Sustainable Investments and Markets 

Sustainable Investment Portfolios
Jeroen Derwall, Kees Koedijk, Rob Bauer
This project represents the first comprehensive review of SRI performance that addresses the need for a specific focus upon individual criteria underlying SRI (i.e. ESG and ethical screens) in order to better understand the return and risk features of SRI approaches. The results clearly show that better understanding is needed regarding whether or not investor preferences are strictly financial. Also the question whether investors/analysts properly anticipate the relation between ESG and firms’ cash flows over both the short-term and long-term is addressed within this theme.

Ethical values and trading decisions of institutional investors
Jeroen Derwall, Nadja Guenster
We compare the trading behaviour of socially responsible (SR) institutional investors to conventional investors. Because SR investors should not only care about the risk-return trade-off but also about social implications of their investments, we expect a different response to financial news: if a company experiences bad financial news but at the same time keeps its CSR standards high, SR investors should be less inclined to walk away. If a company experiences good financial news combined with high CSR ratings, we expect SR investors to favour the company even more.

Sustainable Investment Portfolio Performance and Tracking Error
Rickard Olsson
Evaluates the performance of equity portfolios to satisfy both stringent sustainability criteria and other typical institutional investor risk constraints. Portfolios are constructed for different levels of portfolio sustainability (screening stringency) and different sustainability criteria. The main results for S&P500 stocks with KLD ratings in 1992-2010 indicate that the constructed factor neutral sustainable portfolios often generate significant Carhart alphas and generally outperform equal- and value-weighted portfolios. Results on additional sustainable strategies, including best-in-class screening and portfolio sustainability score maximization, reinforce the main results. The evidence on the performance, factor exposures and tracking error of different sustainable strategies should help in setting investment objectives and performance evaluation. The project demonstrates how portfolio optimization can be used to construct high-performing sustainable portfolios to meet typical institutional risk constraints.

The impact of credit and ESG ratings on Analysts’ Forecasts
Stefano Herzel, Pontus Cerin, Rocco Ciciretti, Alessandro Giovannelli
The recent financial crisis showed that traditional ratings are often inadequate to assess the effective risk of financial investments. The aim of this project is to measure the importance of social rating (ESG) on professional analysts’ forecasts of financial performances. To this goal, we merged in a unique dataset the I/B/E/S Detail data on Analyst Forecasts, the social ratings provided by KLD, and the leading macroeconomic news from 1997 to 2004. We are also proceeding into the integration of data from Asset4 and traditional credit rating agencies. The on-going econometric analysis is providing empirical evidence to assess the information content provided by ESG rating on analysts’ forecasts, after controlling for macroeconomic news releases.

A microstructural investigation of socially responsible investment
Stefano Herzel, Annalisa Fabretti, Marco Nicolosi, Flavio Angelini, Imon Palit
Seeks a better understanding of the link between CSR practices and SRI. We show evidence of a reflexive effect between the trading behaviour of investors and CSR practices. For a clearer understanding of this link we empirically investigated micro-structural market data to study the correlation between CSR practices and the trading behaviour of investors. Matching companies from Thomson Reuters Asset4 CSR ranking and London Stock Exchange order book datasets, analysis shows evidence that companies with higher CSR rankings are more robust to endogenous high frequency speculation. This is of benefit to practitioners looking for more stable and sustainable investment.

Sustainable and Commercial Property
Nils Kok, Piet Eichholtz, Andrea Chegut, Erkan Yonder
Aims to fill an important knowledge gap by focusing on energy efficiency, sustainability and corporate governance in global property markets. We aim to investigate environmental sustainability in the direct property market, the determinants of residential and commercial energy consumption, and especially how sustainability might add value to property developers and investors (listed and unlisted). The Global Real Estate Sustainability Benchmark (GRESB) is the first global effort to survey and assess the environmental performance of real estate companies and funds, assisting pension asset owners to take ESG into account in their real estate allocation.

Sustainable Venture Capital Investments
Anders Isaksson
Explores how private equity (PE) and venture capital (VC) funded ventures create sustainable growth. This includes research on both the supply side (investor behaviour) and the demand side (firm/entrepreneur) of private equity. The studies on investor behaviour explore how (and value of) ESG factors are incorporated in investment decisions, while studies on firm behaviour investigate how entrepreneurial motives and values are linked to environmental concerns. Finally, empirical analysis is performed on cleantech VC investments in order to investigate to what extent cleantech is driven by VC investments. The project can help entrepreneurs to better understand how venture capital investors think and act, and investors are given the opportunity to develop best practice models and to use industry benchmarks. Policy makers will better understand how sustainable VC and entrepreneurship are best supported.

Sustainable Housing: The case of the Swedish private housing market
Pontus Cerin, Nils Kok
Explores whether there exist economic implications of energy performance as specified in the mandatory Energy Performance Certificates during sales of private houses in Sweden. Unique aspects – other than energy consumption – such as type of energy, suggested costs for energy improvements, heating technology, materials and radon are also tested against sale prices of Swedish housing. Since buildings account for about 40 percent of energy consumption within the OECD – and the existing building stock constitutes the vast lion share of these – the results of this project are paramount to investments towards sustainability. A market premium is detected for energy efficiency displayed in energy performance certificates. Buyers of properties also demand a rebate for cost efficient suggestions for energy improvements to compensate for the renovation burden.

The Role of ESG in credit markets
Daniel Hann, Jeroen Derwall, Rob Bauer, Roger Otten
The project intends to shed light on how companies’ ESG profiles are related to their credit standings. The empirical studies altogether investigate the direct and indirect effects that various aspects of ESG may have on credit risk. The studies in project A10 provide evidence that better ESG tends to be associated with more conservative capital structures, higher credit ratings, and lower corporate bond yield spreads.