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Valuing ESG: Doing Good or Sounding Good?

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76 V ESG: Doing g ooD or Sou nDin g gooD? F 2020
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*All articles are now
categorized by topics
and subtopics. View at
PM-Research.com.
Bradford Cor nell
is an emeritus professor of
finance in the A nderson
Graduate School of
Management at UCLA in
Wes t w ood , CA.
bcornell@ad.ucla.edu or
bradfordcornell@gmail.com
aswath damodaran
is a profesor of finance
in the Stern School of
Business at N YU in
New York, NY.
adamodar@stern.nyu.edu
Valuing ESG: Doing Good
or Sounding Good?
Bradford Cornell and aswath damodaran
A B ST R AC T: In the last decade, companies
have come under pressure to be socially conscious
and environmentally responsible, with the pressure
coming sometimes from politicians, regulators, and
interest groups, and sometimes from investors. The
argument that corporate managers should replace
their singular focus on shareholders with a broader
vision, where they also serve other stakeholders,
including customers, employees, and society, has
found a receptive audience with corporate CEOs
and institutional investors. The pitch that com-
panies should focus on doing good is sweetened
with the promise that it will also be good for their
bottom line and for shareholders. In this article, we
build a framework for value that will allow us to
examine how being socially responsible can manifest
in the tangible ingredients of value and look at the
evidence for whether being socially responsible is
creating value for companies and for investors.
TOPIC: ESG investing*
Using criteria based on envi-
ronmental, social, and gov-
ernance (ESG) considerations
has become an increasingly
important aspect of investment decision
making, particularly for high-prof ile insti-
tutional investors. Bloomberg reported on
February 8, 2019 that Europe alone has
“some $12 trillion committed to sustain-
able investing.” Fish et al. (2019) state that
sustainable assets under management world-
wide were approximately $30 trillion by
2019. On the corporate side, there has been
a growing awareness of the need to be, or
at least appear to be, socially responsible,
either to fend off pressure from interest
groups and media or to market themselves
to customers. A statement published by the
Business Roundtable (2019), and signed by
CEOs of major companies, announced that,
“While each of our individual companies
For ESG to increase company value, actions taken to improve ESG ratings have to result
in either higher cash f lows or lower risk, and there is the very real possibility that being
good can lower value for some f irms.
The evidence that being good improves a company’s operating performance (increases
cashf lows) is weak but there is more solid backing for the proposition that being bad can
make funding more expensive (higher costs of equity and debt).
Investing in companies that are recognized by the market as good companies is likely to
decrease, rather than increase, investor returns, but investing in companies that are good,
before the market recognizes and pr ices in the goodness, has a much better chance of success.
KEY FINDINGS
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serves its own corporate purpose, we share a funda-
mental commitment to all of our stakeholders.” In a
follow-up letter to CEOs, Lawrence Fink, the CEO
of Blackrock, stressed that a company’s prospects for
growth are inextricable from its ability to operate sus-
tainably and serve its full set of stakeholders.
In this article, we investigate the interaction
between ESG-related investment criteria and value, both
from the perspective of investors wondering whether and
how to incorporate social issues into investment choices,
as well as from the perspective of companies considering
the value effects of being more socially responsible. We
begin by looking at how corporate social standing is
measured, and then develop a simple valuation frame-
work to examine how and where ESG choices made
by firms play out in value. Specif ically, we look at how
being a good company can make it more valuable, and
the drivers of that higher value, and also how being a
good company can make it less valuable, casting doubt
on the sales pitch of ESG’s most ardent promoters, which
is that good corporate behavior will always be rewarded
with higher value.
We examine the evidence with the intent of
trying to evaluate the link between corporate social
responsibility and value. We begin by looking at how
good companies perform on growth and profitability
measures, relative to bad companies, and f ind that
the research here is thinner and the overall evidence
remains mixed. We then look at the extant research
on how corporate social responsibility and investment
returns are related and find the results to be incon-
clusive on the central question of whether higher
ESG ratings are associated with greater risk-adjusted
returns. Although there are some studies that find that
companies that score high on the corporate responsi-
bility scale reward investors with greater risk-adjusted
returns, there is little consistent evidence that socially
responsible funds that invest in these companies deliver
excess returns. In this regard, we note that much of the
ESG literature conf lates value changes and investor
returns and we argue that positive returns to inves-
tors in companies that score highly on ESG are murky
indicators of whether ESG is value-creating. Finally,
we address the question as to what decisions regarding
ESG considerations should be made by corporate exec-
utives and what decisions should be the province of
public policy determined through the political process.
SOCIAL RESPONSIBILITY AND
ENVIRONMENTAL AWARENESS
Much of the debate around ESG and corporate
social responsibility starts with the premise that we can
differentiate clearly between good and bad companies,
but that is clearly not the case. Unlike profitability and
returns, where there are accepted measures of both, and
numbers to back them up, social responsibility is often
in the eyes of the beholder. It should come as no sur-
prise that a ranking of companies from good to bad by
Greenpeace bears little resemblance to a listing of good
and bad companies by a group focused on labor rights.
There are numerous reasons to interpret results
regarding the impact of ESG ratings screens on portfolio
performance, ambiguous as they are, with particular
care. The f irst problem that arises when attempting to
assess the impact of ESG information on investment
performance is defining what is meant by “ESG infor-
mation.” It turns out there are a large number of orga-
nizations attempting to answer that question. Li and
Polychronopoulos (2020) report that, as of year-end
2019, they had identified 70 different f irms that provide
some sort of ESG rating. Furthermore, they note that
this does not include the multitude of investment banks,
government organizations, and research organizations
that conduct ESG-related research that can be used to
create customized ratings. Fish et al. (2019) document
that more than 600 ESG ratings were produced in 2018.
This problem would not be so bad if all the ratings
were effectively similar, but this is not the case. There
is a substantial literature documenting the divergence
of ESG ratings for the same f irms, which includes Berg
et al. (2019), Chatterji et al. (2016), Dortf leitner et al.
(2015), Semenova and Hassel (2015), and Li and Poly-
chronopoulos (2020). Dimson et al. (2020) look at ESG
ratings for companies from three providers, FTSE Rus-
sell, Sustainalytics and MSCI, and note not only that
the correlations on measures is low across the ser vices,
but also that they disagree on high profile companies.
Facebook, for instance, is ranked at the 1st percentile
(among the worst) by Sustainalytics on environment
and at the 96th percentile (among the best) by MSCI.
