Responsible Investment

Is ESG information for investors losing its competitive edge?

December 13, 2012

An oft-cited argument is that firms reap economic benefits from strong performance on ESG issues in a manner that is not fully understood, and therefore not fully valued, by the financial market. Many of these institutions embrace this view as the primary justification for the pursuit of responsible investments. However, the idea that ESG information will provide investors with a long-term competitive advantage goes against the concept of efficient capital markets as well as a large body of empirical evidence that active portfolio managers fail to beat the market consistently. Even if ESG information arms investors with a competitive advantage, economic theory predicts that these benefits materialize in the short-run but will disappear in the long run as the broader investment community learns about these ESG factors.

An increasing number of studies are hinting that such learning effects have taken place. In a recent study conducted at Harvard and Stanford Universities, Professors Bebchuck, Cohen and Wang[1] suggest that the financial market is no longer surprised about the information content of corporate governance factors that previously have been found to predict stock returns in the U.S. market. On the environmental and social spectrum, I collaborated with researchers from Tilburg Sustainability Center (Tilburg University)  – Arian Borgers, Kees Koedijk and Jenke Ter Horst on the study “Stakeholder relations and stock returns: on errors in investors’ expectations and learning”. Our findings suggest that investors and analysts are nowadays less than before positively surprised about the profits that socially and environmentally responsible companies report. Taken together, the studies also find that risk-adjusted returns on trading rules that use governance or CSR information have diminished in recent years.

These results have several practical implications. For institutional investors that pursue both financial and social goals, the results imply that a performance-oriented investment case for integrating ESG in investment decisions has weaker empirical foundations than before, at least when based on ESG information that is relatively easy to obtain. On the other hand, the results can also be taken to imply that ESG issues are becoming more mainstream, which incentivizes company managers to place ESG issues higher on the corporate agenda.

PRI Conference Prize

The above mentioned paper, “Stakeholder Relations and Stock Returns: On Errors in Investors’ Expectations and Learning” was awarded the Sustainalytics Prize for papers of excellence on responsible investment. The award was presented at the 2012 Principles for Responsible Investment (PRI) Academic Conference held at York University, Toronto 2 October and was judged by a panel of leading academics and investors. Rob Lake, Director of Responsible Investment at the PRI, said: “Academic research is vital to the development of responsible investment: without rigorous evidence of the financial benefits of integrating ESG into investment activities, little will be achieved. The winning article makes an important contribution to this field and we are grateful to Sustainalytics for recognizing and rewarding important research.”


  1. Bebchuk, Lucian A., Alma Cohen, and Charles C. Y. Wang. “Learning and the Disappearing Association Between Governance and Returns.” SSRN eLibrary (June 1, 2011).

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Is ESG information for investors losing its competitive edge?
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Jeroen Derwall
Assistant Professor, Tilburg Sustainability Center

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