Study Suggests Investing Responsibly Improves Performance

Sep 3 2014 | 10:10am ET

A recent study by New Amsterdam Partners suggests it is possible to do well by doing good.

Co-authored by Indrani De and New Amsterdam managing partner and CIO Michelle Clayman, the study looks at the relationship between the environmental, social and governance ratings of a company and its stock returns, volatility and risk-adjusted return in the post 2008 financial crisis era.

“We find a clear relationship between ESG ratings and stock returns,” write the authors. “Higher return companies in aggregate had better ESG ratings. There was a strong negative correlation between ESG ratings and stock volatility, and this relationship was stronger when market volatility was higher. This implies that asset managers can get diversification benefits by choosing better ESG stocks and this diversification benefit strengthens when markets are more volatile. The correlation between ESG rating and risk-adjusted return turned significantly positive in the recent years and this positive correlation strengthens further by excluding the lowest ESG stocks.”

The study compared 100 randomly selected and equally weighted 40-stock portfolios selected from a universe of U.S. stocks with an identically created set from which the lowest 10% of ESG companies were removed. The mean returns were higher for the second group of portfolios in five of the six years measured.

Said De, in a statement: “Clearly, asset managers can actively use ESG information and exclude the worst ESG stocks to enhance their stock-picking and portfolio construction ability.”

New Amsterdam used the Thomson Reuters Corporate Responsibility Ratings of nearly 5,000 companies worldwide to conduct the study. Thomson Reuters jointly developed the TRCRR with S-Network Global Indexes, a New York based consultant.

Said Herb Blank, senior consultant with S-Network, in a statement: “The ratings use a best-practices methodology on an industry-neutral basis and as such may serve as a proxy for management quality. Therefore, it makes sense that screening out the stocks with the worst ESG ratings would improve portfolio returns.”

The TRCRR incorporate nearly 500 different data points, including factors such as carbon footprint, water usage, labor practices and board independence.


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