The rating organizations differ not only in how to mea-
sure the various ESG criteria, but also with respect to
what criteria are deemed worthy of measurement. In
some cases, the criteria are so numerous that it is dif-
ficult to separate those that are germane from those
78 V ESG: Doing gooD or So unDi ng gooD? F  2020
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that are not. For instance, Bloomberg’s ESG data covers
120 environmental, social, and governance indicators.
Nonetheless, virtually all the raters include the most
highly publicized indicators in their ratings. These
include carbon emissions, climate change effect, pol-
lution, waste disposal, renewable energy, discrimina-
tion, diversity, community relations, human rights, and
independent directors. But they still fail to agree on how
these indicators are to be measured.
Finally, we question why governance, a measure
that has historically been defined in research in terms
of responsiveness of managers at publicly traded com-
panies to their shareholders, is bundled with environ-
mental responsiveness and social consciousness, two
concepts that often require managers to put the inter-
ests of other stakeholder groups ahead of shareholders.
It may be that the governance that is incorporated in
the ESG concept is different from the conventional
governance measures, but if it is, any references to the
payoff to good corporate governance should be not
be part of the ESG sales pitch, because it represents a
mindset diametrically opposed to the stakeholder value
mindset that underlies ESG. The stakeholder wealth
maximization objective, f loated as an alternative to
stockholder centrality, is a concept that has acquired
followers, many of whom are also in the ESG camp,
but Bebchuk et al. (2020) discuss its limits.
In summar y, classifying firms into good and bad
firms, from an ESG perspective, is not only diff icult
to do, but subjective. Although we continue to use the
terminolog y of good and bad firms for the rest of this
article, we do so with the recognition that goodness (or
badness) exists not only as a continuum, but also that the
classification depends on the dimension used to measure
company performance.
VALUE AND SOCIAL RESPONSIBILITY
Before looking at the existing research on the
relationship between social responsibility and value, we
need a value framework. That framework will allow us
to identify key value drivers, and then assess how these
drivers are affected, in positive or negative ways, by
attempts by companies to be more socially responsible
and environmentally conscious. In this section, we first
develop that framework and then apply it to assess the
valuation implications of ESG related actions.
The Drivers of Value
There is no mystery as to what determines the
value of a business. In its simplest form, the value of
a business comes from the expected cash f lows it can
generate over time, discounted back at a “risk adjusted
discount rate (see Exhibit 1).
Note that there is nothing in this structure that
pushes a company toward short-term prof itability,
because it allows that company to trade off lower profits
(and cash f lows) in the near term for higher profits and
cash f lows in the future. Taking a deeper dive into the
value equation (see Damodaran 2013 or McKinsey 2018
on Valuation) highlights four drivers:
1. The growth lever: Most companies and investors
view growth favorably, because it allows compa-
nies to scale up and, in the process, make small
operating numbers into bigger ones. We focus
on growth in revenues, rather than growth in oper-
ating or net income, as the cleanest measure of
this scaling up, because it requires that compa-
nies sell more of their products and services. (In
contrast, earnings can grow because of margin
improvements, arising out of economies of scale
and cost cutting). The revenue growth can come
from a market that is growing or from increased
market share.
2. The profitability lever: Ultimately, there is no ben-
efit to scaling up for a business, if it never makes
money. We measure the profitability of a business
by its operating profit margin, calculated as oper-
ating income after taxes divided by revenues. We
focus on operating, rather than net profit, margin
because the latter is not only affected by business
profitability but also by f inancial leverage.
eX h I B I t 1
Expected Cashflows and Adjusted Discount Rate
Expected Cashflows in
T
ime Period
Risk-adjusted Discount Rate
V
alue
Value V
=+
+
+
E
(
CF
1
=+
1
=+
)
E
(
CF
2
CF2
CF
)
E
(
CF
n
)
(1 +
r
)
1
(1 +
r
)
2
(1 +
r
)
n
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3. The investment efficiency lever: Growth in revenues
requires investment in the resources needed to pro-
duce these goods and services. Rather than relying
on the narrow accounting def initions of capital
expenditures, we define reinvestment broadly to
include not only investments in plant and equip-
ment or working capital, but also in expenditures
on research and development and on acquisitions.
Investment efficiency is measured by how much
reinvestment is needed to deliver the forecasted
increase in revenues (from the growth lever), with
more eff icient companies delivering greater added
revenue for every dollar of capital invested.
4. The risk lever: Rather than get mired in endless
debates about risk and return models in finance
and the diff iculties of measuring risk, we argue
that risk in a valuation shows up in two places.
The operating risk of a business as a going con-
cern, measuring uncertainty about revenues and
operating income in the future, is captured in a cost
of capital; higher costs of capital, for any given set
of expected cash f lows, will lead to lower value.
There is also the risk that the company will not
survive as a going concern, and this risk is highest
early in the corporate life cycle (because two-
thirds of start-ups fail) and late in the corporate life
cycle (as aging companies find themselves caught
between declining operations and large debt loads).
We capture this risk as a risk of failure, with a higher
risk of failure leading to lower value.
The role of the four value drivers is illustrated in
Exhibit 2.
If being a good company increases value, it will
have to show up in these inputs. It is this framework that
we use to analyze what we call the virtuous cycle, where
doing good and doing well go hand in hand, followed
by the punitive scenario where being bad causes back-
lash and failure and, finally, a dystopian world, where
bad companies end up being rewarded at the expense
of good companies.
The Virtuous Cycle
The most direct way to induce companies to
behave in a socially responsible manner is to make it in
their f inancial best interests to do so. There is a plausible
scenario, where being good creates a cycle of positive
outcomes, which makes the company more valuable.
Exhibit 3 describes this virtuous cycle:
In terms of Exhibit 3, being good benefits the
company on every dimension. Customers, attracted by
its social mission, favor its products over its competitors,
allowing it to gain market share and to grow revenues.
Although being good creates more operating expenses
in the short term, the company’s cost structure adjusts
quickly to new norms, allowing for unchanged or even
eX h I B I t 2
The Drivers of Value
Revenue Gr
owth
Function of the size of the total
accessible market & market shar
e
Expected FCFF = Revenues * Operating Ma
rg
in –
Ta
xes – Reinvestmen
t
Risk-adjusted Discount Rate
Cost of Equity
Rate of return that equity
investors deman
d
Cost of Debt
Cost of borrowing mone
y,
net of
tax advantages
V
alue of
Value ofV
Busines
s
Failu
re
Risk
Chance of grevious
or catastrophic even
t
putting busines
s
model at risk
Determined by pricing power an
d
cost ef
ficiencies
cost efficienciescost ef
Operating Margin
s
Measure of how much investmen
t
is needed to deliver growth
Gr
owth/Investment Efficiency
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higher margins in the long term. This allows good com-
panies to invest more efficiently than bad companies.
