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Doing well by doing good

Leading the transition to a sustainable and just future more decisively

Doing well by doing good

The decade old question of whether ESG investing is beneficial or detrimental to investment performance has caused a lot of heated debate among investment professionals as well as academics. And it is a difficult question to answer without being more specific about the category that is studied, its definition, and the targeted outcome. As outlined above, ESG aggregates many different concepts with varying definitions and measurement approaches. As such, the question of whether ESG considerations are value-enhancing strongly depends on the targeted outcome of risk, return, or non-financial benefits. It is therefore necessary to distinguish between those ESG signals with evidenced risk or return characteristics and those that target non-financial objectives alone.

When it comes to the question of whether all elements of ESG improve returns, the answer is no and the costs and benefits should be evaluated. That said, specific indicators within the E, S, and G categories can be statistically related to return as well as risk. If the objective is to achieve both financial and non-financial benefits, ‘doing well by doing targeted good’ should be the preferred approach. For example, accruals as a governance measure positively predict returns. Moreover, employee satisfaction generates excess returns and eco-efficient stocks significantly outperform eco-intensive stocks. There is also evidence that addressing ESG issues reduces downside risk; again, more so for some categories than others as risk reduction is particularly effective when addressing environmental topics such as climate change. The devil is, as ever, in the detail.

[2] Pedersen, Lasse Heje and Fitzgibbons, Shaun and Pomorski, Lukasz, 2019. Responsible Investing: The ESG-Efficient Frontier.

[3] Sloan, R.G., 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings?. Accounting Review, pp.289-315.

[4] Edmans, Alex. 2011. “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics 101 (3), 621–640.

[5] Derwall, J., Guenster, N., Bauer, R. and Koedijk, K., 2005. The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), pp.51-63.

Tom square

Dr. Tom Steffen

Quant Research

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In this article we look at what the investment community needs to do better in order to use its substantial influence to lead the transition to a sustainable and just future more decisively.

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This document is issued by Osmosis Investment Management US LLC (“Osmosis”). Osmosis Investment Management UK Limited (“Osmosis UK”) is an affiliate of Osmosis and has been operating the Osmosis Model of Resource Efficiency. Osmosis UK is regulated by the FCA. Osmosis and Osmosis UK are both wholly owned by Osmosis (Holdings) Limited (“OHL”).


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