Research

From the Stockholder to the Stakeholder

We now live in a world where sustainability has entered mainstream. That much is evident from the fact that over 72% of S&P500 companies are reporting on sustainability, demonstrating a growing recognition of the strong interest expressed by investors. This report, entitled From the Stockholder to the Stakeholder, aims to give the interested practitioner an overview of the current research on ESG.

In this enhanced meta-study we categorize more than 200 different sources. Within it, we find a remarkable correlation between diligent sustainability business practices and economic performance. The first part of the report explores this thesis from a strategic management perspective, with remarkable results: 88% of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which ultimately translates into cashflows. The second part of the report builds on this, where 80% of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance.

This report ultimately demonstrates that responsibility and profitability are not incompatible, but in fact wholly complementary. When investors and asset owners replace the question “how much return?” with “how much sustainable return?”, then they have evolved from a stockholder to a stakeholder.

The full report is available here.

Corporate Sustainability: First Evidence on Materiality

Mozaffar Khan, George Serafeim, and Aaron Yoon

Using newly-available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues.

In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

The full report is available here.

The Impact of Corporate Sustainability on Organizational Processes and Performance

Robert G. Eccles, Ioannis Ioannou, and George Serafeim

We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 US companies, we find that corporations that voluntarily adopted sustainability policies by 1993 – termed as High Sustainability companies – exhibit by 2009, distinct organizational processes compared to a matched sample of firms that adopted almost none of these policies – termed as Low Sustainability companies. We find that the boards of directors of these companies are more likely to be formally responsible for sustainability and top executive compensation incentives are more likely to be a function of sustainability metrics. Moreover, High Sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of nonfinancial information. Finally, we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.

The full report is available here.

ESG for All? The Impact of ESG Screening on Return, Risk, and Diversification

 Tim Verheyden, Robert G. Eccles, and Andreas Feiner, Arabesque

One of the most important trends in portfolio management over the past decade has been the incorporation of environmental, social, and governance (ESG) data. According to the Global Sustainable Investment Alliance (2015), $21.4 trillion was being managed through some form of socially responsible investing (SRI) at the start of 2014, representing about 30% of total global assets under management. From 2012 to 2014, SRI assets under management (AUM) increased by over 60%, as compared to 15% for conventional strategies. Total investments in SRI are the largest in Europe ($13.61 trillion), with the U.S. now experiencing the most rapid growth (76% from 2012 to 2014, as compared to a global average of about 50%). Most SRI investments continue to be made by institutional investors, but retail investors are swiftly moving forward (as reflected in the 97% growth in their SRI assets between 2012 and 2014).

Historically, portfolio management has relied on two sets of information to build investment strategies. Fundamental information, which relies heavily on a company’s financial statements, provides insights into the intrinsic value of a company and its growth prospects. Technical information, which can be derived from a company’s past performance in the stock market, provides indicators of the current momentum or movement in stock prices and the extent to which the trend is likely to extend into the future. While these two sets of information have helped investors make sound investment decisions for decades, the widespread availability of such data and the technology to process it has made it increasingly challenging to create superior performance in the form of above-market returns.

The full report is available here.

Multi-criteria decision analysis: Methods to define and evaluate socially responsible investments

Tim Verheyden, Lieven De Moor

Originally being a niche strategy followed by few investors, socially responsible investing (SRI) now represents a significant part of the assets under management. After summarizing empirical evidence on the performance of SRI funds, we present four challenges that are facing the further development of SRI and point to multi-criteria decision analysis (MCDA) as the methodological framework that could help overcome these challenges. A first group of challenges calls for the development of a social performance indicator, which can score and classify mutual funds with respect to social responsibility. Another challenge requires a transparent tool for retail investors interested in SRI to learn about their SRI preferences. Reviewing the three schools of available MCDA methods, we present a concrete approach for future research in building such a social performance indicator and a retail investor tool for SRI.

The full report is available here.

 

The Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value through ESG

Robert G. Eccles, Ph.D. , Mirtha D. Kastrapeli

There are significant challenges in our world today, ranging from deep income inequality to climate change. There are also advances in understanding and analysis that allow us to take a pragmatic approach to a critical but seemingly elusive question: How can we leverage the capital markets to improve not just risk-adjusted returns, but our society as a whole? in other words, how can we create sustainable value?

The most significant of these developments revolves around how we incorporate environmental, social and governance (ESG) factors into business and investment decisions, what is commonly referred to as "ESG integration," a type of ESG investing.

To answer this question, we conducted a global survey of almost 600 institutions investors who are planning to implement ESG into their investment process. This group is obviously not representative of all institutional investors; rather, they are on the vanguard of ESG investing. We also surveyed 750 individual investors, including both ESG and non-ESG investors. We also conducted 25 interviews with executives in our industry. Based on the results of this survey, and extensive secondary research, we will outline a holistic model for integrating ESG considerations into investment decisions.

The full report is available here.