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Sustainable Investing: Establishing Long-Term Value and Performance
Abstract
The evidence is compelling: Sustainable Investing can be a clear win for investors and for companies. However, many SRI fund managers, who have tended to use exclusionary screens, have historically struggled to capture this. We believe that ESG analysis should be built into the investment processes of every serious investor, and into the corporate strategy of every company that cares about shareholder value. ESG best-in-class focused funds should be able to capture superior risk-adjusted returns if well executed.This is the key finding of our report in which we looked at more than 100 academic studies of sustainable investing around the world, and then closely examined and categorized 56 research papers, as well as 2 literature reviews and 4 meta studies - we believe this is one of the most comprehensive reviews of the literature ever undertaken.Frequently, Sustainable Investing is stated to yield "mixed results." However, by breaking down our analysis into different categories (SRI, CSR, and ESG) we have identified exactly where in the sprawling, diverse universe of so-called Sustainable Investment, value has been found.By applying what we believe to be a unique methodology, we show that "Corporate Social Responsibility" (CSR) and most importantly, "Environmental, Social and Governance" (ESG) factors are correlated with superior risk-adjusted returns at a securities level. In conducting this analysis, it became evident that CSR has essentially evolved into ESG. At the same time, we are able to show that studies of fund performance - which have been classified "Socially Responsible Investing" (SRI) in the academic literature and have tended to rely on exclusionary screens - show SRI adds little upside, although it does not underperform either. Exclusion, in many senses, is essentially a values-based or ethical consideration for investors.We were surprised by the clarity of the results we uncovered: 100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity. In effect, the market recognizes that these companies are lower risk than other companies and rewards them accordingly. This finding alone should put the issue of Sustainability squarely into the office of the Chief Financial Officer, if not the board, of every company. 89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company's exhibit accounting-based outperformance. Here again, the market is showing correlation between financial performance of companies and what it perceives as advantageous ESG strategies, at least over the medium (3-5 years) to long term (5-10 years).The single most important of these factors, and the most looked at by academics to date, is Governance (G), with 20 studies focusing in on this component of ESG (relative to 10 studies focusing on E and 8 studies on S). In other words, any company that thinks it does not need to bother with improving its systems of corporate governance is, in effect, thumbing its nose at the market and hurting its own performance all at the same time. In the hierarchy of factors that count with investors and the markets in general, Environment is the next most important, followed closely by Social factors.Most importantly, when we turn to fund returns, it is notable that these are all clustered into the SRI category. Here, 88% of studies of actual SRI fund returns show neutral or mixed results. Looking at the compositions of the fund universes included in the academic studies we see a lot of exclusionary screens being used. However, that is not to say that SRI funds have generally underperformed. In other words, we have found that SRI fund managers have struggled to capture outperformance in the broad SRI category but they have, at least, not lost money in the attempt.
... Furthermore, comparative international studies have been confined to addressing specific ESG factors such as corporate governance (Ammann, Oesch, & Schmid, 2011;Jo & Harjoto, 2011); and have used databases that included only a small proportion of global companies (Xiao, Faff, Gharghori, & Lee, 2013). Other international studies have focused on only one of the components of market value: the cost of capital (Dhaliwal, Li, Tsang, & Yang, 2011;Fulton, Kahn, & Sharples, 2012;Wang & Huang, 2013), and have used different classifications of ESG rating. The results have been mixed to a degree that calls for further investigation (Bird, Hall, Momentè, & Reggiani, 2007;Marsat & Williams, 2011), in particular on the effect of ESG disclosure on market value (reflecting both risk and cash flow) of companies globally. ...
... With the initiatives taken worldwide in sustainability reporting, the trend is for increasing supply of this type of non-financial information (Ball & Grubnic, 2007;Clarkson et al., 2008;Clarkson, Li, Richardson, & Vasvari, 2011;Cohen, Holder-Webb, Nath, & Wood, 2011;Eva, Lawrence, Roper, & Haar, 2011;King & Lenox, 2001). Sustainability information (including CSR, SRI, and others) in the capital market are commonly measured by and referred to as ESG factors, as the measures that is considered by researchers as best understood and most utilised as corporate sustainability metrics (Fulton et al., 2012). ...
... The term ESG was first used in the United Nations Environment Programme (UNEP) in 2004 and has since became popular among investment communities associated with socially responsible investment (Eccles & Viviers, 2011;Fulton et al., 2012;Lapinskienė & Tvaronavičienė, 2012). ...
This chapter analyzes the performance of the companies listed on the Indonesia Stock Exchange (IDX) under the Jakarta Islamic Index (JII). The purpose of our study is twofold: first, to examine the relationship between corporate sustainability practice and financial performance; second, to investigate the relationship of Islamic practice with financial performance, and thereby evaluate whether Islamic compliance moderates the relationship between corporate sustainability practice and financial performance. We analyze the performance of fifteen companies listed on the IDX Jakarta Islamic Index for five consecutive years from 2015 to 2019, based on their annual and sustainability reports. Data for financial performance is measured by three different proxies: Return on Assets, Return on Equity, and Ln Net Profit. Three Robust Ordinary Least Squares Regression Models were performed to test our research hypotheses. This study improves our knowledge since no previous study has investigated the research construct proposed and tested in this inquiry, it contributes to the current literature by providing evidence of a three-dimensional relationship between sustainability, Islamic practice and financial performance. And provides empirical insights for regulators who may utilize them as a basis for policy formulation in regulating corporate sustainability and Sharī‘ah practices.
... In a report from Deutsche Bank Group, Fulton et al. (2012) examine more than 100 academic studies A u t h o r D r a f t f o r R e v i e w o n l y of sustainable investing around the world and note that they generally find a lower cost of capital (in regard to both debt and equity) for more socially responsible firms. This relationship suggests that the market perceives these companies to have lower risk and therefore rewards them through a lower cost of capital. ...
... This relationship suggests that the market perceives these companies to have lower risk and therefore rewards them through a lower cost of capital. Fulton et al. (2012) go as far as saying that this finding alone should put SRI on the radar for every company chief financial officer (and for potential investors). In contrast, they find no support that SRI funds outperform their non-SRI counterparts with regard to return. ...