That may seem like a stretch, but consider a few of the
most positive scenarios. A firm that spends more on
employee wages and welfare might bear higher costs,
at least initially, but this firm may not only have less
employee turnover, but those employees may be moti-
vated to work more efficiently to deliver better results.
Similarly, seeking out suppliers who meet a social code
may lead to higher input costs, in the near term, but
these suppliers may also provide higher quality inputs
and be less likely to switch to competitors. With regard
to the discount rate, equity investors, attuned to social
responsibility, direct their money toward good compa-
nies, potentially driving down the cost of equity, and
lenders are willing to provide more attractive terms, and
governments may offer subsidized loans to a company
because of its social or environmental missions.1 Fi nal ly,
by operating as a good corporate citizen, the company
minimizes the chance of a scandal or a catastrophic event
1 See, for example, Goldman Sachs (2019).
that could put its business model at risk. In the language
of ESG, it makes them a more sustainable business.
For proponents of corporate social responsibility,
this is the best-case setting for their cause, because being
good and doing well converge. This scenario holds,
though, only because customers, employees, investors,
and lenders all put their money where their convictions
lie and are willing to make sacrif ices along the way.
For this scenario to unfold at a company, it must meet
specific criteria:
1. Smaller, rather than larger: Although it is not impos-
sible for a large company to hit all the high notes
in the virtuous cycle, it is far easier for a small
company than a large one, because even a small
subset of all investors can provide the capital at the
favorable terms needed for this scenario to unfold.
2. Niche business, with a more socially conscious customer
base: Adding to the smallness theme, it is easier
for a company that serves a small customer base
to attract customers with its good company mantle
than a company that seeks to reach a mass market.
eX h I B I t 3
The Payoff to Being Good: The Virtuous Cycle
Failu
re
Risk
Chance of grevious
or catastrophic even
t
putting busines
s
model at risk
Revenue Gr
owth
Function of the size of the total
accessible market & market shar
e
Operating expenses higher in
short term, but go back down in
long term:
Unchanged or even
higher margin
s
Capital invested in good
businesses will deliver highe
r
r
eturns:
returns: r
Higher sales/capital an
d
returns in capita
l
Cost of Equity
Rate of return that equity
investors deman
d
Cost of Debt
Cost of borrowing mone
y,
net of tax advantages
Customers will buy mo
re
fr
om
from fr
“good” companies:
Highe
r
revenue growt
h
revenue growthrevenue growt
Investors will pr
efer to invest in
Investors will prefer to invest inInvestors will pr
“good” companies, pushing up their
stock prices:
Lower cost of equity
Higher valu
e
V
alue of
Value ofV
Busines
s
Lenders will lend at lower rates to
good companies, governments
may pr
ovide subsidized
may provide subsidizedmay pr
debt:
Lower cost of debt
Expected FCFF = Revenues * Operating Ma
rg
in –
Ta
xes – Reinvestmen
t
Risk-adjusted Discount Rate
Operating Margin
s
Determined by pricing power an
d
cost ef
ficiencies
cost efficienciescost ef
Gr
owth/Investment Efficiency
Measure of how much investmen
t
is needed to deliver growth
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A company like Patagonia, with revenues of $750
million, can more easily make the compromises to
stay socially responsible than a company like Nike,
with revenues of $34.35 billion, which is forced to
make compromises that will undercut its goodness.
3. A privately held company or a public company with an
investor base that values corporate goodness and prices
it in: Being a private company can help, espe-
cially if the payoff to corporate goodness is long
term, another point working in Patagonia’s favor.
A public company that is closely held or controlled
by its founders can also make choices that may not
be feasible for a widely held company with a vocal
stockholder base.
It is worth noting that the companies that tend to
be most vociferous about their social conscience tend
to meet these criteria, at least early in their corporate
lives. However, they will face a challenge, if they are
successful and want to grow, because growth will bring
in customers and investors not so committed to ESG.
The acid test of social consciousness occurs when a
company scales up and must decide whether to continue
to grow or accept a lower scaling and (perhaps) lower
value to preserve its good company status.
The Punitive Scenario
Even if good companies are not rewarded by cus-
tomers and investors, the case for ESG can still be made,
if bad companies get punished by the same groups. This
less upbeat scenario is captured in Exhibit 4.
Here, the punishment for bad companies is meted
out from every direction, with customers refusing to buy
their products, even if they are lower priced, and higher
operating expenses (and lower margins) in the long term,
as the company has trouble holding on to employees
and finding suppliers. As investors are less willing to
buy their shares, the cost of equity goes up, and lenders
are leery about lending money to the company, leading
to higher costs of debt. Finally, these companies risk
exposure to grievous, or even catastrophic, events arising
eX h I B I t 4
The Punishment for Being Bad: The Punitive Vision
Gr
owth/Investment Efficiency
Measure of how much investmen
t
is needed to deliver growth
Operating Margin
s
Determined by pricing power
and cost ef
ficiencies
and cost efficienciesand cost ef
Revenue Gr
owth
Function of the size of the total
accessible market & market shar
e
Cost of Equity
Rate of return that equity
investors deman
d
Cost of Debt
Cost of borrowing mone
y,
net of tax advantages
Customers will buy less fr
om bad
Customers will buy less from badCustomers will buy less fr
companies:
Lower or negative
revenue growt
h
revenue growthrevenue growt
Investors will pull money out of
“bad” companies, pushing down
their stock prices:
Higher cost
of equity
Failu
re
Risk
Chance of grevious or
catastrophic event puttin
g
business model at risk
Bad companies ar
e
more exposed to big,
negative event (crisis)
:
Higher failure risk
V
alue of
Value ofV
Busines
s
Lower valu
e
Lenders will balk at lending
to bad companies, demanding
higher inter
est rates:
higher interest rates: higher inter
Highe
r
cost of debt
Operating expenses lower in
short term, but higher in long
term:
Unchanged initially
, bu
Unchanged initially, buUnchanged initially
t
lower margins in long term
Capital invested in good
businesses will deliver lowe
r
r
eturns:
returns:r
Lower sales/capital an
d
returns on capita
l
Expected FCFF = Revenues * Operating Ma
rg
in –
Ta
xes – Reinvestmen
t
Risk-adjusted Discount Rate
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from operating with too little consideration of societal
costs. It is often these events, such as the Union Carbide
gas leak in Bhopal, Vale’s dam bursting in Bhopal, and
BP’s oil spill in the Gulf of Mexico, that highlight short-
comings and create long term problems for the company.
