Sustainability and Financial Markets. Lars Hassel Aronia seminar

Transcription

1 Sustainability and Financial Markets Lars Hassel Aronia seminar

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11 Sustainable Investments Research Program Vision Institutional Investors can take a leading role in promoting Sustainable Development (SD) by changing the behaviour of companies in which they invest. Objective Find out how Sustainable Investment (SI) practices can create added value for institutional investors and identify barriers to mainstreaming such practices among asset owners and managers SI have to go beyond the business case and aspire to make a contribution to SD

12 Research Agenda SI and Fiduciary Responsibility ESG in conflict with interpretation of fiduciary duty? Balance between short term gains and long term values The Investment Case Evaluate SI strategies in different asset classes How sustainable can SI be? Company Behaviour Explain mechanisms through which SI can influence company behaviour towards SD How sustainable can companies become?

13 Conflicting Evidence of Risk Adjusted SRI Returns? Best-in-class Superior returns Derwall et al, FAJ 2005 The ecoefficiency premium puzzle Conventional risk/return trade-off No Harm No difference in risk adjusted returns between ethical and conventional mutual funds or back tested portfolios Demystifying RI (Mercer 2007) Shedding light on RI (Mercer 2009) Sin or shunned stocks Superior returns Hong & Kacperczyk, JFE 2009, The price of sin: The effects of social norms on markets Statman & Glushkow, FAJ 2009 The wages of social responsibility

14 Neutral Returns on SRI Funds? SRI mutual funds Conventional wisdom; SRI and conventional mutual funds produce similar risk adjusted returns ; 4 factor α, (Bauer et al JB&F 2005) Applies also to fixed income SRI funds (Derwall and Koedijk JBF&A 2009) Volatility of flows and sensitivity to past returns generally lower in SRI funds (Bollen, JF&QA 2007) Willingness to accept losses applies to negative SRI screens (Renneboog et al 2009) Different SRI retail market segments found in Swedish survey (Nilsson, IJBM 2009) SRI investors have different motives

15 SRI Strategy Negative Screens and Exclusion Shunned Stock Hypothesis Sin stocks in conflict with societal norms (norms constrained investor) Shunned stocks trade at discount and have a higher expected return The Price of Sin (Hong & Kacperczyk JFE 2009) Lower institutional ownership and less analysts coverage Price/book ratios for sin stocks lower Superior returns ; (4 factor α) KLD controversials Shunned stocks outperform peers (Kempf & Osthoff EFM 2007; Statman & Glushkov FAJ 2009) European Sample Sin stocks outperform peers, especially under high litigation risk and protestant faith (Salaber 2007)

16 Fabozzi et al (JPM 2008): Sin Stock Returns

17 SIN Funds

18 SRI Strategy: Positive Selection of Best in Class Errors in expectations hypothesis CSR information value relevant but not well understood by market Abnormal risk adjusted returns only when investors underestimate CSR as a driver of future expected cash flows. Innovest eco efficient portfolios U.S. Portfolio outperformed industry peers (Derwall et al FAJ 2005). KLD social investment indicators High ranked portfolios outperform lowest ranked portolios (Kempf & Osthoff EFM 2007; Statman & Glushkow FAJ Employee satisfaction as an intangible Fortune s classification provided abnormal returns (Edmans, 2009)

19 Derwall et al (FAJ 2005): RISK AND STYLE ADJUSTED PORTFOLIO RETURNS (ALPHA) BASED ON INNOVEST ECO EFFICIENCY RATINGS (U.S companies ) alpha % R m -R f SmB HmL MOM R 2 Market Risk β Small Firm Risk Price/book Risk Momentum Effect Best-in-Class Portfolio 4.15** 0.92*** -0.19*** *** 0.88 Worst-in- Class Portfolio *** *** -0.08*** 0.86 Difference 5.96** -0.12*** -0.23*** -0.22*** Abnormal Return! Mispricing or another risk factor? 19

20 Concluding Studies on SRI Portfolio Strategies SRI markets serve different motives and SRI has become a multidimensional concept (Derwall et al 2010) Back testing based on ESG ratings suggests Values driven investors shun controversial stocks at the expense of financial returns Profit seeking investors hunt best in class stocks The abnormal returns have faded out in recent years when E & G (S) risks and opportunities are priced The value relevance of ESG increases over time

21 Social and Financial Performance on Firm Level Doing good while doing well win win situation -Environmental Social Governance ratings +/- Economic Value: Operating profit Market value and Cost of Equity Capital 21

22 ESG and Extra Financial Value Firm Level Back testing confirms E and G (S) factors bring added value ESG metrics and financial measures (MSCI: U.S.) ROI (+/ ) Market premium, Tobin s Q (+) Cost of Equity Capital ( ) Innovest eco efficiency rating (Guenster et al, 2006) GES environmental index (Semenova &Hassel SD 2008) KLD ESG sub dimensions (Derwall & Verwijmeren, 2008) Commercial property and housing markets Green office buildings U.S (Eichholtz et el AER 2009) Energy efficient housing NL (Brounen & Kook 2009) 22

23 Semenova, Hassel & Nilsson (2010): The Value Relevance of Environmental and Social Performance for Swedish SIX 300 Companies Market Value = Tangible Information + Intangible Information Past performance Earnings and Book Value Market Value Cash Flows/Reputation Environmental and Social Performance Value relevant?

24 Sample: SIX 300 Companies Classified by Sectors and Market Capitalization

25 ES Data Provider: GES - Investment Services Environmental and Social Performance for SIX 300 Companies (U.S. Companies)

26 Environmental Performance Value Relevant for Large and Mid Cap (not Small Cap) on OMX Stockholm Random Effects Market Value of Equity/Total Assets = Net Income/TA Book Value of Equity/TA Environmental performance Social performance Sales Growth Firm Age Industry dummies Year dummies

27 Concluding Studies on ESG and Firm Value An upward market price correction of environmental leaders over time MSCI U.S Market assigns more value relevance to environmental information in Large Cap firms Companies with potential to improve ESG can provide excess returns ESG in Small Cap companies is not priced lower disclosure and transparency less analysts coverage small firm ESG risk

28 Thank You!