... Given the style distribution seen in Exhibit 2, we expect to see some differences in factor exposures between the portfolios. We do find that the top 20% portfolio has smaller risk exposures (i.e., MKT coefficient), which is likely consistent with studies (e.g., Fulton et al. 2012) suggesting a lower cost of capital for sustainable companies; however, this difference is economically small. With regard to the remaining factors, the only consistently significant coefficient (both statistically and economically) is on the size variable, which is reflective of the premium earned on small-cap stocks. ...
... link between ESG and corporate profitability showing that investors can choose to incorporate ESG information as part of their investment strategies without sacrificing financial performance (Cortez et.al., 2009;Galema et.al. 2008). However, many highlighted inconsistencies in the underlying ESG data emphasizing the need for reliable ESG reporting (Fulton et. al., 2012;Kotsantonis & Serafeim, 2019;Jonsdottir et. al., 2022). Such ESG data issues are the likely reason why there is no clear consensus to date on the link between profitability and ESG measures. ...
... More generally, we have reservations about the quality of the ESG data, which is self reported. Possible data inconsistencies in the underlying ESG data have long been reported in extant literature (Fulton et. al., 2012;Kotsantonis & Serafeim, 2019;Jonsdottir et. al., 2022) emphasizing the need for reliable ESG reporting. This represents an inherent limitation of our study, along with missing information on variables included in the analysis for some companies and the overall short period of analysis. However, our paper adds to the body of evidence that ...
This research investigates the evolving nexus between sustainability practices and firm market value, with a specific focus on the rapidly growing Fintech sector. As concerns about environmental, social, and governance (ESG) issues continue to gain prominence, understanding the implications of sustainability efforts on firm performance becomes crucial. This study proposes an empirical exploration of how sustainability initiatives, embedded in ESG scores, undertaken by Fintech firms influence their market valuations. Moreover, the investigation contrasts the findings for the Fintech firms against those for their counterpart Technology firms for the period between 2011 and 2021. The results show that Technology firms are better valued than their Fintech counterparts, which might reflect a perception of higher risk for the later. By employing panel econometric techniques in the system-GMM setting, the paper finds that capital market investors include ESG factors in their valuation of Fintech and Techinology companies, but the environmental and governance-related initiatives at corporate level are most important in this process. The study seeks to contribute to both the theoretical understanding of the sustainability-market value relationship and the practical insights relevant to Fintech firms and their stakeholders.
... The success of sustainability policies also depends heavily on the behavior of stakeholders, in particular financial investors, and their willingness to support commitments and investments in the mediumlong term (Moneva et al., 2007;Steurer et al., 2005). An ideal investor should be willing to accept a lower profit in the short term, provided the company embeds appropriate sustainability strategies, integrates them within the company life cycle, and provides optimal disclosure by means of adequate forms of reporting (Adams et al., 1998;Dube & Maroun, 2017;Fulton et al., 2012;Knauer & Serafeim, 2014). Investors should be fully aware that reaping the rewards of their investments inside the company takes time and short-term expenses are paid off by future profits. ...
... 2. Following Fulton et al. (2012), it is considered necessary to analyze this study's explanatory assumptions, including that our variables measuring corporate liquidity are appropriate, which are primarily the current liquidity ratio, cash and equivalent, and receivables and inventories variables (which are scaled by total current assets). The reason for including these variables is that, in times of crisis such as recent decades in the global economy, a company's ability to generate liquidity, and so be able to finance itself, assumes fundamental importance. ...
Innovation represents one of the most important drivers in the business context. Drawing upon the research on corporate social responsibility (CSR), shared value, and innovation, this paper aims to analyze the relationship between Environmental, Social, and Governance (ESG, a form of CSR) sustainability policies and corporate financial performance (CFP) by investigating the mediating role of Innovation (i.e., investment in research and development, R&D). Our sample comprises 148 European companies belonging to the Euro Stoxx index in the period 2009–2014. For high‐innovation companies (HICs), we find positive relationships between some Social (S) issues and CFP and weaker linkages between Environmental (E) indicators and CFP. In contrast, Governance (G) issues (i.e., issues related to board structure and board function) negatively influence CFP. In contrast, for medium‐innovation companies (MICs), these relationships are absent and low‐innovation companies (LICs) show negative relationships. Adopting reporting frameworks or guidelines affects CFP only in HIC.
We introduce an original interpretative model, which identifies innovation (R&D) as the main driver in corporate sustainability, particularly in light of Social issues related to the production of a good or service. In terms of managerial implications, we identify three key factors for effectively embedding ESG in organizations' policies: investment in product innovation, compliance with environmental regulations, and corporate choices on brands and channels of external communication.
... In this framework, the subject has become a major research area (Friede et al., 2015). ESG is considered as an important element that increases both the company and stock market performance with the support of human and social motivations (Fulton et al., 2012;Chen and Yang, 2020;Yoo and Managi, 2022). Accordingly, academics have investigated the effect of ESG on both portfolio performance and stock prices (La Torre et al., 2020). ...
Purpose
This study aims to examine the effect of environmental, social and corporate governance (ESG) scores on stock markets for the period from February 2018 to December 2022 for G7 countries. Even though ESG is an established area of investigation, prior research has paid inadequate attention to the nexus of ESG scores and stock markets in G7 (Germany, USA, UK, Italy, France, Japan and Canada) countries.
Design/methodology/approach
This study covers G7 countries and uses a data set, which includes ESG scores and stock market returns from reporting channels including financial websites, and international indexes, between February 2018 and December 2022. Cross-section dependency and homogeneity tests were used with Konya (2006) panel causality test to investigate the relations of ESG scores and stock markets, and the research also conducted a separate analysis for each sub-dimension. Homogeneity/heterogeneity tests were also carried out in the research.
Findings
The findings suggest that causality from ESG scores to stock market (DAX) was determined only for Germany. Accordingly, it is understood that German companies have started to implement corporate social responsibility and ESG practices in their management strategies and reporting. These findings offer important implications for those who are considering investing in G7 countries, whether or not to consider ESG scores.
Originality/value
In this context, the research contributes to the existing literature on the relationships between ESG scores and stock markets, which are seen as a vital tool to meet the expectations of stakeholders.
