Updated Review of Academic Studies

It is valuable to consider the wider literature that exists related to research on the relationship between the broad Responsible Investing field and superior financial performance.  This is important since there remain 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.

The overwhelming evidence from the various studies dating back to the 1970’s is that of a slightly positive correlation between ESG factors and financial performance.  It is worth mentioning that as visibility has grown for the concepts of ESG, Sustainable Investing, Responsible Investing, and Faith Driven Investing, there is an increasing amount of data available and greater transparency in the data.  For those reasons, it is expected that research on the topic and management with these factors in mind will continue to increase resulting in improved understanding of the effects such factors play in return performance.

Three recent studies are illustrative of the quantity and quality of research.  They also provide three distinct perspectives – one looking at fund performance, one looking at indexes, and the third looking at many prior studies within the field.  Prior studies remain credible and support the new research.


“Sustainable Reality – Analyzing Risk and Returns of Sustainable Funds”, Morgan Stanley Institute for Sustainable Investing, 2019

The most recent study included in this review was from Morgan Stanley and included performance data through 2018.  The study attempted to test 2 hypotheses; the first that return for Sustainable funds did not differ from traditional funds, the second that risk may be mitigated in sustainable funds compared to traditional funds.

The study also cited a key reason why additional studies are needed.  In a separate survey of investors by Morgan Stanley, they found that over half (53%) believed that sustainable investing requires a financial trade-off.  An even greater number of millennials (59%) had the same perception.  These perceptions continue even though as the Morgan Stanley report states, “In the 2000s, a number of studies analyzed the performance of sustainable investments.  In general, this body of research found that from a statistical perspective, the return performance of sustainable and traditional funds has been similar across regions, asset classes and time periods.  While academic research is broadly settled on the finding of statistically equal performance, there is an increasing collection of empirical evidence that sustainable funds may provide investors with decreased risk compared to traditional funds.  The consensus view of the research community appears to be that sustainable investment choices provide investors returns that are in line with those of their traditional peers, while potentially offering downside risk protections to their investors.”

The Morgan Stanley study looked at data from 2004 – 2018 and included performance data for over 10,000 funds.  The study compared the median performance for sustainable funds (as defined by Morningstar) against the median performance of traditional funds.  The conclusion of the study was “there was no consistent and statistically significant difference in total returns” of sustainable funds compared to traditional funds.  For risk, the study used what they called “Downside Deviation” which they described as similar to standard deviation but only looking at the deviation below the minimum acceptable return.  On this point, the study concluded that “Sustainable funds experienced a 20% smaller downside deviation than traditional funds.  This was a consistent and statistically significant finding.”

Included in the study was a snapshot of performance during high volatility, namely the period October 1st to December 31st, 2018.  The conclusion was

“the median sustainable (equity) fund outperformed the median traditional fund by 1.39%… In other words, we are virtually certain that sustainable investment strategies may potentially offer downside risk protection to their investors in times of high volatility.”


“Responsible Investing: Delivering Competitive Performance”, Nuveen TIAA Investments, July 2017

The study by Nuveen TIAA focused on comparing “Responsible Investing” (RI) indexes against comparable industry benchmark indexes, thus seeking to avoid issues of manager bias or equity selection in the comparisons.  It also removes from the comparison and discussion issues around active versus passive management.  TIAA uses the term Responsible Investing interchangeably with SRI.  In the study, TIAA used the following RI indexes: Calvert U.S. Large Cap Core Responsible Index, Dow Jones Sustainability U.S. Index (DJSI U.S.), FTSE4Good US Index, MSCI KLD 400 Social Index, and MSCI USA IMI ESG Leaders Index.  They compared those to the Russell 3000 and the S&P 500 indexes, while also calculating Sharpe ratios to examine volatility and risk.

TIAA’s study concluded that “leading RI equity indexes over the long term found no statistical difference in returns compared to broad market benchmarks, suggesting the absence of any systematic performance penalty.”

It also concluded that

“incorporating ESG criteria did not result in higher risk levels, measured by Sharpe ratio and standard deviation.”

TIAA did find over shorter periods of time that tracking error between the RI indexes and the benchmarks showed greater variance than over the longer term, and recommended having a good understanding of the methodology underpinning the RI index.


“ESG and Financial Performance: Aggregated Evidence from more than 2000 Empirical Studies”, Journal of Sustainable Finance and Investment, 2015

The most comprehensive meta study to date of ESG factors and corporate financial performance was published in the Journal of Sustainable Finance and Investment in 2015.  This study reviewed 2,200 prior studies of the relationship between ESG factors and corporate financial performance (CFP).  The researchers broke down the studies into two groups – so-called “vote count” studies and econometric “meta-analyses” studies.  Vote count studies used a simplified system to determine a relationship between ESG and financial performance by assessing each data set reviewed and counting as either positive, negative, or neutral.  This does not take into consideration any weighting of data or variances.  The meta-analysis studies, on the other hand, provided a more sophisticated analysis and allowing for statistical significance calculations on the correlation between ESG and financial performance.

For the vote count studies, a total of 35 were reviewed including 1,816 independent studies.  Based on this universe, the research authors determined that 47.9% of the studies had positive findings (ESG factors and performance were positively correlated), while only 6.9% of the studies found negative correlation.  The remaining studies had mixed or neutral results.

With the meta-analyses studies, 25 total studies were included comprising 1,902 independent studies.  Based on this universe, the authors determined that 62.6% had positive correlation findings, while 8.0% were negative and the remainder were mixed or neutral.

Summarizing the review of the studies, the authors found that based on their analysis,

“Roughly 90% of studies found a nonnegative ESG – corporate financial performance relation…. The large majority of studies report positive findings.”  They also found that …Positive ESG impact on CFP appears stable over time.”  In conclusion, there is a “…business case for ESG investing is empirically very well founded.” 



These four older studies or reports remain 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.”



Friede, Gunnar; Busch, Timo; Bassen, Alexander; “ESG and Financial Performance: Aggregated Evidence from more than 2000 Empirical Studies”, Journal of Sustainable Finance and Investment, 2015

O’Brien, Amy; Liao, Lei; Campagna, Jim; “Responsible Investing: Delivering Competitive Performance”, Nuveen TIAA Investments, July 2017

“Sustainable Reality – Analyzing Risk and Returns of Sustainable Funds”, Morgan Stanley Institute for Sustainable Investing, 2019


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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