Review of Academic Studies

It is valuable to consider the wider literature on academic studies that exists related to research on the relationship between the broad Responsible Investing field and superior financial performance.  This is important since there is widespread perceptions and opinions in the professional financial market that incorporating social or faith based values into investment decisions leads to inefficiency, higher risk, less diversification, and lower returns.  This viewpoint is especially strong from those that espouse Modern Portfolio Theory and Shareholder Value Maximization as their beliefs of investing, and who do not view investing as ownership in the underlying assets but as an act entirely independent.

Four recent studies or reports are particularly helpful for this review.  Each of these papers provides a composite analysis of an even larger set of papers on these topics.


The Journal of Investing Paper

A research paper in the Journal of Investing in Fall 2010 attempted to determine if, as is widely suggested by some in the financial industry, the incorporation of faith based values into the investment decision making process, leads to under-performance relative to the broad market or to the related SRI market.  The paper reviewed prior research on this topic, and performed primary research based on an aggregate of existing faith based funds.  The conclusions from both literature review and the primary research contrasted with the perceptions in the market.  The authors conclude that the additional screens and criteria used by the faith-based funds does not hinder performance relative to the market.  The authors also found in their research that faith-based funds did better than SRI funds in general.

“…the additional values-based screens used by these (faith-based) funds do not hinder their performance relative to the market overall.  We also find that faith-based funds do better than SRI funds in general.  From the findings, we can conclude that investors do not seem to sacrifice satisfactory economic returns by making ethically and socially responsible investing decisions based on their faith.”

In this study by Lyn and Zychowicz, the researchers did specifically look only at faith based funds.  However, the study included all faith based funds, and did not specifically look at Christian faith based funds.  Also, the study used composite performance data across all categories so may distort or hide category specific variances in relative performance and relationships.


Mercer Research Report

There are two research reports from Mercer that reviewed the relationship between financial performance and ESG criteria.  The most recent report is cited here, as it includes information on both the current report and the earlier report.  The current report reviewed 16 studies that sought to identify the relationship between financial performance (annualized returns) and the use of ESG criteria in a “Responsible Investing” approach.  Their analysis and conclusions led to the following results:  10 (62.5%) of the studies found a positive relationship between Responsible Investing and financial performance, 4 (25%) of the studies were neutral, and 2 (12.5%) of the studies found a neutral-negative relationship.  No recent studies found a strong negative relationship.

Mercer also went back to an earlier report they had prepared in 2007 that had additional studies on this topic.  Between the current report and that prior one, they’ve reviewed 36 studies that looked at performance issues and Responsible Investing with the following results: 20 (55.6%) show a positive relationship between ESG screens and performance, 2 (5.6%) are neutral-positive, 8 (22.2%) are neutral, 3 (8.3%) are neutral-negative, and 3 (8.3%) show negative relationship.








Figure 1 – ESG Performance Studies; source: Mercer Research



In summary, the studies show clear support, and Mercer concluded the same, that social screening and ESG integration have either neutral or more likely positive effects on performance.

“We have shown that the results are leaning in favor of the value-added proposition of ESG integration, and we are encouraged to see more research considering the impacts across different asset classes (beyond equities) and the effects at the disaggregated level (such as sector impacts).”



Deutsche Bank Report

This report focused on what they describe as Sustainable Investing, first providing a history of the evolution in the approach from simple negative screens, to Socially Responsible Investing (SRI) which generally includes both negative and positive screens, and finally to what they describe as Responsible Investing (RI) which takes into account ESG factors in a more integrated fashion.

They reviewed primary and secondary research to determine correlation between ESG factors and positive financial performance (risk adjusted superior returns).  What was interesting to note is they found correlation between ESG integration and superior risk adjusted returns, but more so at the individual company level, not in the funds that seek to invest in those same companies.

“We do indeed find positive correlation in a majority of securities studies, particularly those that look at securities that rate highly with regard to CSR (Corporate Social Responsibility) and/or ESG.”


MSCI Report

The MSCI report focused largely on testing and analyzing different enhanced index portfolio designs with the use of various Environmental, Social, and Governance (ESG) factors.  They used their own proprietary Intangible Value Assessment (IVA) rating system to measure the relative performance of companies on ESG factors.  Because this was designed to analyze different enhanced index strategies, the research focused on individual companies and index funds created specifically for this analysis.  It did not compare to existing index funds, but only to industry benchmarks. The three strategies for an enhanced index design were 1) to exclude the companies with the worst ESG scores (“ESG Exclusion”), 2) to overweight those companies with the best ESG scores (“Simple ESG Tilt”), and 3) to overweight those companies with the greatest improvement in their ESG score over a period of time (“ESG Momentum”).   The results of the research are summarized in the below highlight from the report:

“Proponents (of ESG Investing) argue that markets do not efficiently price ESG factors because they address long-term risks that have not been absorbed by the economy, and that alpha generation is possible as markets begin to recognize these undervalued influences. Academic studies and industry analyses have supported both sides of this argument, although on balance they find that investors employing ESG factors do not impose a significant performance penalty, that investors can achieve comparable risk-adjusted returns to non-ESG tilted strategies, and that investors may be able to enhance their returns through the use of certain ESG strategies.”



Lyn, Esmeralda O.; Zychowicz, Edward J.; “The Impact of Faith-Based Screens on Investment Performance.” The Journal of Investing, Vol 19, No 3 (Fall 2010), pp 136-143

Carpenter, Guy; Wyman, Oliver; “Shedding Light on Responsible Investment: Approaches, Returns, Impacts”, Mercer Investment Consulting, November, 2009

Fulton, Mark; Kahn, Bruce; Sharples, Camilla; “Sustainable Investing: Establishing Long-Term Value and Performance”, Deutsche Bank, June 2012

Nagy, Zoltan; Cogan, Doug; Sinnreich, Dan; “Optimizing Environmental, Social, and Governance Factors in Portfolio Construction”, MSCI, February 2013

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