... High-performing businesses consistently outshine their peers in various aspects, showcasing their ability to achieve organizational objectives and enhance shareholder value. Strong business performance fosters shareholder confidence, attracts investors, and facilitates access to funds for future expansion endeavors (Fulton et al., 2012). Furthermore, exceptional performance often results in a favorable reputation within the industry and the broader business community, positioning the company as a reliable partner, employer, and innovator. ...
In today's dynamic economic landscape, businesses continually strive to enhance their competitive edge and overall performance. This study investigates the crucial roles played by technological and financial stability in a company's success and competitiveness. By analyzing a diverse range of businesses across various industries, we aim to illuminate the intricate relationship between these dimensions and their combined impact on a firm's operational effectiveness. Our comprehensive approach employs quantitative financial analysis, technology assessments, and performance metrics, supported by advanced statistical methods. Additionally, qualitative insights from expert interviews enrich our understanding. The results highlight the interdependence between technological and financial strength, underscoring their significance in boosting corporate competitiveness. A firm's capacity to capitalize on growth opportunities and navigate economic challenges is notably influenced by financial factors such as capital accessibility, liquidity, and investment strategies. Similarly, technological capacity, encompassing digital infrastructure and innovation adoption, drives operational efficiency and market distinctiveness. This research unveils the synergistic effects of harnessing both technology and financial resources, enabling strategic resource allocation that empowers businesses to sustain competitiveness, foster innovation, and adapt to evolving market dynamics. These insights hold profound implications for both theoretical research and practical management, emphasizing the need to balance investments in technical and financial capabilities. They provide valuable guidance for researchers, policymakers, and business leaders grappling with an increasingly competitive landscape. Ultimately, this study advances our comprehension of the factors shaping firm success and equips businesses with a roadmap for surmounting challenges and seizing opportunities in today's dynamic market.
... In a follow-up second-order meta-analysis, they confirmed the claim that "it pays to be a good firm" (Busch & Friede, 2018). In an enhanced meta-analysis, Clark et al. (2015) reported that firms with better ESG scores had better performance, which aligns with similar results found by Fulton et al. (2012). In a recent meta-analysis, Sinha et al. (2019) also confirmed the positive impact of ESG factors on financial performance. ...
Recently, interest in socially responsible investing has grown, including new investment vehicles such as environmental, social, and governance exchange-traded funds (ESG ETFs). Despite their rising popularity, few studies have attempted to examine the performance characteristics of these stylized funds. This study aimed to fill this knowledge gap by elaborating on the performance attributes of ESG ETFs and examining fund managers’ security selection and market timing skills. Our results suggest that these funds generally underperform relative to conventional ETFs in many aspects. Additionally, the market timing skills of fund managers require improvement but are comparable to those of conventional ETFs. These results are robust to selecting the individual funds and alternative indices used in the sample. Furthermore, both the security selection and market timing skills of ESG ETF managers deteriorated significantly during the COVID-19 pandemic. Finally, the results indicate a slightly weaker cointegrated relationship between ESG ETFs and their benchmark indices when compared to conventional ETFs, suggesting that potential investors in ESG ETFs should carefully inspect the funds to make informed decisions.
... [1]The amount of aberrant returns is also found to be significantly positively impacted by project size [2]. Sustainable investing has the potential to benefit businesses and investors alike [3]. Our research shows that major players in the investment value chain seek levels of corporate and social behavior that are higher than those that are currently acceptable under individual nations' regulatory frameworks [4]. ...
Today's Internet businesses and software development firms are growing quickly and profitably in the era of the Internet economy, luring investors from a variety of industries to invest. The demand for office software and games is rising as a result of the continued popularization of computers, mobile phones, and other electronic devices. This article will examine the three investments using the process of assessing financial indicators, examine the investment value of each company, and offer investors some suggestions for further reading. Through the comparison of risk indicators such as total debt ratio, current ratio, asset turnover, profit margin, ROA, ROE and other profitability indicators, and PB ratio, PE ratio, and other market value indicators Finally, it can be concluded from the analysis of various financial indicators that MSFT-Microsoft Corporation and MSFT-Microsoft Corporation each have their own benefits and drawbacks, while EA-Electronic Arts have a low-risk profile and a high rate of return, making it the most advantageous investment among the three firms.
... An expanding body of research has focused on the investigation of ESG measures and ranking methodologies [7], as well as the evaluation of the impacts of ESG factors on financial performance and risk management [8,9]. Many studies have tried to summarize the different results [10] and others have analyzed the impact of ESG factors on the performance of information technology [11]. Usually, the objective of scientific studies is to use ESG tools to achieve financial results in portfolio management. ...
Over the last two decades, there has been an increased attention to and awareness of corporate environmental, social, and governance (ESG) responsibilities. The asset allocation process has changed accordingly to consider these ESG responsibilities, and it has largely been recognized that private and institutional investors are sensitive to ESG factors when deciding on firms in which to invest. In addition to ESG factors, other key stock-related factors to which investors generally pay attention are risk-adjusted indicators, such as the Sharpe ratio (SR) and the Sortino index (SI), as well as tail risk measures, such as the Value-at-Risk (VaR) and the Expected Shortfall (ES). Overall, the SR, SI, VaR, and ES can provide a guide for investors concerning the risk market performance of a stock under investigation. In this context, the research question that arises is the following: are firms’ performances sensitive to ESG rates? The present contribution aims to answer this question. In particular, the SR, SI, VaR, and ES measures of a set of listed firms are calculated and evaluated. Among these, there are firms with low ESG grades and some with high ESG grades according to two ESG rate providers. The list of stocks under consideration consists of the first 25 constituents (by weight) of the S&P500 index in the period from 2020 and 2022. The empirical findings indicate that risk market performance does not properly depend on high or low ESG rates.
... By investing in these socially responsible companies, retail investors in such SRI funds would have opportunities to make profits from the high growth potential of sustainability-driven products [15]. After an extensive review of the academic literature, Fulton et al. (2012) [11] concluded that securities with a strong corporate commitment to CSR are positively related to corporate performance, and their returns are comparable to those of conventional benchmarks. Specifically, since the early 2000s, corporate governance has been strongly linked to a corporation's financial performance. ...
... Furthermore, studies by (Pedersen et al., 2021;Chen & Yang, 2020) propose an overreaction hypothesis regarding ESG investments, mainly related to climate change. ESG investments are associated with better corporate governance structures, which translates to a lower cost of capital and a higher firm value reflected in accounting-based performance (Fulton, Kahn, & Sharples, 2012;Auer & Schuhmacher, 2016). Cornel (2021) argues that proponents of ESG investments often conflate these benefits with higher expected returns. ...
