Handbook on Sustainable Investments
documented that ESG performance positively influences both credit risk and performance.16
Summary Overall, there is ample academic evidence that ESG parameters have a positive influence on the returns from financial assets (see Figure 1). Trying to translate these findings into superior portfolio performance leads to rather mixed results. Generally speaking, it is absolutely possible to create portfolios with superior ESG characteristics while achieving risk/return profiles that match those of traditional portfolios at the same time. There will presumably be more regulation to come with respect to ESG issues. This presents latent risks for entities with a poor ESG performance, which could face very tangible negative economic impacts. Incorporating a sound analysis of ESG factors into the investment process will therefore be in the best interest of investors, particularly with regard to their fiduciary duty to the ultimate asset owners.
Further Reading •• Clark, G. L., Feiner, A., & Viehs, M. (2015). From the stockholder to the stakeholder: How sustainability can drive financial outperformance. Available at SSRN 2508281. •• Fulton, M., Kahn, B. M., & Sharples, C. (2012). Sustainable investing: Establishing long-term value and performance. Available at SSRN 2222740. •• Kleine, J., Krautbauer, M., & Weller, T. (2013). Nachhaltige Investments aus dem Blick der Wissenschaft: Leistungsversprechen und Realität, Analysebericht. Research Center for Financial Services of SteinbeisHochschule Berlin, Berlin. •• Renneboog, L. D. R., Ter Horst, J. R., & Zhang, C. (2007). Socially responsible investments: Methodology, risk and performance. Center Discussion paper, 2007.
Endnotes Cremers, K. J., & Nair, V. B. (2005). Governance mechanisms and equity prices. Journal of Finance, 60(6), 2859–2894. 2 Bauer, R., Guenster, N., & Otten, R. (2004). Empirical evidence on corporate governance in Europe: The effect on stock returns, firm value and performance. Journal of Asset Management, 5(2), 91–104. 3 Dowell, G., Hart, S., & Yeung, B. (2000). Do corporate global environmental standards create or destroy market value? Management Science, 46(8), 1059–1074. 1
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