With regard to promoting social responsibility, this
scenario is not as good as the virtuous cycle, because
it will tend to scare companies away from being bad,
rather than induce them to be good. That said, this is a
more realistic pathway to corporate social responsibility,
because there are examples of bad companies that one
can point to as cautionary tales. Consider the rise and
fall of Valeant, a Canadian pharmaceutical company
that rose from a small market capitalization to being
one of the largest companies in the sector, in terms of
market cap. Along the way, its business model was to
acquire drugs still under patent protection that were
being underpriced and to reprice them to generate sub-
stantial prof its. Although the model was legal, it pushed
ethical and moral bounds, and when a series of missteps
led to a backlash, the market capitalization not only
melted down quickly, but the company’s bad reputation
became an almost insurmountable obstacle to its reha-
bilitation. Regulators cracked down on the company,
scientists refused to work in its research department,
and politicians used it as a punching bag. Eventually, the
company had to replace its top management, abandon
its business model, and change its corporate name; even
with all that, it is still struggling.
Dystopian World
There is a final and darker scenario that is also
plausible, where being good does not yield an upside
and bad companies are not punished but are rewarded,
creating a perverse outcome where bad companies out-
perform good ones, not only on operating metrics, but
also with respect to stock returns. Exhibit 5 portrays
this scenario.
In this scenario, bad companies mouth platitudes
about social responsibility and environmental conscious-
ness without taking any real action, but customers buy
eX h I B I t 5
The Bad Companies Win: The Dystopian Vision
Gr
owth/Investment Efficiency
Measure of how much investmen
t
is needed to deliver growth
Operating Margin
s
Determined by pricing power
and cost ef
ficiencies
and cost efficienciesand cost ef
Revenue Gr
owth
Function of the size of the total
accessible market & market shar
e
Cost of Debt
Cost of borrowing mone
y,
net of tax advantages
Customers pr
efer pr
Customers prefer prCustomers pr
oducts (cheap,
efer products (cheap,efer pr
convenience) made by “bad”
companies:
Bad companies grow
faster
Cost of Equity
Rate of return that equity
investors deman
d
Bad companies
re
port highe
report highere
r
earnings & have higher stock prices
:
Bad companies have lower cost
s
Bad companies have lower costsBad companies have lower cost
of equity
Failu
re
Risk
Chance of grevious or
catastrophic event puttin
g
business model at risk
Bad
companies
outperfor
m
outperformoutperfor
good
companies
V
alue of
Value ofV
Busines
s
Lenders lend based upon earnings
/
Lenders lend based upon earnings/Lenders lend based upon earnings
cashflow & bad companies look
safer:
Bad companies have lowe
r
costs of borrowing
Good companies spend mo
re
on
being good, and have highe
r
costs:
Bad companies have
higher margin
s
Bad companies, with fewer
constraints, invest mo
re
efficiently:
Bad companies
reinvest more ef
ficiently
reinvest more efficientlyreinvest more ef
Expected FCFF = Revenues * Operating Ma
rg
in –
Ta
xes – Reinvestmen
t
Risk-adjusted Discount Rate
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their products and services, either because they are
cheaper or because it is convenient, employees continue
to work for them because they can earn more, and inves-
tors buy their shares because the expected returns are
higher for reasons discussed later. As a result, bad com-
panies may score low on corporate responsibility scales,
but they will score high on prof itability and stock price
performance.
THE EVIDENCE ON ESG AND CORPORATE
SOCIAL RESPONSIBILITY
Testing whether social responsibility pays off is dif-
ficult for two reasons. One is that, as we noted earlier,
there is no consensus on what comprises a good com-
pany, with different raters using different metrics and
measures. The second is that even within the research,
there is confusion regarding what is being tested, and
what the findings say about the payoff to being socially
responsible. As we see it, there are three fundamental
questions:
Do good companies create more value than bad compa-
nies? If good companies grow faster and are more
profitable than bad companies, it would clearly be
supportive of the virtuous cycle and lead to good
companies being more valuable than bad ones. An
alternative possibility is that if bad companies are
viewed as riskier than good companies, that would
lead them to have higher costs of equity and cap-
ital, and lower values, also supportive of the thesis
that it is better to strive for corporate responsibility.
Do markets price good companies higher than bad compa-
nies? If good companies are priced higher by mar-
kets, either because they are perceived to be better
performers or because investors prefer to hold them
as investments, it, too, would be a powerful incen-
tive for companies to be socially responsible.
Does investing in good companies earn higher average
returns than investing in bad companies? If investments
in good companies offer higher expected returns,
it would make the push toward socially responsible
investing much easier.
Exhibit 6 considers the possible answers to each
of the three questions, and how their interactions make
testing the effects of ESG difficult.
The bulk of research to date has focused on
answering the last question. As our review documents,
the answers are highly ambiguous. A major reason for
the ambiguity is the failure to consider suff iciently the
impact of market pricing on the observed returns. The
situation is further complicated, if market prices are not
always rational and can overreact or underreact to ESG
information. In this context, Exhibit 7 considers six pos-
sible combinations of answers to the f irst two questions,
eX h I B I t 6
The Big Questions on ESG
Resea
rc
h on the links between ESG and
– Gr
owth (Revenues & Earnings
– Growth (Revenues & Earnings– Gr
)
owth (Revenues & Earnings)owth (Revenues & Earnings
– Pr
ofits (Mar
– Profits (Mar– Pr
gins,
ofits (Margins, ofits (Mar
Accounting Returns)
– Risk (Discount Rates & Shocks
)
– Risk (Discount Rates & Shocks)– Risk (Discount Rates & Shocks
Resear
ch on the links between
Research on the links between Resear
a
company
’s
ESG and how its stock is
priced (PE, PB
V,
T
obin’
Tobin’ T
s Q, or EV
obin’s Q, or EVobin’
multiple)
Resear
ch on whether stocks that scor
Research on whether stocks that scorResear
e
ch on whether stocks that scorech on whether stocks that scor
high on ESG or funds with an ESG focu
s
deliver higher or lower r
eturns than
deliver higher or lower returns thandeliver higher or lower r
expected, given risk
Do investors make exces
s
returns on ESG stocks
Investors make positiv
e
excess returns
Investors make “fai
r
rate” of returns
Investors make positiv
e
excess returns
How does the market price th
e
consequences of ESG?
