The relevance of sustainability for investors : can socially responsible investments offer investors superior returns or reduced volatility?

Gianina Thalmann
2019
According to the classical approach, investment decisions are made on the basis of two key parameters; the expected rate of return and the level of investment risk. Many investors today are, however, also concerned about the nonfinancial dimensions of investments, such as environmental or social impacts. This has given rise to socially responsible investment practices, integrating environmental, social, and governance (ESG) considerations into investment decision-making. Naturally, the question
more » ... rally, the question arises whether investors face a trade-off between the financial and the non-financial dimensions of investment performance. In fact, the question has been widely debated among empirical literature, but remains unsolved, due to largely contradicting conclusions. This thesis addressed this question by investigating whether socially responsible investments can provide investors with a financial advantage in either the form of reduced volatility or higher return. For this purpose, a combination of both primary and secondary research methods was used. Firstly, existing literature was studied to derive the current state of empirical research on the topic. Secondly, a statistical analysis was conducted, examining the relationship between the ESG scores and respective volatility and return rates of more than 1500 equity funds across a three-year time horizon between 2016 and 2018. The obtained results indicated that socially responsible investments are, in fact, slightly less volatile than more traditional investments. The review of existing literature clearly illustrated that a vast majority of empirical research has determined that socially responsible investments generally exhibit lower volatility rates than conventional investments. Likewise, the statistical analysis provided evidence of a weak but statistically significant, negative correlation between funds' ESG scores and volatility rates. On the contrary, the results indicated that no clear relationship can be established between an investment's degree of social responsibility and its rate of return. The conclusions of the reviewed literature were found to be largely contradicting, with some research claiming a negative and others a neutral or even positive relationship between the two variables. Similarly, the statistical analysis indicated that there is no significant correlation between a fund's ESG score and return rate. The Relevance of Sustainability for Investors ii Hence, the results of this thesis suggest that socially responsible investments generally exhibit lower volatility rates, but not significantly different returns rates than more conventional investments. Consequently, the thesis is not only relevant to investors contemplating a more sustainable investment approach, but also to companies considering committing to sustainability and policymakers determined to foster sustainable development. Based on the limitations of this thesis, future research is recommended to investigate the extent by which the performance of socially responsible investments is affected by either its respective investment horizon or particular investment universe. The Relevance of Sustainability for Investors iii Acknowledgment First and foremost, I would like to thank my supervisor, Dr. Fridolin Brand, for his continued and patient assistance throughout this whole project. I am also very grateful to Mr. Daniel Frauenfelder and the company CSSP for not only providing their expertise but also the extensive dataset which I have been able to work with. Finally, I would like to thank my friends and family for supporting and guiding me through this time.
doi:10.21256/zhaw-19093 fatcat:ae5uhapl5zfljmnw2z622xh4lu