Responsible Investment

The eco-efficiency premium puzzle

January 30, 2008
Image“pieces of the puzzle” by Mark Lietz (CC BY-NC-SA 2.0)

Returns were computed for the 1995-2003 time period (the Innovest data starts in July 1997 — the authors acknowledge that look-ahead bias is possible, but note that shortening the time period to 1997-2003 does not affect the results of the paper). Annualized mean return for the high-ranked portfolio was 12.2% vs. 8.9% for the low-ranked portfolio. CAPM alpha was computed as 1.29 (p<0.01) for the high-ranked vs. -1.76 (p<0.01) for the low-ranked. After adjusting for industry, the difference in these alphas grew from 3.05 to 3.82. The authors also use a Carhart-type model and find that the high-ranked portfolio’s alpha of 3.98 (p<0.10) was dramatically higher than the low-ranked portfolio’s -1.08. The industry-adjusted difference is again larger, rising from 5.06 to 6.04. The authors employ a variety of tests of robustness to demonstrate that the effect persists despite changes in regression variables or imposition of transaction costs.

Although this study is a backtest, the magnitude of the reported alphas are so large, even after adjusting for risk using a variety of models, that the findings deserve further attention.

See also the closely-related Bauer et al. (2005).


This article was previously published on, January 30, 2008.

This article may be reproduced according to our terms of use with attribution (and link, if online) to To be cited as: “The Eco-Efficiency Premium Puzzle”, Lloyd Kurtz,, January 30, 2008.

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Research Paper


Kees Koedijk
Professor of Financial Management, Tilburg University and Dean of TiSEM

Jeroen Derwall
Assistant Professor, Tilburg Sustainability Center

Rob Bauer
Rob Bauer is Professor of Finance, Maastricht University

Nadja Guenster
Assistant Professor of Finance, Maastricht University

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