Price underadjusts to
value change
Price correctly reflects
value change
Price overadjusts to
value change
How does ESG af
fect a firm’
How does ESG affect a firm’How does ESG af
s
operations & value?
Reduce value by
increasing costs and/or
increasing risk
Increase value by
improving profitability
and/or reducing risk
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on operating value and market pricing, and how they
relate to excess expected returns for investors.
Given the multitude of possibilities, a finding that
investments in highly rated ESG stocks provide positive
excess returns tells us little about the payoff to companies
of being socially responsible, because it is entirely driven
by what markets incorporate into stock prices. Adding
to the empirical messiness is the difficulty of measuring
ESG that we noted at the start of this article, with dif-
ferent interest groups prioritizing different elements of
social goodness in coming up with their scores. Despite
such potential short-run complexity, in the long run we
would expect rational pricing to obtain. As we explain
in greater detail in the next section, if investors have
a preference for highly rated ESG stocks, then those
stocks will offer lower average excess returns. Note that
this conclusion is contrary to the views of many ESG
advocates in the investment profession. For instance,
Blackrock CEO Larry Fink (2020) states that, “Our
investment conviction is that sustainability and climate
integrated portfolios can provide better risk-adjusted
returns to investors.”
ESG and Value
To summarize, being socially responsible (or
improving your ESG standing) can make a f irm more
valuable, either by increasing profitability and cash f lows
or by reducing the discount rate. In this section, we
summarize the research f indings are on both fronts.
ESG and prof itability. The argument that
socially responsible companies should generate higher
profits, either because they have greater revenues or face
lower regulatory and legal costs, and that these lead to
more sustainable healthy performance seems to rest
largely on faith. As an example, Larry Fink’s (2020)
assertion in his letter on social responsibility that “a
company’s prospects for growth are inextricable from
its ability to operate sustainably and serve its full set of
stakeholders” comes with little or no supporting evi-
dence. Even when the linkage is tested and a positive
relationship is found between ESG scores and profit-
ability, a question regarding causality remains. Cau-
sality can run from performance to a higher ESG rating
because companies that are doing well are in a better
position to spend money being socially responsible. In
this context, ESG spending can be thought of as a luxury
good that successful companies buy to embellish the
reputation of management.
If there is a consensus view that emerges from the
research evidence, it is that the relationship is positive,
but the findings are fragile and sensitive to both how
ESG and profitability are measured. An early study by
Waddock and Graves (1997) found that companies that
ranked high on social performance (what they termed
CSP, a precursor to ESG) also ranked high on financial
performance. However, Zhao and Murrell (2016) extend
the Waddock-Graves study over a longer time period
(1991–2013) using a larger sample and conclude that the
original findings do not hold up.
eX h I B I t 7
Value Effects, Market Pricing, and Excess Returns
Va
lue Effect
ESG increases valu
e
ESG decreases valu
e
ESG increases valu
e
ESG decreases valu
e
ESG increases valu
e
ESG decreases valu
e
Market Pricin
g
Markets overreact, pushing up
prices too much.
Markets overreact, pushing dow
n
prices too much.
Markets underreact, with prices
going up too little.
Markets underreact, with prices
going down too little.
Markets react correctly
, with
Markets react correctly, withMarkets react correctly
prices increasing to reflect value.
Markets underreact, with prices
going down too little.
Investo
r
Returns to ES
G
Negative excess returns fo
r
i
nvestors in good ESG firms.
Positive excess returns fo
r
i
nvestors in good ESG firms.
Positive excess returns for
i
nvestors in good ESG firms.
Negative excess returns fo
r
i
nvestors in good ESG firms.
Zero excess returns for investors
in good ESG firms.
Zero excess returns for investors
in good ESG firms.
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In a review of the literature, Margolis et al. (2009)
examined 251 studies of the linkage between ESG and
operating profitability in 214 papers and found only a
small positive link between the two, leading them to con-
clude that “citizens looking for solutions from any quarter
to cure society’s pressing ills ought not appeal to f inancial
returns alone to mobilize corporate involvement.” Friede
et al. (2015) present results of a meta study of more than
2,000 studies that looked at the link between ESG and
corporate financial performance (CFP), and conclude that
“roughly 90% of the studies f ind a non-negative ESG-
CFP relation.” Breaking down ESG into its component
parts, they f ind that environment (E) offered the strongest
positive link to performance and social (S) the weakest,
with governance (G) falling in the middle.
Pedersen et al. (2019) also find that firms with
good governance realize higher accounting rates of
return, but this result is not robust to different mea-
sures of ESG or to different profitability metrics. Nollet
et al. (2016) use Bloomberg’s ESG scores for S&P 500
firms and f ind a negative relationship between ESG
and return on capital, though they f ind that imposing a
nonlinear relationship creates a U-shaped relationship,
which they construe, rather hopefully, as evidence that
the long-term effects are positive. Schreck (2011) tries
to control for the endogeneity problem, that is, whether
good performing companies are socially responsible or
socially responsible companies are good performers and
concludes that there is no link between profitability and
social responsibility.
ESG and risk. If the link between profitability
and ESG is weak, there is still the possibility that value
is higher for companies that are socially responsible, if
they are less risky, with two variants on the risk stor y.
In the first, companies that are socially responsible
are rewarded with lower discount rates, which leads
to higher value, because investors prefer to hold good
companies and build these preferences into expected
returns. In the second, bad companies or companies
that score low on ESG expose themselves to reputational
and disaster risks that are infrequent but can have a large
impact when they occur.
Good companies and expected returns. Fa ma and
French (2007) develop a simple framework that can be
applied to show how investors preferences for good com-
panies affect expected returns. They show that when
utility functions for at least some investors include vari-
ables other than future consumption, prices deviate from
the standard predictions of conventional risk and return
models. In particular, if investors prefer to invest in good
companies, the expected return on companies that are
socially responsible will be lower, with the magnitude of
the effect depending on how much money they have to
invest. With upwards of $30 trillion of investment being
affected by ESG considerations, the price impact is likely
to be material. A more recent and detailed model devel-
oped by Pastor et al. (2020) reaches the same conclusion
that if investors have a preference for good companies
the risk-adjusted expected returns on those companies
well be less.
