Top

Financial Markets and Portfolio Management

Published in:

28-05-2020

Factor exposures and diversification: Are sustainably screened portfolios any different?

Authors: Arnaud Gougler, Sebastian Utz

Published in: Financial Markets and Portfolio Management | Issue 3/2020

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

We analyze the performance, risk, and diversification characteristics of global screened and best-in-class equity portfolios constructed according to Inrate’s sustainability ratings. The financial performance of sustainably high-rated portfolios is similar to the risk-adjusted market performance in terms of abnormal returns of a five-factor market model. In contrast, low-rated portfolios exhibit negative abnormal returns. Firms with high sustainability ratings show lower idiosyncratic risk and higher exposure toward the high-minus-low and the conservative-minus-aggressive factor.

next article Momentum effects in the cryptocurrency market after one-day abnormal returns

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

The United Nations, under the stewardship of the World Commission on Environment and Development, addressed the term of sustainability in the 1987 report ‘Our Common Future,’ which came to be known as the Brundtland Report, and gave it the following commonly accepted definition: Sustainable development is a development that meets the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development 1987; Staub-Bisang 2012).

Agenda 21—‘21’ stands for the twenty-first century—is the action plan of the United Nations to concretize the steps necessary to implement sustainable development in various levels of society (e.g., governments, NGOs, businesses). It is the result of the first UN Conference on Environment and Development in Rio de Janeiro in 1992 (Pufé 2014).

Many similar terms are used to describe the efforts of firms in terms of sustainability, which include corporate sustainability, corporate responsibility, and corporate citizenship.

The use of these broadly defined concepts to assess the extra-financial information of investments is well established (Eccles 2010), even though the scope of criteria and types of indicators used to vary and depend on the institution and the country (United Nations Principles for Responsible Investment 2017; Eurosif 2018).

A paper written by Schwegler (2018) can be found online under https://www.inrate.com/cm_data/inrate_methodology_paper_newdesign_02.pdf. Additional information on Inrate’s rating methodology can also be found under https://www.inrate.com/en/esg-impact-ratings.html.

The data is from mba.tuck.dartmouth.edu/pages/faculty/ken.french.

The unrestricted universe includes firms from 49 countries.

Australia, Austria, Belgium, Canada, Germany, Denmark, Finland, France, Great Britain, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, Norway, New Zealand, Portugal, Singapore, Spain, Sweden, Switzerland, USA.

Adler, T., Kritzman, M.: The cost of socially responsible investing. J. Portf. Manag. 35(1), 52–56 (2008)

Areal, N., Cortez, M.C., Silva, F.: The conditional performance of US mutual funds over different market regimes: do different types of ethical screens matter? Fin. Mark. Portf. Manag. 27(4), 397–429 (2013)

Auer, B., Schuhmacher, F.: Do socially (ir)responsible investments pay? New evidence from international ESG data. Q. Rev. Econ. Finance 59, 51–62 (2016)

Barnett, M., Salomon, R.: Beyond dichotomy: the curvilinear relationship between social responsibility and financial performance. Strateg. Manag. J. 27(11), 1101–1122 (2006)

Bauer, R., Koedijk, K., Otten, R.: International evidence on ethical mutual fund performance and investment style. J. Bank. Finance 29, 1751–1767 (2005)

Bolton, P., Kacperczyk, M.: Do investors care about risk? SSRN Working Paper (2019)

Bouslah, K., Kryzanowski, L., M’Zali, B.: The impact of the dimensions of social performance on firm risk. J. Bank. Finance 37(4), 1258–1273 (2013)

Braun, A., Utz, S., Xu, J.: Are insurance balance sheets carbon-neutral? Harnessing asset pricing for climate change policy. Geneva Pap. Risk Insur. Issues Pract. 44(4), 549–568 (2019)

Cao, J., Titman, S., Zhan, X., Zhang, W.: ESG preference and market efficiency: evidence from mispricing and institutional trading. SSRN Working Paper (2019)

Capelle-Blancard, G., Monjon, S.: Trends in the literature on socially responsible investment: looking for the keys under the lamppost. Bus. Eth. Eur. Rev. 21(3), 239–250 (2012)

