015 Harvard Business School: Mozaffar Khan, George Serafeim, and Aaron Yoon Corporate Sustainability: First Evidence on Materiality
  This study focuses on the financial performance of firms related to their sustainability performance on material vs. immaterial sustainability issues. Using calendar-time portfolio stock return regressions the study finds that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing.
Sept 2014 Oxford University and Arabesque Partners From the Stockholder to the Stakeholder: How sustainability can drive financial outperformance (March 2015 update)

Based on more than 190 academic studies, industry reports, newspaper articles, and books, this meta-study showed three compelling arguments.

  • 90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies
  • 88% of the research shows that solid ESG practices result in better operational performance of firms
  • 80% of the studies show that stock price performance of companies is positively influenced by good sustainability practices
June 2014 Investment Leaders Group, Uni. of Cambridge Institute for Sustainability Leadership The Value of Responsible Investment
  As a whole the report offers a tour of the main drivers and debates in responsible investment, with recommendations on future actions and research.
Feb 2013 Research Center for Financial Services, Steinbeis Hochschule Berlin  Sustainable Investments in the Spotlight of Science 
  Study analysing the performance of traditional and sustainable investments, concluding that sustainability factors can be used by asset managers to add value within the context of an active investment strategy.   
June 2012  Deutsche Bank  Sustainable Investing – Establishing long-term value and performance 
  Comprehensive literature review of sustainable investment concluding that CSR and ESG factors are correlated with superior investment returns at a securities level, though exclusionary approaches to sustainable investment have a neutral impact on investment returns at a fund level.   
Oct 2009 Mercer Shedding Light on Responsible Investment: Approaches, Returns and Impacts 
  Review of academic and commercial studies finding that, on average, the evidence is in favour of responsible investment adding value.   
Nov 2007  UNEPFI & Mercer Demystifying Responsible Investment Performance 
  A review of academic and broker research on ESG factors

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