The article examined three widely accepted approaches to sustainable investing: Socially Responsible Investing (SRI), Environmental, Social and Governance (ESG), and impact investing. Nevertheless, these sustainable investment strategies are under-institutionalised, characterised by a lack of consistent terminology and mixed return performance. Given that these inconsistencies are prevalent in academic research regarding sustainable investing, the paper aimed to perform a systematic review of related studies to compare, contrast and consolidate these sustainable investment approaches. The findings of this study reveal overlapping conceptual frameworks between SRI, ESG and impact investing. The paper recommends the development of a consistent conceptual framework for sustainable investing.
... An overall conclusion can be drawn that there is a positive relationship between sustainability and operational performance (Fulton, M., Kahn, B. M., & Sharples, C. 2012, Hoepner and McMillian 2009, Salzmann 2005. Furthermore, despite an unclear link between ESG and CFP, there seems to be an upsurge in the number of studies finding a positive association between ESG performance and financial performance in recent literature. ...
... Risk tolerance tends to increase as the investment horizon increases. From a portfolio management perspective, longterm is defined as 5-10 years (Hoffmann et al., 2015;Fulton et al., 2012) q5. If the equity investment took a sharp hit by 20%, what would you prefer to do? a) Buy more to average the cost b) Ignore or move funds to safer avenuesbonds, bank deposits c) Move funds from risky stocks to less risky stocks Risk tolerance The traditional definition of a bear market is a condition where securities fall by 20% or more amidst negative investor sentiment. ...
Purpose
Investor risk perception is a personalized judgement on the uncertainty of returns pertaining to a financial instrument. This study identifies key psychological and demographic factors that influence risk perception. It also unravels the complex relationship between demographic attributes and investor's risk attitude towards equity investment.
Design/methodology/approach
Exploratory factor analysis is used to identify factors that define investor risk perception. Multiple regression is used to assess the relationship between demographic traits and factor groups. Kruskal–Wallis test is used to ascertain whether the factors extracted differ across demographic categories. A risk perception framework based on these findings is developed to provide deeper insight.
Findings
There is evidence of the relationship and influence of demographic factors on risk propensity and behavioural bias. From this study, it is apparent that return expectation, time horizon and loss aversion, which define the risk propensity construct, vary significantly based on demographic traits. Familiarity, overconfidence, anchoring and experiential biases which define the behavioural bias construct differ across demographic categories. These factors influence the risk perception of an individual with respect to equity investments.
Research limitations/implications
The reference for the framework of this study is limited as there has been no precedence of similar work in academia.
Practical implications
This paper establishes that information seekers make rational decisions. The paper iterates the need for portfolio managers to develop and align investment strategies after evaluation of investors' risk by including these behavioural factors, this can particularly be advantageous during extreme volatility in markets that concedes the possibility of irrational decision making.
Social implications
This study highlights that regulators need to acknowledge the investor's affective, cognitive and demographic impact on equity markets and align risk control measures that are conducive to market evolution. It also creates awareness among market participants that psychological factors and behavioural biases can have an impact on investment decisions.
Originality/value
This is the only study that looks at a three-dimensional perspective of the investor risk perception framework. The study presents the relationship between risk propensity, behavioural bias and demographic factors in the backdrop of “information” being the mediating variable. This paper covers five characteristics of risk propensity and eight behavioural biases, such a vast coverage has not been attempted within the academic realm earlier with the aforesaid perspective.
... These elements can also improve a company's financial success. Moreover, good business performance on ESG issues has resulted in a lower cost of capital and improved financial performance (Fulton et al., 2012). ...
As global ecological degradation intensifies, a trade‐off has arisen between environmental protection and production efficiency to achieve sustainable development for the environment, society, and the company itself. However, the potential reverse causality relationship between environmental, social, and governance (ESG) and corporate efficiency may lead to confusion. This study estimates the eco‐efficiency of Apple Incorporated's value‐chain counterparts in the first stage and creates values and profitability in the second stage of efficiency evaluation. Results obtained from the (i) directional distance function in the two‐stage data envelopment analysis (DEA), (ii) additive efficiency decomposition two‐stage network DEA model, and (iii) network slacks‐based measure model are consistent. That is, Apple counterparts manage more efficient eco‐efficiency than profitability efficiency, implying that eco‐efficiency is their competitive advantage. We thus also run a regression analysis to examine how the ESG ratings of Apple counterparts explain their eco‐efficiency and profitability efficiency. Although the overall ESG rating positively explains the efficiencies, we found that the individual governance rating shows no statistically significant effect. The regression results provide insight for practitioners on the importance of investing in the three aspects of a firm's collective conscientiousness for societal and environmental governance. This paper integrates companies' eco‐efficiency and profitability efficiency to resolve the conflict between environmental issues and production efficiency. It also analyzes in depth the effects of ESG and its three individual factors on eco‐, profitability, and average efficiencies. The diversity of research methods also provides new ideas for future research related to firm efficiency.
... All-Weather Sector Portfolio performance (return) from 1998-2012(Varadi, 2013. ...
“Climate change and the degradation of the world’s natural capital assets are defining issues of our time. The world is getting warmer; sea levels are rising, pollution is costing lives and biodiversity is collapsing [...] We need to shift to a world where we are at net-zero emissions and deliver our commitment that this will be the first generation in our history to leave the environment in a better condition than we found it” (Green Finance Strategy, 2019).
Climate change is one of the many sources of structural changes that will ultimately affect the financial system, as climate-related risks are a cause of financial risk (NGFS, 2019). Being green today is no longer seen as a cost of doing business, it is more a catalyst for driving innovation, wealth creation and exploring new market opportunities (Clarke, Et al. 1994). With this, the idea of Green Finance was formed within the financial industry parlance, which defines the mobilisation of capital for environmentally sustainable and resilient growth, to promote sustainability on a global scale.
Investors portray a crucial role within this financial system of facilitating capital while targeting the principle of diversification through green investments (GI), to reduce the overall portfolio risk. These have shown to be a valuable tool to reach the desired global minimum variance portfolio for investors (Lhabitant, 2017). The standard deviation is utilised as an indicator for the market volatility, a measurement of risk that an investment will not reach the expected return over time (Grones, 2019).
