Innovest Strategic Value Advisors, Inc.

Can Environmantal Factors Improve Stock Selection?

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Courtesy of Innovest Strategic Value Advisors, Inc.

The concern over the sustainability of mankind’s use of natural resources has found a receptive audience in many parts of the world. As evidence of environmental challenges such as global climate change continue to grow, it is likely that sustainability issues will be raised by financial institutions, especially those exposed to property loss or product liability. Given this backdrop, it is not surprising that there have been a number of studies attempting to answer the question of whether ‘social responsibility’ or ‘sustainability’ improves or detracts from investment performance.
While a number of studies based on the performance of socially responsible mutual funds have attempted to answer the performance question, they have limitations, since there are a number of factors, such as manager skill, that also
meaningfully affect returns. One recent study by Derwall et al. (2004) made a great leap ahead in that it used a sophisticated multifactor framework on which to evaluate whether strong environmental performance translates into
superior equity performance. They concluded that their ‘findings provide evidence suggesting that the benefits of considering environmental criteria in the investment process can be substantial.



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