Part A: Sustainable Investment at portfolio level
Sustainable Investment at portfolio level consists of research on performance evaluation of sustainable equity and fixed income mutual funds and on self-composed portfolios, and portfolio optimization constrained by sustainability criteria. Research is conducted using a number of databases on how ESG risks and performance are priced in the financial markets. We want especially to estimate and understand how risks related to ESG are assessed and priced in the markets.Researchers:
Bauer, Rob
Braun, Robin
Derwall, Jeroen
Koedijk, Kees
Olsson, Rickard
There are four projects:
1. CSR attributes and earnings surprises (Derwall)
The question of whether investors misjudge the value created by Corporate Social Responsibility (CSR) policies, if any, is central to this research. It adds to understanding the nature of return difference between “strong” CSR investment portfolios and weak CSR portfolio, if any. With this test, we could investigate whether such portfolio-return differences are attributable to investors’ mistakes about the future earnings of companies, which would be consistent with mispricing CSR. ECCE and Umeå are undertaking this research in a parallel manner, and we expect to bundle the results in a summary document (such as a handbook). KLD and European data are used.
2. Portfolio optimality and investment universe constraints induced by sustainability criteria screening (Olsson)
The best attainable portfolios or the efficient set of portfolios are in general negatively affected when investment universe constraints are imposed, such as in cases of negative screening. How severe the effects of the constraints are is an empirical question that this study intends to shed light on by examining the performance over time of mean-variance efficient investment strategies under different universe constraints induced by positive and negative screening on sustainability criteria. Data come from GES-Investment services Risk and Opportunity ratings.
3. On the relation between perceived and materialized risk: Sustainability risk ratings and incidents (Olsson)
One important aspect of a risk measure is that it measures the risk it is intended to measure in a timely and adequate manner. Another aspect is how, if at all, the risk measured is priced on the market. Investors seeking sustainable investments, that is, investments with low sustainability risk, would certainly appreciate that sustainability risk ratings are relevant risk measures. The same investors could also be expected to prefer that the sustainability risks measured would not be priced according to finance theory, which implies that lower risk yields lower return. This study focuses on the first aspect and investigates the relation between sustainability risk ratings and materialized incidents of sustainability risks. Data come from GES opportunity and risk ratings and GES incident data.
4. Asset pricing tests using portfolios formed on CSR attributes (Derwall, Bauer, Braun, Koedijk)
Research is in a spirit similar to the portfolio study by Derwall et al. ( 2005, Financial Analysts Journal). Similar studies following this approach are now entering the public domain; see, e.g. http://www.cfr-cologne.de/download/workingpaper/cfr-06-10.pdf. Due to data delays we have asked this research to carry the status “ongoing”. KLD, Innovest, and likely also Vigeo data will be used.