Capelle-Blancard, G., Monjon, S.: The performance of socially responsible funds: does the screening process matter? Eur. Financ. Manag. 20(3), 494–520 (2014)

Carroll, A., Shabana, K.: The business case for corporate social responsibility. A review of concepts, research and practices. Int. J. Manag. Rev. 12(1), 85–105 (2010)

Cheema-Fox, A., LaPerla, B.R., Serafeim, G., Turkington, D., Wang, H.: Decarbonizing factors. SSRN Working Paper (2019)

Davison, A., Kuonen, D.: An introduction to the bootstrap with applications in R. Stat. Comput. Stat. Gr. Newsl. 13(1), 6–11 (2002)

de Carvalho Ferreira, M.C.R., Sobreiro, V.A., Kimura, H., de Moraes Barboza, F.L.: A systematic review of literature about finance and sustainability. J. Sustain. Finance Invest. 6(2), 112–147 (2016)

DeMiguel, V., Garlappi, L., Nogales, F., Uppal, R.: A generalized approach to portfolio optimization: improving performance by constraining portfolio norms. Manag. Sci. 55(5), 798–812 (2009)

Derwall, J., Guenster, N., Bauer, R., Koedijk, K.: The eco-efficiency premium puzzle. Financ. Anal. J. 61(2), 51–63 (2005)

Derwall, J., Koedijk, K., Ter Horst, J.: A tale of values-driven and profit-seeking social investors. J. Bank. Finance 35, 2137–2147 (2011)

Dichtl, H., Drobetz, W., Wambach, M.: Where is the value added of rebalancing? A systematic comparison of alternative rebalancing strategies. Financ. Mark. Portf. Manag. 28(3), 209–231 (2014)

Diltz, J.: Does social screening affect portfolio performance? J. Invest. 4, 64–69 (1995)

Drempetic, S., Klein, C., Zwergel, B.: The influence of firm size on the ESG score: corporate sustainability ratings under review. J. Bus. Ethics (2019) (forthcoming)

Eccles, N.: UN principles for responsible investment signatories and the anti-apartheid SRI movement: a thought experiment. J. Bus. Eth. 95, 415–424 (2010)

Eccles, N., Viviers, S.: The origins and meanings of names describing investment pratices that integrate a consideration of ESG issues in the academic literature. J. Bus. Eth. 104(3), 389–402 (2011)

Eurosif: Europrean SRI Study 2018. Eurosif, Paris (2018)

Fama, E., French, K.: Size, value, and momentum in international stock returns. J. Financ. Econ. 105(3), 457–482 (2012)

Fama, E., French, K.: A five-factor asset pricing model. J. Financ. Econ. 116, 1–22 (2015)

Fama, E.F., French, K.R.: Choosing factors. J. Financ. Econ. 128, 234–252 (2018)

Fox, J.: Applied Regression Analysis and Generalized Linear Models. Sage Publications, Los Angeles (2015)

Friede, G., Busch, T., Bassen, A.: ESG and financial performance: aggregated evidence from more than 2000 empirical studies. J. Sustain. Finance Invest. 5(4), 210–233 (2015)

Friedman, M.: Capitalism and Freedom. University of Chicago Press, Chicago (1962)

Gabriel, K.: Ethik in der Geldanlage: Grundlagen, Kriterien und Herausforderungen. In: Scholz, S., Faust, M. (eds.) Nachhaltige Geldanlagen - Produkte. Frankfurt School Verlag, Strategien und Beratungskonzepte, Frankfurt (2014)

Galema, R., Plantinga, A., Scholtens, B.: The stocks at stake: return and risk in socially responsible investment. J. Bank. Finance 32(12), 2646–2654 (2008)

Griffin, J.: Are the Fama and French factors global or country specific? Rev. Financ. Stud. 15(3), 783–803 (2002)

Hahn, R.: Ethische Grundlagen des betrieblichen Nachhaltigkeitsmanagments. In: Baumast, A., Pape, J. (eds.) Betriebliches Nachhaltigkeitsmanagement. Verlag Eugen Ulmer, Stuttgart (2013)

Harjoto, M., Laksmana, I.: The impact of corporate social responsibility on risk taking and firm value. J. Bus. Eth. 151(2), 353–373 (2018)

