Dr Ioannis Oikonomou

Transcription

1 The impact of sustainability on financial returns and risk Dr Ioannis Oikonomou Presented at Amsterdam, October 7,

2 On a broad level, you believe the relationship between sustainability and risk-adjusted returns to be: 1) Positive 2) Negative Live poll 3) Neutral/Non-existent 4) May be either positive or negative dependent on specifics 2

3 Terminology 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

4 Sustainability Metrics Rating agencies MSCI KLD Oekom Vigeo Sustainalytics ASSET4 Other sources Corporate reports Lists of best/most responsible firms (e.g. Business in the Community's Corporate Responsibility Index) SR equity indices (e.g. MSCI KLD 400, FTSE4Good) 4

5 Relevant academic literature 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

6 What we know 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

7 More on 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

8 Stylized indications 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

9 Limitations and considerations 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

10 What we don t know 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

11 What do we need to find out? 11

12 References 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, Barnett, M. L. and R. M. Salomon (2006). "Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance." Strategic Management Journal 27(11): Deng, X., Kang, J. K. & Low, B. (2013). "Corporate social responsibility and stakeholder value maximization: Evidence from mergers." Journal of Financial Economics, 110, Derwall, J. and K. Koedijk (2009). "Socially Responsible Fixed Income Funds." Journal of Business Finance & Accounting 36(1 2): Eichholtz P., Kok Nils. and Erkan Y. (2012) " Portfolio greenness and the financial performance of REITs. " Journal of International Money and Finance 31: 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):

13 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): Hong, H. & Kacperczyk, M The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93, 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): Kim, M., Surroca, J. and Tribo, J. (2014). "Impact of ethical behaviour on syndicated loan rates." Journal of Banking & Finance 38: 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):

14 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: Mishra S. and Modi S., 2013, "Positive and Negative Corporate Social Responsibility, Financial Leverage and Idiosyncratic Risk". Journal of Business Ethics 117(2), Moskowitz, M. (1972). "Choosing socially responsible stocks." Business and Society Review 1(1): 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, Oikonomou I., Brooks C. and Pavelin S. (2014). "The Financial Effects of Uniform and Mixed Corporate Social Performance", Journal of Management Studies 51(6):

15 References Orlitzky, M., F. L. Schmidt and S.L. Rynes (2003). "Corporate social and financial performance: A meta-analysis." Organization Studies 24(3): 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): Salama, A., Anderson K. and Toms, S. (2011). "Does community and environmental responsibility affect firm risk? Evidence from UK panel data " Business Ethics: A European Review 20(2): Schröder, M. (2007). "Is There a Difference? The Performance Characteristics of SRI Equity Indices." Journal of Business Finance and Accounting 34 (2), Statman M., 2006, "Socially Responsible Indices". Journal of Portfolio Management 32 (3),

16 References Statman, M. and D., Glushkov, The wages of social responsibility. Financial Analysts Journal 65 (4): Statman, M. (2000). "Socially responsible mutual funds." Financial Analysts Journal 56(3): Ye K. and Zhang, R. (2011). Do lenders value corporate social responsibility? Evidence from China Journal of Business Ethics, 104: