Socially Responsible Investing: The Eco-Efficiency Premium Puzzle

33 Pages Posted: 13 Feb 2004  

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement; Tilburg University - School of Economics; Maastricht University - Department of Finance

Rob Bauer

Maastricht University

Nadja Guenster

University of Muenster - Finance Center Muenster; University of California, Berkeley

Kees C. G. Koedijk

Tilburg University - Department of Finance

Date Written: May 17, 2004

Abstract

There exists a widespread consensus among mainstream academics and investors that socially responsible investing (SRI) leads to inferior, rather than superior, portfolio performance. Using Innovest's well-established corporate eco-efficiency scores, we provide evidence to the contrary. We compose two equity portfolios that differ in eco-efficiency characteristics and find that our high-ranked portfolio provided substantially higher average returns compared to its low-ranked counterpart over the period 1995-2003. Using a wide range of performance attribution techniques to address common methodological concerns, we show that this performance differential cannot be explained by differences in market sensitivity, investment style, or industry-specific components. We finally investigate whether this eco-efficiency premium puzzle withstands the inclusion of transaction costs scenarios, and evaluate how excess returns can be earned in a practical setting via a best-in-class stock selection strategy. The results remain significant under all levels of transactions costs, thus suggesting that the incremental benefits of SRI can be substantial.

Notes: Previously titled "Socially Responsible Investing: The Eco-Efficiency Premium in the U.S. Equity Market"

Keywords: Socially Responsible Investing, SRI, Corporate Environmental Performance, Eco-Efficiency, Performance Measurement, Style Analysis

JEL Classification: G12, G20, G23

Suggested Citation

Derwall, Jeroen and Bauer, Rob and Guenster, Nadja and Koedijk, Kees C. G., Socially Responsible Investing: The Eco-Efficiency Premium Puzzle (May 17, 2004). EFMA 2004 Basel Meetings Paper; Erasmus University Working Paper. Available at SSRN: https://ssrn.com/abstract=551590 or http://dx.doi.org/10.2139/ssrn.551590

Jeroen Derwall (Contact Author)

Maastricht University - European Centre for Corporate Engagement ( email )

FEBA
Tongersestraat 53
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://www.corporate-engagement.com/

Tilburg University - School of Economics ( email )

P.O. Box 90153
NL-5000 LE Tilburg, Brabant
Netherlands

HOME PAGE: http://www.tilburguniversity.nl/webwijs/show/?uid=j.m.m.derwall

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.fdewb.unimaas.nl/finance/?page=member&id=175

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Nadja Guenster

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

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