The Eco-Efficiency Premium Puzzle

36 Pages Posted: 26 Aug 2006

See all articles by Jeroen Derwall

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004 6,

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 ecoefficiency scores, we provide evidence to the contrary. We compose two equity portfolios that differ in eco-efficiency characteristics and find that our highranked 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.

Keywords: corporate environmental performance, eco-efficiency, performance measurement, socially responsible investing (SRI), style analysis

JEL Classification: M, G3, M14

Suggested Citation

Derwall, Jeroen and Bauer, Rob and Guenster, Nadja and Koedijk, Kees G., The Eco-Efficiency Premium Puzzle (April 2004 6,). ERIM Report Series Reference No. ERS-2004-043-F&A. Available at SSRN: https://ssrn.com/abstract=594967

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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