An equation with many variables: unhiding the relationship between sustainability and investment performance

Abstract

Financial investment performance of stock portfolios is driven by many factors of influence like portfolio diversification, quality of funds management or gravitational effects of market phases. It is, therefore, quite possible that relationships between sustainability and financial performance elude measurability because they may be overshadowed and dominated by other, more powerful or temporarily more influential factors. Using a new quantitative model for portfolio optimisation that simultaneously controls for both financial and sustainability related effects, we investigate whether and how different levels of sustainability in stock portfolios influence investment return when other factors with known influence on investment performance are neutralised. The model is applied to the German Stock Market Index Deutscher Aktienindex (DAX) for the period of 2003–2012 with regard to varying market phases. The findings show a distinct yet nonlinear relationship between sustainability and investment performance that is especially strong in phases of crisis. These results may indicate a business case for socially responsible investment (SRI) that has not yet been fully capitalised with the existing SRI instruments.

Keywords:

• socially responsible investment (SRI)
• portfolio management
• portfolio optimisation
• sustainability
• financial performance