Investments in man and the environment underrated on stock market

September 17, 2014

Investments of companies in the environment and man are sometimes underrated in the stock market, as is evident from studies into socially responsible investments by Ph D student Arian Borgers of the Tilburg University. Correcting this may yield investors in these stocks extra returns. He also concludes that excluding controversial stocks, such as products relating to weapons and tobacco, has but little (negative) effect on the returns of investment portfolios.

Image: © Nationale Beeldbank

The number of ‘responsible’ investors and investment funds has steadily increased worldwide during the past decades. In his study, Responsible Investing: New Insights into Performance and Tastes, Arian Borgers studies various financial aspects of Socially Responsible Investment (SRI). Borgers is supervised by Prof. dr. C.G. Koedijk and Prof. dr. J.R. ter Horst, dean and vice-dean of TIAS, respectively. The co-promotor is Dr. J.M.M. Derwall.

The ethical aspect concerns the exclusion of investments in companies or business sectors that go against the standards and values of the investor. In addition, there are also certain investors who weigh information on how a company operates on an environmental-, social and administrative level (Environment, Social and Governance, ESG) in their investment decisions, in order to optimize the return-risk ratio in that way.
Borgers’ study demonstrates that this ESG information is of value to investors, because investments in man and the environment were underrated in the stock market. If the market were to correct this undervaluation, the investor can realize additional returns on those stocks. Borgers analyzed various types of data: data on the corporate social responsibility of the three thousand largest companies from the USA, the daily and monthly returns on stocks, the predictions of analysts regarding trading profits, accounting data, the returns of investment funds and the investments of institutional investors.

Responsible pension investments important to women

The thesis also contains a paper by Borgers from which it is evident that more than half of the people of a pensionable age in the Netherlands find how their pension contribution is invested to be important. Women in particular are even willing to settle for a somewhat smaller pension in that respect. The Dutch mainly have an aversion for investments that are profitable to the weapons industry or violators of human rights. There is relatively little objection to investments in tobacco, alcohol and gambling. It is found, however, that approx. one-third of the people are not sufficiently ‘financially educated’ to actually take their ethical preferences into account in their financial choices. More than 1700 Dutch people were questioned in this pension survey.

Arian Borgers (Veldhoven, 1987) acquired a Research Master at the Tilburg University in 2010. He then started his doctoral research at the department of Finance and the Tilburg Sustainability Center. As of May 2014, he has been working as a research assistant at the Maastricht University and the European Center for Corporate Engagement.
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