As an illustration of this effect, both Hong and
Kacperczyk (2009) and Dimson, Marsh et al. (2015,
2020) study what they call “sin” stocks, that is, compa-
nies involved in businesses such as producing alcohol,
tobacco, and gaming. They hypothesize that these are
stocks for which investors have negative tastes. Consistent
with Fama and French’s theory, both groups of authors
find that sin stocks are less commonly held by institutions
and that they have higher average returns than otherwise
comparable stocks. They conclude that investors must
be compensated in terms of greater expected return for
the reputational cost associated with holding sin stocks.
Fabozzi et al. (2007) also report similar results in their
comparison of sin stocks against market indices around
the world, with the highest excess returns in gaming and
weapons companies. Blitz and Fabozzi (2017) do push
back against the sin stock premium and argue that almost
all of the premium can be explained away by two quality
factors—prof itability and investment.
In recent years, there have been attempts to explic-
itly build ESG into an asset pricing/return framework,
with the intent of explicitly adjusting discount rates
for differences in ESG. Zerbib (2019) develops an asset
pricing model that incorporate investor tastes for socially
responsible companies (Sustainable-CAPM) and applies
the model to US stocks from 2000–2018 to find that
investor taste for sustainability creates an average exclusion
effect of 3% for sin stocks. Pedersen et al. (2020) incor-
porate the information in ESG score about fundamentals
and investor preferences into deriving an ESG-efficient
frontier and use it to conclude that the sin stock premium
is smaller than estimated by Hong and Kacperczyk for sin
stocks, but that there remains a premium. Finally, Ang
et al. (2020) explicitly bring ESG into a factor model and
note that it is correlated with established factors, with
higher momentum and quality stocks scoring better on
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ESG, and that the portion of ESG that is not factor-related
has little or no relationship to returns.
Disaster and reputational risk. An alternate reason
why companies would want to be good is that bad com-
panies are exposed to disaster risks, where a combina-
tion of missteps by the company, luck, and a failure
to build in enough protective controls (because they
cost too much) can cause a disaster, either in human
or financial terms. That disaster can not only cause
substantial losses for the company, but the collateral
reputational damage created can have long-term con-
sequences. Glossner (2017) created a value-weighted
portfolio of controversial firms that had a history of vio-
lating ESG rules and reported negative excess returns
of 3.5% on this portfolio, even after controlling for
risk, industry, and company characteristics. He argues
that these lower excess returns are evidence that being
socially irresponsible is costly for firms, that markets do
not fully incorporate the consequences of bad corporate
behavior. It is important to stress that results such as
these require that markets fail to incorporate the impact
of bad behavior. Once the market has incorporated the
bad behavior, the return discount should disappear or
even become a premium. Karpoff et al. (2005) examine
fines, damage awards, and market capitalization losses at
firms that violate environmental standards. They find
that these firms suffer significant market value losses
but that these losses are roughly equivalent to the legal
penalties imposed. They f ind no evidence of additional
losses from reputational damage.
It is worth noting that this argument for ESG is
less an argument for companies to be good, because they
will be rewarded, than for companies not to be bad,
because they will be punished. It is in keeping with the
punitive vision that we outlined earlier, but as we noted
there, it is a much less ambitious argument, with less in
terms of social payoff from corporate actions, than the
utopian vision, where being good will deliver higher
growth, more sustainable profit margins, and higher
returns on capital.
ESG and Pricing
If being socially good creates a payoff for firms,
either as higher cash f lows or lower discount rates, their
values should increase. But will markets have the fore-
sight to look past what may be near-term lower earnings
and reward them with higher pricing? That question
is important not only from the lofty perspectives of
eff icient markets, but it can also have more immediate
consequences. To the extent that markets are myopic
and ignore the value effects of being good, the man-
agers of these firms, whose compensation and tenure are
tied to stock price performance and/or current f inancial
performance, may be loath to follow the path of social
responsibility.
The research on this question is sparse, due to two
challenges. The first is that it requires a measure of ESG
that can be correlated with current pricing, with that
pricing measured using multiples such as PE, price to
book, or EV to EBITDA. The second is that even if a
correlation exists, it is difficult to establish causation. In
other words, do companies with high ESG scores get
rewarded with higher market pricing or are companies
with higher market pricing just more favorably viewed
by society? One simple proxy that can be used to address
the question of the link between ESG and pricing is to
look at the pricing multiples of stocks held by ESG funds
versus the rest of the market. A snapshot from early
2020, for instance, yields the results shown in Exhibit 8.
Exhibit 8 suggests that ESG stocks are priced closer
to growth than value stocks but, without controlling for
the differences in growth, it is difficult to draw a strong
conclusion about whether this is indicative of a forward-
looking market incorporating ESG considerations.
One way to avoid the interlinkages that make it
difficult to isolate the effects of ESG on pricing is to
focus on ESG events, that is, events that would lead
to market to reassess a firm’s ESG standing. Capelle-
Blancard and Petit (2019) look at 33,000 ESG news sto-
ries on 100 listed companies between 2002 and 2010
and conclude that negative events cause a market drop
of 0.1% but that firms gain nothing from positive events.
This finding is echoed by Mitsuyama and Shimzutani
(2015), who study the market reaction to announce-
ments of the ESG Branding of Japanese firms, where
firms are recognized for their “goodness.” The authors
find little evidence of a positive market reaction to the
announcements.
In summar y, the evidence that markets reward
companies for being good is weak, which can either
be taken to mean that markets are rationally assessing
ESG actions and finding that they have little effect on
value or that markets are short-sighted and are not incor-
porating the long-term value increases associated with
being more socially conscious. Either conclusion is not
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promising for ESG advocates; the first undercuts their
central thesis that being good translates into doing well,
and the second makes it less likely that managers will
invest more in ESG, because they will realize few tan-
gible benef its in the market today.
Investor Returns and Social Responsibility
As we noted earlier in the section, the weakest
test of the payoff to positive ESG behavior is looking at
returns earned by investors on stocks that score well on
the ESG scale, because it can be compatible with a wide
range of possibilities, some of which are not favorable to
the ESG case. That said, the bulk of the research on ESG
has been done in this area and the findings have been
read broadly, and in our view, often casually as evidence
that being socially good delivers positive results.
In the long term: ESG as a constraint. To
begin with, the notion that adding an ESG constraint to
investing increases expected returns is counterintuitive.
