Socially responsible investing: the trade-off between Financial Performance and Societal Impact
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2023-07-27
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en
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Over the past years, the externalities of companies have received more attention in the public debate. Socially responsible investment is an investment strategy where investors use ESG criteria to steer investment decisions. This paper uses ESG scores to calculate ESG-adjusted returns. Based on these ESG-adjusted returns a mean-variance optimum portfolio is determined. This ESG-adjusted portfolio is compared to the unadjusted optimum portfolio. Both the case including and the case excluding short selling were analysed. For the case without short selling, the out-of-sample analysis showed no significant change in the average annual return or volatility. However, there was a significant decrease in the Sharpe ratio found, from 1.05 to 0.57. Meanwhile, the average ESG score improved significantly from 54.98 the 56.97, on a range of 0 to 100. The out-of-sample analysis showed a significant decrease from 25.58% to 18.86% in the average annual return and no significant change in average volatility for the case without short-selling. The average Sharpe ratio decreases significantly from 1.68 to 1.30. The average ESG score improved from 76.14 to 80.90. Similar patterns were found when screening for the individual pillar scores. A further understanding of the trade-off between financial performance and socially responsible investment is developed.
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Faculteit der Managementwetenschappen