A financial crisis may also originate from climate change risks, which is why 70% of the UK’s banking sector agrees on this claim, either from physical or transitional risk (Green Finance Strategy, 2019). Suggesting, why these become a more profitable investment choice for investors, during a volatile period such as a global turn (Bernow, Et al. 2017). The quantitative study commenced in this research supports this claim. It has showcased a detrimental surge in returns while optimising for risk with a constructed green stock portfolio. Moreover, observing the risk reduction occurring with the inclusion of green assets in a Grey Benchmark Portfolio. The dissertation explores in depth the concept of Environmental Social Governance (ESG), with a further discussion on the recent Covid-19 economic crisis and its impact on climate change targets.
... La Torre et al. (2020) found that an ESG index affected the stock returns for energy and utility sectors more than other sectors. Fulton et al. (2012) showed that CSR and ESG factors are associated with higher risk-adjusted returns at the stock level. Reverte (2012) found a negative relationship between CSR ratings and the cost of equity capital. ...
Empirical evidence indicates that ESG practices are associated with firm financial performance, but little is covered about investors' attention towards stock performance. In this paper, we conduct a test of the relationship between ESG performance disclosures and required return. We undertake a stratified sample of large cap firms across 8 sectors drawn from the S & P 100 during the period 2016 to 2021. Our results show that few critical ESG disclosures are positively related and dominate over the usual firm level determinants of ROA. Further, we find the governance practice is more significant than climate disclosures. These outcomes are robust on additional use cases of environmental rating and investor safety recommendations. The results could have useful implications for investors, fund managers and regulators.
... Ruefli et al. 1999). This fact is further reinforced by a review of a number of studies conducted, which unanimously established that companies with high ESG ratings have an ex-ante lower cost of capital both for equity and debt (Fulton et al. 2012). Secondly, if a company has lower beta or lower systematic risk, then there could be idiosyncratic firm-specific characteristics associated with that company, which bring down its systematic risk exposure. ...
Studies show that companies with a strong Environment, Social and Governance (ESG) profile are more competitive than their peers, as they use resources, human capital and innovation more efficiently. High ESG-rated companies have lower exposure to systematic risk factors and low expected cost of capital, leading to higher valuations in a DCF model framework. They are typically more transparent, particularly with respect to their risk exposures, risk management and governance standards and have better long-term vision. The paper finds that higher Alpha can be harvested by restricting investment exposure to the ESG theme combined with various style characteristics, as they display low systematic and idiosyncratic tail risks. It shows that an ESG overlay on such factor-based strategies, particularly on ‘multi-factor’, ‘value’ and ‘low volatility’ in that order, reduces both systematic and idiosyncratic risks further. ESG overlay on ‘quality’ factor provides the highest return among ESG target indices, however, the underlying ‘quality’ factor provides even higher excess return. These findings can provide some insight on return enhancement to investors investing in the global equity markets.
... Several discussions and previous studies have been carried out to test and observe the impact of a sustainable financial system (Cheng et al., 2014;Fulton et al., 2012;Lins et al., 2017). However, mixed empirical findings were obtained from these studies. ...
This work is among the first studies to review the Morgan Stanley Capital International (MSCI) ESG Leaders Index in Asian countries and other emerging markets, such as Brazil, China, and Russia. The relationships among gross domestic product (GDP), human development index (HDI), and a set of key indicators are the fundamental argument of this study. By applying 2SLS estimation from 2010 to 2018, this research examines the connection between environmental, social, governance (ESG) index, GDP growth, and HDI from nine countries as rated in the MSCI ESG Index. The objective is to test whether the index can be efficiently utilized to justify the notion that the adoption of ESG principles can positively influence sustainable development and inclusive growth. The post estimations reveal close relationships between the ESG index and GDP growth. However, the index is not an effective instrument for measuring the connection between HDI‐ESG because it has not yet had a direct effect on HDI. With this result, the index can be utilized to measure the connections with and investments made by countries and corporations for sustainable development.
... This should not be a problem of finance, because "financial theory is indeed rooted in empirical realism and relies mainly on a deductive method of inquiry". 9 However, not all financial intermediaries include sustainability concepts in their investment process. Paetzold and Busch 10 dwell on the problem of availability and accessibility of sustainable investments for private investors. ...
... Sustainable investment has emerged in recent decades and has evolved to include many concepts and terms that are used interchangeably (Fulton et al., 2012). Sustainable investment is a multidimensional concept term that associated or synonymous with many concepts such as environmental investment, socially responsible investment and green investment (Marinoni et al., 2009;Inderst et al., 2012;Bajpai, 2013;Utz et al., 2015;De la Torre et al., 2016;Yang et al., 2019). ...
Sustainable tourism investment is one of the important topics imposed by environmental challenges to reduce the negative effects of tourism investment on the environment. Sustainable tourism investment is the investment in all tourism activities to achieve tourism development, sustainable development goals, and apply economic, social, and environmental dimensions. This research aims to evaluate sustainable tourism investment practices in Egypt. Data were collected from 356 managers through a questionnaire, which was distributed in various tourism businesses such as travel agencies, hotels, eco-lodges, diving centers, and protected areas. The results revealed that tourism businesses in Egypt apply sustainable tourism investment practices. In addition that the eco-lodges are the most tourism business in Egypt that apply sustainable tourism investment practices. On the other hand, travel agencies are the least viable tourist businesses for sustainable tourism investment practices. Moreover, the results of the research indicated that Egyptian private investment projects are the most committed types of investment in implementing sustainable tourism investment. The results of this research hold important implications for the research community and tourism businesses in Egypt.
... Some people can be confused about the differences between some concepts, such as SRI, CSR, and ESG, related to sustainable investing. Socially responsible investment (SRI) has its roots in the practices of religious believers and ethical exclusion (Chidi 2018;Fulton et al. 2013;Oonishi and Umeda 2018). For example, churches in the United States opposed gambling, alcohol, and tobacco in the 1920s. ...
