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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:

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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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