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The risk-return tradeoff: are sustainable investors compensated adequately?

Author

Listed:
  • Christina E. Bannier

    (Justus-Liebig-University Giessen)

  • Yannik Bofinger

    (Justus-Liebig-University Giessen)

  • Björn Rock

    (Justus-Liebig-University Giessen)

Abstract

We investigate the returns from investing according to corporate social responsibility (CSR) criteria using factor model estimations for a large sample of U.S. firms over the period 2003–2017. To identify the CSR intensity that allows investors to optimize their portfolio returns for a given amount of risk, we relate factor-adjusted portfolio returns to a variety of risk measures. This consideration is important as equity risks have been shown to significantly decrease with CSR. Surprisingly, our results indicate that the lowest CSR-rated portfolios are able to outperform their higher CSR-rated counterparts: Not only do they show higher factor-adjusted returns but they also deliver higher return-to-risk ratios. This indicates that equity returns in our sample decrease even more strongly than the corresponding risks with rising CSR activity.

Suggested Citation

  • Christina E. Bannier & Yannik Bofinger & Björn Rock, 2023. "The risk-return tradeoff: are sustainable investors compensated adequately?," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 165-172, May.
    • Handle: RePEc:pal:assmgt:v:24:y:2023:i:3:d:10.1057_s41260-023-00303-6
    DOI: 10.1057/s41260-023-00303-6
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    Cited by:

    1. Ian Berk & Massimo Guidolin & Monia Magnani, 2023. "Strong vs. Stable: The Impact of ESG Ratings Momentum and their Volatility on the Cost of Equity Capital," BAFFI CAREFIN Working Papers 23202, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Prodosh Eugene Simlai, 2024. "Risk Characterization of Firms with ESG Attributes Using a Supervised Machine Learning Method," JRFM, MDPI, vol. 17(5), pages 1-9, May.

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    More about this item

    Keywords

    Stock returns; Risk-return; CSR; ESG; Factor analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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