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New review of academic research finds sustainable investments match or beat conventional peers

New analysis by researchers at Germany’s University of Kassel

A new analysis of academic literature has found that returns from sustainable investments are either equal or superior to those from conventional ones.

Having examined 35 of the studies, Professor Christian Klein and Miriam Hofmann at Germany’s University of Kassel found that in 14 of them, sustainable investments outperformed the conventional ones. In another 15, there was no performance difference. And in only six of the studies did sustainable investments underperform versus conventional peers.

Nearly all of the studies that Klein and Hofmann examined were written between 1997 and 2005. “Since 2006, there have been hardly any more published. One explanation is that people in academia have realised that merely focusing on returns doesn’t add much value to the debate,” Klein said.

In evaluating the studies, Klein and Hofmann did not focus on pure returns, but instead bore in mind the trade-off between risk and return. To gauge performance of both investment approaches, they used such measurements as the Sharpe Ratio.The researchers also discovered that most of the studies concluded that companies which score highly on environmental, social and governance (ESG) factors tend to outperform those that do not. To measure this, the researchers looked at the companies’ market capitalisation.

Klein also noted that two-thirds of all empirical studies (53) looking into the merits of sustainable investing were done for the US market. Of the rest, most dealt with the UK, with Germany playing just a minor role, he said. His and Hofmann’s analysis will be published by the German Academic Association for Business Research (link).

Meanwhile, the pair are working on another paper looking into the link between ESG scores for companies and how their bonds are rated. According to Klein, one key finding is that companies in markets which value sustainability have much higher rated debt than those in markets which do not.