The Eco-Efficiency Premium Puzzle

TLDR

The study investigates whether socially responsible investing (SRI) yields superior portfolio performance by evaluating eco‑efficiency. Using Innovest eco‑efficiency scores, the authors built and compared two equity portfolios ranked by eco‑efficiency. The high‑eco‑efficiency portfolio outperformed the low‑eco‑efficiency one, with the excess returns persisting after controlling for market, style, industry, and transaction cost effects.

Abstract

Does socially responsible investing (SRI) lead to inferior or superior portfolio performance? This study focused on the concept of "eco-efficiency," which can be thought of as the economic value a company creates relative to the waste it generates, and found that SRI produced superior performance. Based on Innovest Strategic Value Advisors' corporate eco-efficiency scores, the study constructed and evaluated two equity portfolios that differed in eco-efficiency. The high-ranked portfolio provided substantially higher average returns than its low-ranked counterpart over the 1995–2003 period. This performance differential could not be explained by differences in market sensitivity, investment style, or industry-specific factors. Moreover, the results remained significant for all levels of transaction costs, suggesting that the incremental benefits of SRI can be substantial.