In this study, we investigate the relationship between environmental, social, and governance (ESG) disclosures and stock price crash risk. A stock price crash is a dreadful event for market participants. Thus, exploring stock price crash determinants is helpful for investment decisions and risk management. In this study, we use samples of major market index components in Europe, the United States, and Japan to perform regression analyses, after controlling for other potential stock price crash determinants. We estimate static two-way fixed-effect models and dynamic GMM models. We find that coefficients of firm-level ESG disclosures are not statistically significant in the static model. ESG disclosure coefficients in the dynamic model are not statistically significant in the U.S. market sample. On the other hand, coefficients of ESG disclosure scores in the dynamic model are statistically significant and negative in the European and Japanese marker sample. Our findings suggest that ESG disclosures lower future stock price crash risk; however, the effect and predictive power of ESG disclosures differ among regions.
... They found exclusionary investing offers mixed to neutral results and non-exclusionary companies comparably have lower levels of cost of debt and equity. They found the market rewards companies for environmental consideration, followed closely by corporate factors (Fulton, Kahn and Sharples, 2012). A study completed by Felipe Arias Fogliano de Souza Cunha and Carlos Patricio Samanez, which was published in the Journal of Business Ethics demonstrates that sustainable securities on the Brazilian Mercantile, Futures and Stock Exchange have mixed performance. ...
... They would be more likely to tolerate mistakes rather than suspending the collaboration (in case of suppliers), leaving for other products or services (in case of customers) or changing the job (in case of employees). Relationships developed via CSR are sustainable and lasting ones [52][53][54]. The more firms engage themselves in socially responsible initiatives, the more authentic and enduring connections they can build around their critical stakeholders. ...
Resilience captures firm capability to adjust to and recover from unexpected shocks in the environment. Being latent and path-dependent, the manifestation of organizational resilience is hard to be directly measured. This article assesses organizational resilience of firms in the context of the COVID-19 pandemic with pre-shock corporate social responsibility (CSR) performance as a predictor that positively influences the level of organizational resilience to the external shock caused by the pandemic. We develop three theoretical mechanisms based on stakeholder theory, resource-based theory, reputation perspective and means-end chain theory to explain how CSR fulfillment in the past could help firms maintain stability to adapt to and react flexibly to recover from the crisis. We examine the relationship in the context of the systemic shock caused by COVID-19, using a sample of 1597 listed firms in China during the time window from 20 January 2020 to 10 June 2020. We find that companies with higher CSR performance before the shock will experience fewer losses and will take a shorter time to recover from the attack.
... They found exclusionary investing offers mixed to neutral results and non-exclusionary companies comparably have lower levels of cost of debt and equity. They found the market rewards companies for environmental consideration, followed closely by corporate factors (Fulton, Kahn and Sharples, 2012). A study completed by Felipe Arias Fogliano de Souza Cunha and Carlos Patricio Samanez, which was published in the Journal of Business Ethics demonstrates that sustainable securities on the Brazilian Mercantile, Futures and Stock Exchange have mixed performance. ...
This research report studies the risk-adjusted performance of the major international equity indices against their ESG screened equivalents (MSCI World, MSCI USA, MSCI Emerging Markets, and MSCI Europe). The daily closing prices, returns, standard deviations, and Sharpe ratio characteristics are analyzed from 2013 to 2020. The current literature available from highly rated journals on the subject is also considered, which provided mixed results on the subject matter. We found no academic papers focusing specifically on analyzing the performance of indices and their ESG screened equivalents. With this paper, we intend to fill this gap in the current research available. We conclude that for the passive investor, choosing ESG screened indices over the conventional equivalent has consistently provided better risk-adjusted returns over the long-term period. These findings are robust with the consistently higher Sharpe ratios over the eight-year period for each index. We predict ESG investments may continue to outperform due to changing retail and institutional investor preferences.
... In a paper written by Fulton, Kahn and Sharples: Sustainable Investing: Establishing Long-Term Value and Performance [5], researchers have found that firms with high ESG ranking can better finance their activities since they have a lower cost per capital. Stocks of these firms have a much lower risk than others. ...
Bu çalışmanın amacı, bankaların çevresel, sosyal ve kurumsal yönetim (ESG) faaliyetlerinden elde edilen performanslarının bileşenleri olan ESG skoru, Kombine ESG skoru, ESG tartışma skoru, ESG sosyal skoru, ESG kurumsal yönetim skoru ve ESG çevresel skorunun aktif ve özsermaye karlılıklarına etkisini incelemektir. Bu amaçla 2010-2019 yılları arasında 25 ülkeden 63 banka kapsama alınmıştır. Yapılan analizler sonucunda ESG kurumsal yönetim skorunun banka aktif karlılığını pozitif; ESG, ESG sosyal ve ESG çevresel skorunun aktif karlılığı negatif yönde etkilediği tespit edilmiştir. Ayrıca banka özsermaye karlılığı ile ESG sosyal skoru arasında negatif yönlü ilişki olduğu ortaya çıkmıştır. Araştırma kapsamında elde edilen bulguların pek çok kesim için yol gösterici olması beklenmektedir. Bulgular bankaların sorumlu ve sürdürülebilir finansmanı destekleme noktasında ortaya çıkan kazanç ve maliyetler konusunda aydınlatıcı olmaktadır. Ayrıca kamu ve özel sektör işletmelerinin sermaye bütçelemesi ve yatırımların değerlemesi aşamalarında ESG bileşenlerinin de finansal performans ile ilişkisini gözetmeleri gerektiğini ortaya koymaktadır. Diğer taraftan düzenleyici ve denetleyici kuruluşlara sermaye verimliliğini arttıracak ve kurumsal finansman maliyetlerini düşürecek ESG uygulamalarının belirlenmesi ve teşviki ile ilgili düzenleme ve yönergelerin oluşturulmasında yol gösterici olması beklenmektedir. Kurumsal ve bireysel yatırımcıların ise sürdürülebilirlik ilkelerini yatırım süreçlerine entegre ederken sosyal sorumlu firmalarla oluşturulacak portföylerde ESG bileşenlerinin portföy performansı üzerindeki etkilerini anlamalarına yardımcı olacağı düşünülmektedir.