After all, a constrained optimum can, at best, match an
unconstrained one and, most of the time, the constraint
will create a cost. To illustrate, the TIAA-CREF Social
Choice Equity Fund explicitly acknowledges this cost
and uses it to explain its underperformance, stating that
“The CREF Social Choice Account returned 13.88 per-
cent for the year [2017] compared with the 14.34 percent
return of its composite benchmark. … Because of its
ESG criteria, the Account did not invest in a number of
stocks and bonds … the net effect was that the Account
underperformed its benchmark.”2
The research in this area, though, is directed at
answering the question of whether you can have your
cake (be socially conscious as an investor) and eat it too
2 TIAA- CREG Annual Report (2017, 34).
eX h I B I t 8
ESG and PE Ratios
Source: FactorResearch.
Av
erage PE
W
eighted
Weighted W
Av
erage PE
Median PE
0
5
10
15
20
25
30
35
40
45
50
ESG ETF
s
Russel
V
alu
ValuV
e
Russel Growth
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(by earning higher returns).3 At a practical level, the
empirical f indings are mixed.
• There are the studies that we referenced earlier
as backing for good f irms having lower discount
rates, including the ones that showed that sin
stocks deliver higher returns than socially con-
scious companies. Dimson et al. (2015) provide
a comparison of two Vanguard Index funds, the
Vice fund (invested in tobacco, gambling, and
defense companies), and the FTSE Social Index
fund (invested in companies screened for good cor-
porate behavior on multiple dimensions) and note
that a dollar invested in the former in August 2002
would have been worth almost 20% more by 2015
than a dollar invested in the latter.
At the other end of the spectrum, there are studies
that seem to indicate that there are positive excess
returns to investing in good companies. Di
Bartolomeo and Kurtz (1999) showed that stocks
in the Anno Domini Index outperformed the
market, but that the outperformance was more due
to factor and industry tilts than to social respon-
siveness. Derwall et al. (2005) look at the payoff
to socially responsible investing by comparing
the returns on two portfolios, created based upon
eco-eff iciency scores, and conclude that compa-
nies that are more eco-eff icient generate higher
returns, which cannot be explained by investment
style or industry factors. Some of the strongest
links between returns and ESG come from the
governance portion, which, as we noted earlier, is
ironic, because the essence of governance, at least
as measured in most of these studies, is fealty to
shareholder rights, which is at odds with the cur-
rent ESG framework that pushes for a stakeholder
perspective.
Splitting the difference, there are other studies that
find little or no differences in returns between good
and bad companies. A Morningstar Quantitative
study (2020) of ESG stocks found that companies
that scored high on ESG generated mildly lower
3 Some of the research, especial ly the portions that are spon-
sored either by ESG funds or inst itutes that are promoters of social
responsibility, has to be discounted because of the bias that they
have toward finding that investing in ESG stocks generates positive
excess returns.
returns than companies that scored poorly, though
the difference was statistically insignificant.
In steady state, it is internally inconsistent to argue
that good companies will benef it from lower discount
rates and that investors can also earn higher returns
at the same time. Thus, we are not surprised that the
evidence pushes in many directions and that the pitch
that investing in good companies will generate higher
returns does not have stronger empirical support.
In the near term: a transition period payoff?
If, as the research seems to suggest, there is little or
no payoff to investors from companies being socially
responsible, why do investors push companies to be
good? There is one possible scenario where being good
benefits both the company (by increasing its value) and
investors in the company (by delivering higher returns),
but it requires an adjustment period, where being good
increases value, but investors are slow to price in this
reality. After all, concern over ESG is a relatively new
phenomenon coming to the fore during the past 10 years
or so; it is possible that market prices have been adjusting
to a new equilibrium that ref lects ESG considerations.
As the market adjusts to incorporate ESG information,
and assuming that the information is material to inves-
tors, the discount rate for highly rated ESG companies
will fall and the discount rate for low-rated ESG com-
panies will rise. Due to the changes in the discount
rates, the relative prices of highly rated ESG stocks will
increase and the relative prices of low-ESG stocks will
fall. Consequently, during the adjustment period the
highly rated ESG stocks will outperform the low-ESG
stocks, but that is a one-time adjustment effect. Once
prices reach equilibrium, the value of high-ESG stocks
will be greater and the expected returns they offer will
be less. In equilibrium, highly rated ESG stocks will
have greater values, but investors will have to be satis-
fied with lower expected returns. As one example of
this adjustment process, Bebchuk et al. (2013) docu-
ment the disappearance of a return premium associated
with highly rated corporate governance during an earlier
period. This adjustment process means that the mea-
sured performance of stocks as a function of their ESG
rating will depend on the sample period. If the sample is
drawn from a time period during which the adjustment
is underway, highly rated ESG stocks will be found to
outperform and the reverse for low-ESG stocks. On the
other hand, if the sample is drawn from a period after
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which the adjustment is complete, highly rated ESG
stocks should be observed to have lower average returns.
The presence of a transition period, in which mar-
kets learn about ESG and price them, can also explain
why there may be a payoff to more disclosure and trans-
parency on social and environmental issues. Eccles et al.
(2014) use a matched sample of 180 US companies to
show that companies that adopted sustainability poli-
cies in 1993 and disclosed nonfinancial information
on these policies signif icantly outperformed their less
socially responsible counterparts both on profitability
and stock performance measures. It is perhaps this hope
of transition period excess returns that has driven some
institutional investors to become more activist on ESG
issues and can explain why some have been able to show
excess returns from increasing (reducing) their hold-
ings in good (bad) companies. It is not just the large
players like Blackrock and Vanguard that have jumped
on this bandwagon, with Blackrock announcing that
it would divest itself of coal companies, but also pure
return-focused investors like Elliott Management and
Third Point, which recently targeted utility companies
about their excessive carbon footprints. Their activism
goes well beyond jawboning management and includes
efforts that range from stopping mergers to proxy f ights
to altering boards of directors. Dimson et al. (2015)
examine 613 public firms that were targeted by an
activist institutional investor focused on improving ESG
practices and find positive excess returns in the 18% of
engagements where the activism succeeded. In a follow-
up study in 2019, the same authors conclude that these
engagements also resulted in improvements in corporate
profitability and performance.
If there is an investing lesson embedded here, it is
the unsurprising one that investors who hope to benef it
from ESG cannot do so by investing mechanically in
companies that are already identified as good (or bad),
but have to adopt a more dynamic strategy built around
either aspects of corporate social responsibility that are
not easily measured and captured in scores, or from
getting ahead of the market in recognizing aspects of
corporate behavior that will hurt the company in the
long term.
