Relationship between sustainable and responsible investing and returns: a global evidence

Abstract

Purpose

The purpose of this study is to examine whether sustainable and responsible investing (SRI) outperforms the benchmark index investing across different time frames globally.

Design/methodology/approach

Based on the systematic weighted environmental, social and governance (ESG) ratings compiled by Thomson Reuters Asset4, the authors assess the stock market performance and risk of highly compliant firms portfolio in seven different countries; grouped as developed and developing nations over different time frames by adopting the Jensen’s alpha model (CAPM) and the Fama and French three-factor model.

Findings

The study finds that SRI portfolios significantly underperform their benchmark index, in case of, the developing nations, however, enjoy a significantly lower risk. This is contrary to the findings in case of developed nations, where the US SRI portfolio has significantly outperformed the benchmark index and the UK and Australia SRI portfolios have performed in line with the benchmark index. Finally, the study discusses results and implications for regulators, practitioners and investors’ who believe in the SRI investing.

Research limitations/implications

This study provides empirical support for the practitioners, policymakers and investors emphasizing that in the case of developed nations SRI investments generate a significant excess return or at the best perform in line with the broader market index. However, in the case of developing nations, very few firms are consistently rated on ESG parameters. This provides lesser options for investors in developing nations to apply the “impact first” philosophy of investment. The investor’s community and regulators need to make a serious effort in promoting firms to take up sustainability effort seriously.

Originality/value

The unique contribution of this study is that it considers a wider definition of the term “sustainability” and examines the performance of SRI investment in developed vs developing countries. This is one of the few studies at the global level, which highlights whether sustainable investing generates abnormal risk-adjusted returns for the investors.

Citation

Bodhanwala, S. and Bodhanwala, R. (2020), "Relationship between sustainable and responsible investing and returns: a global evidence", Social Responsibility Journal, Vol. 16 No. 4, pp. 579-594. https://doi.org/10.1108/SRJ-12-2018-0332