Harvey, C.R., Liu, Y., Zhu, H.:. and the cross-section of expected returns. Rev. Financ. Stud. 29(1), 5–68 (2016)

Heinkel, R., Kraus, A., Zechner, J.: The effect of green investment on corporate behavior. J. Financ. Quant. Anal. 36(4), 431–449 (2001)

Hong, H., Kacperczyk, M.: The price of sin: the effects of social norms on markets. J. Financ. Econ. 93(1), 15–36 (2009)

Hudson, R.: Ethical investing: ethical investors and managers. Bus. Eth. Q. 15(4), 641–657 (2005)

Humphrey, J., Tan, D.: Does it really hurt to be responsible? J. Bus. Eth. 122, 375–386 (2014)

Humphrey, J.E., Lee, D.D., Shen, Y.: Does it cost to be sustainable? J. Corp. Finance 18(3), 626–639 (2012)

In, S.Y., Park, K.Y., Monk, A.: Is ’being green’ rewarded in the market? An empirical investigation of decarbonization and stock returns. SSRN Working Paper (2019)

Kanning, H.: Nachhaltige Entwicklung - Die gesellschaftliche Herausforderung für das 21. Jahrhundert. In: Baumast, A., Pape, J. (eds.) Betriebliches Nachhaltigkeitsmanagement. Verlag Eugen Ulmer, Stuttgart (2013)

Kempf, A., Osthoff, P.: The effect of socially responsible investing on portfolio performance. Eur. Financ. Manag. 13(5), 908–922 (2007)

Kim, Y., Li, H., Li, S.: Corporate social responsibility and stock price crash risk. J. Bank. Finance 43, 1–13 (2014)

Kotchen, M., Moon, JJ.: Corporate social responsibility for irresponsibility. BE J. Econ. Anal. Policy 12(1):Article 55 (2012)

Kuhlman, T., Farrington, J.: What is sustainability? Sustainability 2, 3436–3448 (2010)

Lahiri, S.: Resampling Methods for Dependent Data. Springer, New York (2003)

Lai, T., Xing, H.: Statistical Models and Methods for Financial Markets. Springer, New York (2008)

Laurence, E.: Socially responsible investment. In: Idowu, S.O., Capaldi, N., Zu, L., Das Gupta, A. (eds.) Encyclopedia of Corporate Social Responsibility, pp. 2258–2263. Springer, Berlin (2013)

Ledoit, O., Wolf, M.: Robust performance hypothesis testing with the Sharpe ratio. J. Empir. Finance 15, 850–859 (2008)

Lee, D., Faff, R.: Corporate sustainability performance and idiosyncratic risk: a global perspective. Financ. Rev. 44(2), 213–237 (2009)

Lee, D., Faff, R., Rekker, S.: Do high and low-ranked sustainability stocks perform differently? Int. J. Account. Inf. Manag. 21(2), 116–132 (2013)

Levitt, S.D., List, J.A.: What do laboratory experiments measuring social preferences reveal about the real world? J. Econ. Perspect. 21(2), 153–174 (2007)

Lioui, A.: The decarbonisation factor: a new academic fiction? EDHEC Working Paper (2019)

Markowitz, H.: Portfolio selection. J. Finance 7(1), 77–91 (1952)

Mattingly, J.E., Berman, S.L.: Measurement of corporate social action: discovering taxonomy in the Kinder Lydenburg domini ratings data. Bus. Soc. 45(1), 20–46 (2006)

McNeill, J., Engelke, P.: The Great Acceleration: An Environmental History of the Anthropocene Since 1945. The Belknap Press of Harvard University Press, Cambridge (2014)

Merton, R.: A simple model of capital market equilibrium with incomplete information. J. Finance 42, 483–510 (1987)

Patton, A., Politis, D., White, H.: Correction to automatic block-length selection for the dependent bootstrap by D. Politis and H. White. Econ. Rev. 28, 372–375 (2009)

Pizzutilo, F.: Measuring the under-diversification of socially responsible investments. Appl. Econ. Lett. 24(14), 1005–1018 (2017)

Politis, D., Romano, J.: The stationary bootstrap. J. Am. Stat. Assoc. 89, 1303–1313 (1994)