Green bonds. To this point, we have focused
on equity. However, there has been a good deal of
attention to green bonds that have become popular in
recent years. Corporate green bonds are bonds whose
proceeds are committed to f inance environmental and
climate-friendly projects. A question that arises imme-
diately is why a company would even want to issue such
bonds. By forcing itself to use the proceeds in a spe-
cif ic manner, a company loses the f lexibility to employ
the funds in a more general manner if circumstances
change. Furthermore, if the green purpose is the best
use of funds, then monies raised from generic bonds
can always be devoted to green projects. As noted by
Flammer (2020), there are three rationales that have
been put forward to explain why companies issue green
bonds. First, green bonds may serve as a credible signal
of the company’s commitment toward the environment.
Second, issuing green bonds could be a form of public
relations greenwashing. Third, if investors are willing
to pay more for green bonds, then the company should
be able to issue them at a lower yield. This is the bond
market version of our prior discussion regarding the
cost of equity.
Of the three rationales, we view the public rela-
tions effort as being the most likely explanation. There
are many ways that companies can, and do, signal their
environmental commitment without altering their cap-
ital structure. In addition, empirical research such as
Zerbib (2019a) finds that yields on green bonds are nearly
identical to yields on otherwise comparable nongreen
bonds. On the other hand, Goss and Roberts (2011)
report that companies facing concerns regarding social
responsibility pay higher interest rates on their loans,
relative to companies without those concerns, leading
to a higher discount rate for firms. However, once again
causality could run the other way. Successful firms are
both more responsible, because they can afford to be,
and can borrow at more favorable rates.
CONCLUSION
In many circles, ESG is being marketed as not only
good for society, but good for companies and investors.
In our view, the hype regarding ESG has vastly outrun
the reality of both what it is and what it can deliver.
Claims of ESG payoffs are too often based on research
that is ambiguous and inconclusive, if not outright
inconsistent with some of the claims. The evidence as
we see it is nuanced, and can be summarized as follows:
The evidence that socially responsible firms
have lower discount rates, and thereby investors
have lower expected returns, is stronger than the
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evidence that socially responsible f irms deliver
higher profits or growth. There are clearly f irms
that benef it from being socially responsible, but
there are just as clearly firms where being socially
responsible creates costs with no offsetting ben-
efits. Telling f irms that being socially responsible
will deliver higher growth, profits, and value is
false advertising. In addition, many of the firms
that promote ESG are successful for other reasons.
The evidence is stronger that bad firms get pun-
ished, either with higher discount rates or with
a greater incidence of disasters and shocks. ESG
advocates are on much stronger ground telling
companies not to be bad than when they tell com-
panies to be good. In short, expensive gestures
by publicly traded companies to make themselves
look good are futile, both in terms of improving
performance and delivering returns.
The evidence that markets incorporate social
responsibility into pricing is weak, except for com-
panies that are labeled as bad firms. Furthermore,
there is a weak link between ESG and operating
performance. In addition, the fact that markets do
not ref lect that link should serve as a note of cau-
tion when marketing ESG to corporate managers.
The evidence that investors can generate positive
excess returns with ESG-focused investing is weak,
and there is no evidence that active ESG investing
does any better than passive ESG investing,
echoing a finding in much of active investing lit-
erature. Even the most favorable evidence on ESG
investing fails to solve the causation problem. It
appears just as likely that successful f irms adopt the
ESG mantle as adopting the ESG mantle makes
firms successful.
If there is a hopeful note for ESG investing, it is in
the payoff to being early to the ESG game. Inves-
tors who are ahead of markets in assessing how
corporate behavior, good or bad, will play out in
performance and be priced, will be able to earn
excess returns, and if they can affect the change,
by being activist, potentially benefit even more.
Much of the ESG literature starts with an almost
perfunctory dismissal of Milton Friedman’s thesis that
companies should focus on delivering profits and value
to their shareholders, rather than play the role of social
policy makers (see Friedman 1970). The more that we
have examined the arguments that advocates for ESG
make for why companies should expand mission state-
ments, and the evidence that they offer for the proposi-
tion, the more we are inclined to side with Friedman. In
our view, what is needed is an open, frank, and detailed
dialogue concerning ESG-related corporate policies,
with an acceptance that being good can add value at
some companies and may destroy value at others, and
that in the long term, investing in good companies can
pay off during transition periods but will typically trans-
late into lower returns in the long term.
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ADDITIONAL READING
Sin Stocks Revisited: Resolving the Sin Stock
Anomaly
david Blitzandfr ank J. faBozzi
The Journal of Portfolio Management
https://jpm.pm-research.com/content/44/1/105
A BS T R AC T: Various studies report that investing in “sin stocks”—
firms that make money from human vices such as alcohol, tobacco,
gambling, and weapons—has historically delivered significantly
T J  I   ESG I  93Fal l 2020
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positive abnormal returns. This f inding has inspired the hypothesis
that sin stocks are shunned to such an extent that they become sys-
tematically underpriced, enabling investors who are willing to bear the
reputation risk involved with investing in these stocks 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
five-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.
Sin Stock Returns
frank J. faBozzi, k. C. ma,
and BeCky J. olipha nt
The Journal of Portfolio Management
htt ps://jpm.pm-research.com/content/35/1/82
A BS T R AC T: In this article, the authors examine the issue of
how social values affect economic values. Based on a small subset
of the stock universe that has been generally associated with sin-
seeking activities, such as alcohol consumption, adult services, gaming,
tobacco, weapons, and biotech alterations, the authors find that a sin
portfolio produced an annual return of 19% over the study period,
unambiguously outperforming common benchmarks in terms of both
magnitude and frequency. Several likely reasons for the positive excess
returns in sin stocks are identified. The authors argue that trustees
or fiduciaries who develop institutional investment policy statements
should fully understand the economic consequences of screening out
stocks of companies that produce a product inconsistent with their value
systems. In addition, institutional investors should question if the cost
to uphold common social standards is worthwhile.
... The pitch that companies should focus on "doing good" is sweetened with the promise that it will also be good for their bottom line and for shareholders. In this paper, build a framework for value that will allow us to examine how being socially responsible can manifest in the tangible ingredients of value and look at the evidence for whether being socially responsible is creating value for companies and for investors [6]. ...
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