This white paper explores the construction of a reliable Environmental, Social, and Governance (ESG) scoring engine, with a focus on the importance of data sources and quality, selection of ESG indicators, weighting and aggregation methodologies, and the necessary validation and benchmarking procedures. The current challenges in ESG scoring and the importance of a robust ESG scoring system are addressed, citing its increasing relevance to stakeholders. Furthermore, different data types, namely self-reported data, third-party data, and alternative data, are critically evaluated for their respective merits and limitations. The paper further elucidates the complexities and implications involved in the choice of ESG indicators, illustrating the trade-offs between standardized and customized approaches. Various weighting methodologies including equal weighting, factor weighting, and multi-criteria decision analysis are dissected. The paper culminates in outlining processes for validating the ESG scoring engine, emphasizing the correlation with financial performance, and conducting robustness and sensitivity analyses. Practical examples through case studies exemplify the implementation of the discussed techniques. The white paper aims to provide insights and guidelines for practitioners, academics, and policy makers in designing and implementing robust ESG scoring systems.
This chapter focuses on the birth and evolution of sustainable finance. The main steps that have been taken in the last century in this sector are retraced. Over time, in fact, the perspective of investors has increasingly broadened towards assessments that go beyond the portfolio’s risk and return profile and which include the principles of investment ethics. We will first focus on the steps, not only regulatory, which have been most decisive for the growth of the sector. The second part focuses on the empirical evidence of the impact of ESG integration on the assessment of financial performance and on the fundamental role of ESG disclosure as a strategic management tool for a company.KeywordsEthical investingSustainable investingSocially Responsible Investing (SRI)ESG investingESG disclosure
Corporate Social Responsibility Across the Globe demonstrates many ways that CSR can be applied by law to overcome regulation and governance challenges around the world. Using interdisciplinary and comparative models and perspectives, the book challenges dominant understandings of CSR, such as neoliberal voluntarism, and demonstrates the regulatory and governance implications of an interdependent relationship between CSR and the law. The book identifies substantive and procedural barriers for CSR in national, public, and private international law. By analyzing, deconstructing, and reframing CSR in these contexts, the book underlines opportunities for more effective application of CSR as a governance mechanism. Chapters investigate relevant regulation concepts, paradigms and approaches for CSR; methods for infusing CSR in corporate governance; and ways to facilitate private regulation of CSR in more developed, emerging, and developing jurisdictions.
The importance of sustainable and responsible investment strategies has significantly risen due to the increasing cognizance concerning environmental stability and socioeconomic development of countries. Responsible investment strategies take Environmental, Social and Governance (ESG) aspects into investment consideration to enhance risk management and generate sustainable yields for investors. Therefore, the purpose of this paper is to examine the influence of ESG factors on the performance of Indian public limited companies in terms of profitability and the value of the firm through multiple measures of return on asset and Tobin’s Q ratio. The authors used annual ESG data of 65 Indian firms listed on the NSE 100 ESG Index database, covering the period from 2015 to 2017. Random effect panel data regression analysis was used to test the influence of ESG factors on the economic performance of the firms. The findings of the study indicate that good corporate ESG performance enhances financial performance evaluated through accounting as well as market based measures. The findings have practical implications for corporates, investors, regulators, as well as policymakers. The study highlights the need for adoption of sustainability reporting, including disclosure of ESG scores. This would go a long way in improving sustainable business practices and long-term viability of the shareholders’ wealth
Environmental, Social, and Governance (ESG) factors are increasingly at the center of corporate and investment decisions. In this context, the aim of the paper was to test whether ESG factors impact on financial efficiency of a sample of firms belonging to different European sectors. This study enriches the literature of the field through a multi‐sectoral analysis. The Data Envelopment Analysis was used as widely considered in empirical and financial studies. Research findings showed that ESGs impact on firm efficiency differently over sectors: some of them are more sensitive than others to ESG factors. Furthermore, for most sensitive sectors the risk‐return characteristics related to ESGs were represented in order to provide insights for investors aiming to construct efficient and sustainable firm portfolios to invest in.
Should financially sustainable growth and environmental, social, and governance (ESG) sustainable growth targets interact? Does a company's growth add to both shareholders' surplus and surplus of stakeholders different from shareholders? The objective of this study is to address the unconventional problem of equilibrium between financially sustainable growth and ESG sustainable growth and how to detect and correct imbalances in those two dimensions. It develops both an incremental framework that articulates, organizes, and connects current theories of financially sustainable growth, ESG, sustainable development, corporate social responsibility, and stakeholder theory, and a revelatory model, the financial/ESG sustainable growth matrix. It inspires new multiple‐disciplinary research to see growth differently, as the impact on shareholders versus stakeholders different from shareholders of equilibrium and tension between financial and ESG growth. The model developed is directly applicable to management practice and beneficial to a broader community, as it reveals companies that create or destroy societal surplus.
Integrating Environmental, Social, and Governance (ESG) factors into credit risk assessment is the new frontier for credit risk management as regulators and investors increasingly require banks to channel loans to “sustainable” borrowers and ultimately foster sustainable growth. Our findings show that higher ESG awareness is strongly associated with better creditworthiness (proxied by the Altman Z‐score). We apply a two‐step methodology to 3331 companies from various industries and geographies in the 2000–2016 period which reveals that high ESG awareness scores are strongly and very significantly associated with a reduction in firm credit risk. We check the robustness by using the Probability of Default as a dependent variable and an instrumental variable constructed with a factor analysis. Our results support the appropriateness of the introduction of ESG awareness parameters in the creditworthiness assessment of borrowers.
So long as a company is closely held, the control group and the stockholders are identical, and seldom is there a conflict of interest between them. However, once a company goes public, it acquires a group of shareholders who depend on the management for the safety and profitability of their investment. In short, an agency principal relation is established where the management is the agent and the shareholder is the principal. This relation implies a commitment by management that the outside shareholders will be treated fairly in such matters as cash payouts, expansion policies, accounting probity, and the level of executive compensation, and that in general, the company affairs will be directed vigorously and conscientiously.
Purpose
This paper aims to explore how the student fund managers perceive the benefits of being part of the fund. Furthermore, this paper examines the country-specific challenges of setting up and managing a student-managed investment fund (SMIF) in India.
Design/methodology/approach
Qualitative content analysis technique is used to identify, compare and retrieve critical themes about the present state of SMIF clubs in India. The data collection method involved structured, in-depth online interviews with ten student fund managers from various higher educational institutions in India.
Findings
Some of the study’s key findings indicate that the existence of SMIFs as part of learning facilitates group decision-making and peer learning. Additionally, this study brings to light specific issues related to registration, incorporating real-world practices and integrating SMIF into the academic curriculum.
