||When testing the impact “extra-financial” factors have on performance, past empirical studies have returned mixed results, with some suggesting SRI funds yield the same risk-adjusted return, on average, as traditional funds, and others suggesting investors pay a price for their ‘ethics’. If satisfying an SRI factor is a value creating decision, the price performance of a stock should have a positive relationship with the level of adherence to SRI.|
Several arguments would support this, such as increased adherence enhancing a firm’s input-output efficiency, signaling strong management, or strengthening supply chain stability. Secondary effects, such as a firm’s access to financing may also be improved with such activities improving its standing amongst other financial market participants and governments. Conversely, it can be argued that adopting these standards translates into higher costs and is as such damaging to shareholder value.
Rather than hope to provide a definitive conclusion to this debate, we simply examine here the performance of the “ESG” (environment, social and governance) styles as represented by the Bloomberg ESG Survey and the stock ratings that underlie them to provide some further context to the discussion.
In doing so, we consider factors that influence their performance such as size effects and relative valuation within the tiers of companies defined by TWSE. An awareness of regional and sector effects is also integral to this. As well as simply “letting the data speak”, we also wish to see if we can enhance the performance of stocks selected by extra-financial factors by considering their associated financial characteristics. To conduct our analysis, we also have utilized Hann-Tarn Jeng’s “8+ Business Model” and “8+ Finance & Accounting Model”.
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