Nadja Guenster


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TBLI CONFERENCE™ EUROPE 2012 - Zurich - Switzerland

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Nadja Guenster

  1. 1. INSIGHTS IN RISK AND RETURN OF SOCIALLY RESPONSIBLEINVESTING: WHAT WE CAN LEARN FOR THE FUTURENadja GuensterECCE, Maastricht UniversityHaas Center for Responsible Business, UC BerkeleyTBLI, November 9, 2012
  2. 2. PERFORMANCE OF SRI STRATEGIES The Practitioner’s PerspectiveInstitutional investors motivate their decision to follow SRI strategies withfinancial performance:UNPRI ( “...we believe that environmental, social, and corporate governance (ESG)issues can affect the performance of investment portfolios...”Calpers‟ tobacco divestment• Poor performance• No ethical considerations( 2
  3. 3. PERFORMANCE OF SRI STRATEGIES Theoretical PerspectiveEfficient Market Hypothesis: Prices reflect all publicly available informationand prices instantaneously adjust to reflect any new public informationIf all information is incorporated in prices No predictive power for future returns It is not possible to use ESG information to earn abnormal returns (as long as this information is available to more investors)Restricting the universe worsens portfolio‟s risk-return tradeoff SRI portfolios underperform 3
  4. 4. THE CONTRADICTIONFinance Theory (EMH) Practitioner viewLet‟s look at the empirical evidence! 4
  5. 5. EMPIRICAL STUDIESTwo common strategies:1. ESG strategies2. Sin stocksESG Portfolios:• Top: best performers on E, S, or G• Bottom: worst performers on E, S, or GAbnormal returns “Risk-adjusted” returns• Different risk-factors taken into account 5
  6. 6. ENVIRONMENTAL PERFORMANCE AND RETURNS Overview of studies Abnormal returnStudy Data Period (best-worst)Derwall et al. (2005) Innovest 95-03 5.06%*Kempf and Osthoff (2007) KLD 91-04 3.02%Statman and Glushkov (2009) KLD 92-07 2.47%Studies find positive abnormal returns (not all statistically significant) 6
  7. 7. SOCIAL PERFORMANCE AND STOCK RETURNS Overview of Findings Abnormal return Study Data Social Criterion Period (best-worst) Community 3.96%* Diversity 0.34% Statman and KLD Employee Relations 92-07 3.73%* Glushkov (2009) Human Right -2.57% Product 2.02% Derwall et al. 92-04 5.62% KLD Employee Relations (2011) 92-08 2.81% Borgers et al. 92-04 3.52%* KLD Stakeholder Index (2012) 04-09 -2.30%Positive returns in earlier periods…. but after 2004 no evidence of positive returns anymore 7
  8. 8. CORPORATE GOVERNANCE AND STOCK RETURNS Overview of Findings Abnormal returnStudy Data Period (best-worst)Gompers et al. (2003) 90-99 IRRC 8.5%* 90-99 8.25%Core et al. (2005) IRRC 00-03 -1.56% 90-99 5.88%* to 14.76%*Bebchuk et al. (2011) IRRC 00-03 -3.60%* to 4.2%*1990-1999: large positive abnormal returnsAfter 2000: no evidence of abnormal returns 8
  9. 9. ESG AND INVESTMENT PERFORMANCEInstitutional investors were right: Investing in high ESG firms wasassociated with better investment performance in the 90sHowever, for S and G the effect dimished after 2000/2004Investors learned to appreciate positive effect of S and G on profits Top S and G performers valued higher than worst performers 9
  10. 10. THE PRICE OF SIN: THE EFFECT OF SOCIETAL NORMS ON MARKETS Hong and Kacperczyk (2009)Hong and Kascperzyk (2009) find that norm-constrained institutionalinvestors shun “sin stocks”Triumvirate of Sin: Alcohol, Tobacco, and GamblingOnly 23% of shares held by institutions instead of 28%; lower analystcoveragePrices of sin stocks low relative to fundamental value (15-20% lower thancomparables)Sin stocks earn higher returns after correcting for risk factors (2.5%)Institutional investors shunning sin stocks missed out on positive returns! 10
  11. 11. PERFORMANCE OF SRI STRATEGIES: PAST VERSUS FUTUREPAST FUTURE (best guess disclaimer!)SR-investors earned: • High returns on ESG standards no equililbrium• High returns on stocks with effect: returns dimish as high ESG standards attention increases• Missed out on high returns on • Sin stock effect likely to sin stocks persistIf simply overweighting high ESG firms might not work anymore (interms of returns)…• More focus on engagement?• Invest in „rising ESG stars‟? 11
  12. 12. MORE“Performance Implications of SR-Investing” by Nadja Guenster, Chapter 23in Socially Responsible Finance and Investing: Financial Institutions,Corporations, Investors and Activists, Nofsinger and Baker, Kolb Series inFinanceMore SIRP research at: European Center for Corporate Engagement(ECCE): www.corporate-engagement.comPresentations of ECCE Conference on Finance and Responsible Businessat Haas, UC Berkeley: 12