Social implications
The outcomes of this study shall be of use to students and the teaching fraternity across Indian colleges and universities who aspire to set up SMIFs as part of experiential learning. This study will also help existing SMIF clubs in India understand how their counterparts work and can consequently improvise their organizational structure and functioning.
Originality/value
To the best of the authors’ knowledge, this is the first interview-based evaluation of the present structure of SMIFs structured as clubs in India.
Le Società Benefit sono il vestito giuridico con il quale gli obiettivi di profittabilità aziendale si integrano con quelli ambientali e sociali. La trasformazione in Socie-tà Benefit non aggiunge molto a ciò che le aziende idriche già sono, ma può cer-tamente contribuire a suggellare una missione informata al miglioramento del servizio e orientata al benessere collettivo, dove la regolazione coniuga gli obiet-tivi ambientali con i costi efficienti.
Partendo da un breve excursus sulle Società Benefit, frutto di un percorso di evoluzione della responsabilità sociale nell'attività d'impresa (CSR), questo articolo intende porre l'attenzione sulla pionieristica esperienza italiana - prima in Europa - di un modello giuridico di impresa che punta a integrare massimizzazione del profitto con il raggiungimento di finalità sociali e ambientali. Tra queste rientrano le public utility, aziende del servizio pubblico locale che erogano beni e servizi essenziali per la collettività, già in realtà benefit oriented. Dal protocollo tra Confservizi CISPEL Lombardia e Assobenefit sottoscritto a dicembre 2020, in un solo anno si documenta la scelta, non scontata, delle prime due aziende di servizi pubblici in Lombardia di adottare lo status di Società Benefit. L'esperienza di Neutalia S.r.l. e Tea S.p.A
This chapter examines the different strands of literature about ESG factors. First studies on the relationship between financial performances and ESG factors can be traced back to the beginning of the 1970s. However, the increasing attention of investors has prompted the academic literature to investigate the ESG impact at financial and corporate levels. Starting with a new paradigm of company able to embrace contemporary economic dimension together with environmental and social ones, we deepen the main contributions on ESG issues. Therefore, we introduce firstly studies that attempted to assess how ESG factors can impact the cost of capital, both equity and debt, and Firms’ Performance. Finally, we consider financial studies which have attempted to identify the benefits related to ESG investment choices.
The purpose of this chapter is to explore the relationship between ESG criteria and alternative investments by investigating the evolution of this phenomenon. Traditionally, ESG investments have been oriented towards liquid assets such as securities and bonds, due to the disclosure of information, the weight of assets under management, and rights provided to shareholders. Nowadays, ESG aspects are properly incorporated into alternative asset classes to a significant extent, thanks to their association with risk reduction and value creation. In this chapter, we first provide an overview of alternative investments, by distinguishing between the different categories and examining the key role that they have in the investment process. Second, we highlight the nexus between ESG factors and alternative investments, also describing the role of impact investment. Third, we focus on private equity (PE) investment in relation to ESG issues, indicating the ESG selection criteria in PE industry. Fourth, we discuss PE investments and ESG due diligence process. Fifth, we explore the ESG aspects in hedge fund investments, and, finally we discuss the adoption of ESG criteria in real estate investments.
So long as a company is closely held, the control group and the stockholders are identical and seldom is there a conflict of interest between them. However, once a company goes public, it acquires a group of shareholders who depend on the management for the safety and profitability of their investment. In short, an agency-principal relation is established where the management is the agent and the shareholder is the principal. This relation implies a commitment by management that the outside shareholders will be treated fairly in such matters as cash payouts, expansion policies, accounting probity, and the level of executive compensation and that in general the company affairs will be directed vigorously and conscientiously.
The adoption of sustainability standards is often viewed as a profitability conundrum by palm oil firms and their shareholders. This study examines whether, considering the inherent risk, the Roundtable on Sustainable Palm Oil (RSPO) sustainability initiative creates shareholder value. Based on the panel information of plantation firms listed on the Indonesia and Kuala Lumpur Stock Exchanges, RSPO‐certified firms earned mixed risk‐adjusted performance results relative to non‐RSPO and total palm oil portfolios. They also demonstrated a limited probability for upside growth. Additionally, it is possible that institutionalized sustainability standards do not address all the environmental, social and governance pillars that should constitute sustainable investing. Consequently, business operators and investors seeking improved performance should focus on the fundamentals whilst incorporating sustainability standards.
Practitioners and researchers struggle with valuing the return on sustainability investment (ROSI). We apply a five-step methodology that systematically monetizes sustainability actions to answer a key question: Do sustainable practices lead to a positive financial return for the business? We demonstrate the versatility of this methodology by monetizing potential and realized financial benefits via mediating factors (i.e., financial drivers) across two types of industries: Brazilian beef supply chains that committed to deforestation-free beef and the automotive industry, where companies were working to make manufacturing operations more sustainable. The companies participating in our cases generated substantial value from implementing sustainability strategies. The beef supply chain yielded a potential net present value (NPV) between 0.01 to 12% of annual revenue, depending on the supply chain segment. For one automotive company, the five-year NPV based on realized benefits was 12% of annual revenue. Our ROSI methodology guides managers to better value sustainability’s financial benefits. Ultimately, monetizing sustainability can lead to a competitive advantage and shared value for multiple stakeholders.
This work proposes a novel approach for overcoming the current inconsistencies in ESG scores by using Machine Learning (ML) techniques to identify those indicators that better contribute to the construction of efficient portfolios. ML can achieve this result without needing a model-based methodology, typical of the modern portfolio theory approaches. The ESG indicators identied by our approach show a discriminatory power that also holds after accounting for the contribution of the style factors identified by the Fama-French five-factor model and the macroeconomic factors of the BIRR model. The novelty of the paper is threefold: a) the large array of ESG metrics analysed, b) the model-free methodology ensured by ML and c) the disentangling of the contribution of ESG-specific metrics to the portfolio performance from both the traditional style and macroeconomic factors. According to our results, more information content may be extracted from the available raw ESG data for portfolio construction purposes and half of the ESG indicators identified using our approach are environmental. Among the environmental indicators,
some refer to companies' exposure and ability to manage climate change risk, namely the transition risk.
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