ESG, Investment Returns and Performance Attribution - new research from CFA Institute and Robeco
How do ESG decisions impact fund performance? How is investment performance affected by excluding so-called “sin stocks”?
A 2016 paper by Dr Chendi Zhang, covering over 10,000 stocks in 28 markets, and commissioned by Newton Investment Management, concluded that a threshold-based screening of sin stocks would have reduced overall returns by 0.47% pa during 2004-2015. Most (but not all) other research has found similar results.
However, recent research from Robeco asks why “sin stocks” appear to have outperformed. Their research suggests that the apparent outperformance of “sin stocks” is actually caused by an exposure to risk factor premia; in particular, an exposure to “quality” factors.
A paper from BofAML goes further, and suggest that, from a bottom-up perspective, rigorous ESG screening can help investors to avoid companies that are likely to go bankrupt. In their paper, below, the authors describe ESG rankings as “the best signal we’ve found for fundamental risk”.
For those investors who have already implemented ESG screening into their stock selection process, how should the return implications of that decision be measured? A new paper, recently published in the Financial Analysts Journal, proposes a new methodology for performance attribution. Traditionally, attribution analysis will identify the returns attributable to active asset allocation and to stock selection decisions. The authors of the FAJ paper propose that an additional component is measured, quantifying the impact of ESG screening.
Do Social Responsibility Screens Matter When Assessing Mutual Fund Performance? (Financial Analysts Journal)
This paper proposes a new methodology for attribution analysis, which incorporates the impact of SR screening into performance attribution.
Research reveals why "sin stocks" outperform (Robeco, Sept 2017)
Why have so-called "sin stocks", such as alcohol and tobacco companies, historically outperformed their relevant indices? Robeco points to research which indicates that this outperformance emanates from an exposure to risk factors.
The impact of ethical investing on returns, volatility & income (Newton, 2016)
Lucius Li and Chendi Zhang, analyse the performance impact of commonly applied ethical frameworks. The authors seek to provide an independent and academic starting point for interested investors.
Resolving the Sin Stock Anomaly (Journal of Portfolio Management, 2017)
This research, from David Blitz et al, argues that there is no evidence that alcohol and tobacco stocks or "sin" stocks increase reputation risk after controlling for their exposure to risk factors.
ESG and avoiding bankruptcies: A deeper dive (BofAML, 2017)
The authors explain why ESG factors are "the best fundamental signal" to help investors avoid stocks at risk of bankruptcy.
Tobacco's Investment Returns and Societal Costs (Deutsche AM, Sep 2017)
(For compliance reasons, this paper is only accessible in the UK)
This report provides a detailed examination of the tobacco industry’s investment returns, external societal costs and how investors are engaging with or divesting from the industry.
ESG issues significantly impact emerging debt returns (Robeco, 2017)
Robeco explains how ESG analysis is fully integrated into the investment process of their Emerging Debt strategy. The differences in ESG profiles are considerable between emerging countries, and changes can happen quickly.
Does Socially Responsible Investing Hurt Investment Returns? (RBC, 2012)
This article, an update of an earlier research paper, challenges the "myth" of lower long-term returns for SRI investors and provides an overview of the current research on the subject.
Responsible Investing: Delivering competitive performance (TIAA, July 2017)
Does investing in a Responsible Investing strategy require sacrificing performance or taking an additional risk, compared to a broad market index? The paper argues that performance is NOT adversely affected.
ESG: Good companies can make good stocks (BofAML, 2016)
Merrill Lynch presents findings based on the Reuters ESG dataset, and conclude that ESG may be too costly to ignore.