Politis, D., White, H.: Automatic block-length selection of the dependent bootstrap. Econ. Rev. 23, 53–70 (2004)

Pufé, I.: Nachhaltigkeit, 2nd edn. UVK Lucius, München (2014)

Renneboog, L., Horst, T., Zhang, C.: Socially responsible investments: institutional aspects, performance, and investor behavior. J. Bank. Finance 32, 1723–1742 (2008)

Revelli, C., Viviani, J.L.: Financial performance of socially responsible investing: what have we learned? A meta-analysis. Bus. Eth. Eur. Rev. 24(2), 158–185 (2015)

Sauer, D.: The impact of social responsibility screens on investment performance: evidence from the Domini Social Index and Domini Equity Mutual Fund. Rev. Financ. Econ. 6(2), 137–149 (1997)

Scholtens, B.: Finance as a driver of corporate social responsibility. J. Bus. Eth. 68(1), 19–33 (2006)

Schröder, M.: The performance of socially responsible investments: investment funds and indices. Fin. Mark. Portf. Manag. 18(2), 122–142 (2004)

Schwegler, R.: Inrate’s ESG impact rating methodology. https://www.inrate.com/cm_data/inrate_methodology_paper_newdesign_02.pdf (2018)

Statman, M., Glushkov, D.: The wages of social responsibility. Financ. Anal. J. 65(4), 33–46 (2009)

Staub-Bisang, M.: Sustainable Investing for Institutional Investors: Risks, Regulations and Strategies. Wiley and Sons, Hoboken (2012)

Steffen, W., Sanderson, A., Tyson, P., Jäger, J., Matson, P., Moore, B., Oldfield, F., Richardson, K., Schellnhuber, H.J., Turner, B., Wasson, R.: Global Change and the Earth System. Springer, Heidelberg (2004)

United Nations Environment Programme Finance Initiative: Translating environmental, social and governance factore into sustainable business value. UNEP FI and World Business Council for Sustainable Development, Geneva (2010)

United Nations Principles for Responsible Investment: PRI Reporting Framework Main Definitions 2018. PRI Association, London (2017)

Utz, S.: Over-investment or risk mitigation? Corporate social responsibility in Asia-Pacific, Europe, Japan, and the United States. Rev. Financ. Econ. 36(2), 167–193 (2018)

Utz, S., Wimmer, M.: Are they any good at all? A financial and ethical analysis of socially responsible mutual funds. J. Asset Manag. 15(1), 72–82 (2014)

Van Marrewijk, M.: CSR and corporate sustainability: between agency and communion. J. Bus. Eth. 44(2–3), 95–105 (2003)

Verheyden, T., Eccles, R., Feiner, A.: ESG for all? The impact of ESG screening on return, risk and diversfication. J. Appl. Corp. Finance 28(2), 47–55 (2016)

von Arx, U., Ziegler, A.: The effect of corporate social responsibility on stock performance: new evidence for the USA and Europe. Quant. Finance 14(6), 977–991 (2014). https://doi.org/10.1080/14697688.2013.815796CrossRef

Walker, T.J., Lopatta, K., Kaspereit, T.: Corporate sustainability in asset pricing models and mutual funds performance measurement. Fin. Mark. Portf. Manag. 28, 363–407 (2014)

World Commission on Environment and Development. Our Common Future. United Nations (1987)

Zerbib, O.D.: A sustainable capital asset pricing model (S-CAPM): evidence from green investing and sin stock. SSRN Working Paper (2020)

Ziegler, A., Schröder, M., Rennings, K.: The effect of environmental and social performance on the stock performance of European corporations. Environ. Resour. Econ. 37, 661–680 (2007)

Title: Factor exposures and diversification: Are sustainably screened portfolios any different?
Authors: Arnaud Gougler
Sebastian Utz
Publication date: 28-05-2020
Publisher: Springer US
Published in: Financial Markets and Portfolio Management / Issue 3/2020
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI: https://doi.org/10.1007/s11408-020-00354-4

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 3/2020

Diversification and portfolio theory: a review

Emmanuel Saez and Gabriel Zucman: The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay

Momentum effects in the cryptocurrency market after one-day abnormal returns

A new unbiased additive robust volatility estimation using extreme values of asset prices