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www.icmacentre.ac.uk
Dr Ioannis Oikonomou
The impact of sustainability on financial returns and risk
Presented at Amsterdam, October 7, 2014
• On a broad level, you believe the relationship
between sustainability and risk-adjusted returns
to be:
1) Positive
2) Negative
3) Neutral/Non-existent
4) May be either positive or negative
dependent on specifics
2
Live poll
• Key concept:
- Corporate Social Responsibility/Performance (CSR/CSP)
- Corporate Sustainability
- Corporate Citizenship
And
- Socially Responsible Investing (SRI)
- ESG Investing
- Impact investing
- Ethical/Green/Religious investing
3
Terminology
Rating agencies
• MSCI KLD
• Oekom
• Vigeo
• Sustainalytics
• ASSET4
4
Sustainability Metrics
Other sources
• Corporate reports
• Lists of best/most responsible
firms (e.g. Business in the
Community's Corporate Re-
sponsibility Index)
• SR equity indices (e.g. MSCI
KLD 400, FTSE4Good)
• Empirical work on the link between sustainability and financial
performance started on the 1970s
• First paper: Moskowitz (1972)
• Bulk of literature from early nineties onwards
• More than 500 hundred papers in existence
• Majority consists of analysis at the firm level and looks into
accounting or equity market performance
• But literature is expanding rapidly. Dozens if not hundreds of
working papers
• And moving from generic themes (e.g. CSR in the equity
markets) to more eclectic ones (e.g. CSR and M&As)
5
Relevant academic literature
• Both qualitative reviews (Margolis and Walsh, 2003) and
meta-analyses (Margolis et al., 2009; Orlitzky, et al., 2003)
generally point towards a positive CSP-CFP link, statistically
strong but economically modest
• In the last few years, significant indications of links between
CSP and risk per se (Oikonomou et al. 2012; Salama et al.
2011; Luo and Bhattacharya, 2009; Godfrey et al., 2009)
• Possible that the penalties of social irresponsibility are more
pronounced than the rewards of social responsibility
(Kappou and Oikonomou ,forthcoming; Mishra and Modi,
2013; Lankoski, 2009)
6
What we know
• Comparing SRI funds and indexes with otherwise similar
conventional funds/indexes generally points to very
similar performance (Renneboog et al., 2008; Schroder,
2007; Statman, 2006; Statman, 2000)
• Some indications of SRI outperformance (Derwall and
Koedijk, 2009; Kempf and Osthoff, 2007)
• Excluding entire “sin industries” can lead to
underperformance (Statman, 2009; Hong and
Kacperczyk, 2009)
• Hence, use “best in class” approach instead
7
More on what we know
• Getting “caught in the middle” is probably the
worst thing you can do (Barnett and Salomon,
2006; Oikonomou et al., 2014)
• Green REITs seem to outperform and be less risky
(Eichholtz et al., 2012)
• Sustainability/corporate ethics are priced in bank
loans (Goss and Roberts, 2011; Kim et al., 2013)
• CSP plays a role in M&As (Aktas et al.,2011; Deng
et al., 2013) 8
Stylized indications
• Sampling issues (size, time, region, industries)
• What sustainability? (environment, society,
product safety, employees, diversity, human
rights, ethics, governance etc.)
• What financial performance? (risk adjusted
returns and alpha estimates, observation
window, frequency)
• Transaction costs and market microstructure
9
Limitations and considerations
• What the CSP-CFP link is in the developing
markets (some evidence from China - Ye and
Zhang, 2011)
• Sustainability in alternative asset classes (hedge
funds, private equity, venture capital, equity
options etc.)
• Few international studies
• Additional moderating factors of the CSP-CFP link
(e.g. economic and political cycle)
10
What we don’t know
• Aktas, N., De Bodt, E. & Cousin, J. G. (2011). " Do financial markets care about SRI? Evidence from mergers and acquisitions. " Journal of Banking & Finance,35, 1753-1761.
• Barnett, M. L. and R. M. Salomon (2006). "Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance." Strategic Management Journal 27(11): 1101-1122.
