Corporate social responsibility and financial performance

This paper aims to investigate the interaction between sustainability and financial performance. Can socially responsible investors, integrating environmental, social and ethical issues in their investment policy, expect the same return as traditional investors?

Based on the sustainability ratings of a specialized rating agency, Vigeo, a Fama and French approach is performed to adapt for style biases in the performances.

The results indicate that, on a style‐adjusted basis, high sustainability‐rated portfolios have performed better than low‐rated portfolios, but, probably due to the short horizon, not to a significant extent. The same results are found for four out of the five sub‐ratings of which the sustainability rating is composed, suggesting that sustainability is a broad and multidimensional concept that cannot be attributed to one specific theme or topic. The results also indicate that investors are ready to pay a premium for companies with good management of their relations with shareholders, clients and suppliers.

Owing to the rather new concept of socially responsible investing and in order to avoid survivorship bias, only a relative time horizon is considered.

There is no cost involved in integrating sustainable dimensions in the investment policy.

The paper shows the relevance of socially responsible investing when one adjusts for style differences within the portfolio.