• Deng, X., Kang, J. K. & Low, B. (2013). "Corporate social responsibility and stakeholder value maximization: Evidence from mergers." Journal of Financial Economics, 110, 87-109.
• Derwall, J. and K. Koedijk (2009). "Socially Responsible Fixed Income Funds." Journal of Business Finance & Accounting 36(1 2): 210-229.
• Eichholtz P., Kok Nils. and Erkan Y. (2012) " Portfolio greenness and the
financial performance of REITs. " Journal of International Money and Finance
31: 1911-1929.
• Godfrey, P. C., C. B. Merrill and J.M. Hansen (2009). "The relationship between
corporate social responsibility and shareholder value: an empirical test of the
risk management hypothesis." Strategic Management Journal 30(4): 425-
445.
12
References
• Goss, A. and G. S. Roberts (2011). "The impact of corporate social
responsibility on the cost of bank loans." Journal of Banking & Finance 35(7):
1794-1810.
• Hong, H. & Kacperczyk, M. 2009. The price of sin: The effects of social norms
on markets. Journal of Financial Economics, 93, 15-36.
• Kappou, K. and Oikonomou, I. “Is there a Gold Social Seal? The Financial
Effects of Additions to and Deletions from Social Stock Indices”, forthcoming
Journal of Business Ethics.
• Kempf, A. and P. Osthoff (2007). "The effect of socially responsible investing
on portfolio performance." European Financial Management 13(5): 908-922
• Kim, M., Surroca, J. and Tribo, J. (2014). "Impact of ethical behaviour on
syndicated loan rates." Journal of Banking & Finance 38: 122-144.
• Luo, X. and C. Bhattacharya (2009). "The debate over doing good: Corporate social performance, strategic marketing levers, and firm-idiosyncratic risk." Journal of marketing 73(6): 198-213.
13
References
• Margolis, J., H. A. Elfenbein and J.P. Walsh (2009). "Does It pay to be good... and does it matter? A meta-analysis of the relationship between corporate social and financial performance." Harvard Business School Working Paper. 229
• Margolis, J. D. and J. P. Walsh (2003). "Misery loves companies: Rethinking social initiatives by business." Administrative Science Quarterly: 268-305.
• Mishra S. and Modi S., 2013, "Positive and Negative Corporate Social Responsibility, Financial Leverage and Idiosyncratic Risk". Journal of Business Ethics 117(2), 431-448.
• Moskowitz, M. (1972). "Choosing socially responsible stocks." Business and Society Review 1(1): 71-75.
• Oikonomou, I., Brooks, C. and Pavelin, S. (2012). ‘The impact of corporate social performance on financial risk and utility: a longitudinal analysis’. Financial Management, 41, 483–515.
• Oikonomou I., Brooks C. and Pavelin S. (2014). "The Financial Effects of
Uniform and Mixed Corporate Social Performance" , Journal of Management
Studies 51(6): 898-925. 14
References
• Orlitzky, M., F. L. Schmidt and S.L. Rynes (2003). "Corporate social and
financial performance: A meta-analysis." Organization Studies 24(3): 403-
441.
• Renneboog L., Ter Horst, J. and Zhang, C. (2008). “The price of ethics and
stakeholder governance: The performance of socially responsible mutual
funds”, Journal of Corporate Finance 14(3): 302-322
• Salama, A., Anderson K. and Toms, S. (2011). "Does community and
environmental responsibility affect firm risk? Evidence from UK panel data
1994–2006." Business Ethics: A European Review 20(2): 192-204
• Schröder, M. (2007). "Is There a Difference? The Performance Characteristics
of SRI Equity Indices." Journal of Business Finance and Accounting 34 (2),
331-348.
• Statman M., 2006, "Socially Responsible Indices". Journal of Portfolio
Management 32 (3), 100-109.
15
References
• Statman, M. and D., Glushkov, 2009.“The wages of social responsibility”.
Financial Analysts Journal 65 (4): 33-46.
• Statman, M. (2000). "Socially responsible mutual funds." Financial Analysts
Journal 56(3): 30-39.
• Ye K. and Zhang, R. (2011). “Do lenders value corporate social responsibility?
Evidence from China” Journal of Business Ethics, 104:197-206
16
References