In recognition of Earth Day and Bryant’s April 22 panel on Climate Change and ESG Investing, we asked Asli Ascioglu, Ph.D., Finance Professor and Department Chair, Coordinator for the C.V. Starr Financial Markets Center, and Director of Archway Investment Fund, to share insights on ESG (environmental, social, and governance) investing. Professor Ascioglu first introduced ESG investing into the Archway Investment Fund in 2017, and since then it’s become an increasingly important factor in evaluating investments for the program.
The most important aspect of socially responsible investing is aligning an investor’s investment dollars with her values.
What is ESG investing and what is the appeal? What are the benefits to investors, beyond creating a positive sustainable impact?
The most important aspect of socially responsible investing is aligning an investor’s investment dollars with her values. This gives investors a say in what direction they want companies to move on the sustainability spectrum through their investment choices. Foremost, this is empowering.
The term “socially responsible investing” (SRI) is being used in various contexts ranging from ethical/values-based investing, to impact investing, to environmental, social, and governance (ESG) factor integration in investing.
Using ethical/values-based investing, investors may screen out “sin” stocks such as companies involved in tobacco, alcohol, firearms, and gambling, and choose to invest in companies that align with their own values, hence bringing in a social mission aspect to investing.
Through impact investing, investors may choose companies with the intention to generate measurable and beneficial social/environment impact in addition to long term financial return. Examples may include investing in retailers with ethical supply chains or in financial institutions that direct a certain percentage of their capital to underserved regions/populations.
By integrating ESG factors into the investment process, investors can assess a company’s behavior and policies related to environment, social and governance issues which cannot be measured by traditional financial analysis.
By integrating ESG factors into the investment process, investors can assess a company’s behavior and policies related to environment, social and governance issues which cannot be measured by traditional financial analysis.
Academic studies show that portfolios constructed with ESG integration can achieve better risk-adjusted returns. The idea behind this is that ESG factors also identify opportunities as well as concerns. For example, Khan, Serafeim, and Yoon (2016) show that a portfolio of stocks with best ranked material ESG issues has a significantly higher risk-adjusted return than a portfolio of stocks with the worst material ESG issues. A key issue here is to differentiate ESG factors based on their materiality for the performance of a company, and material ESG factors are industry specific. Therefore, through a careful analysis of ESG factors for the specific companies being considered for investment, investors can also generate better returns.
What guidance might you offer investors interested in creating a socially responsible investment portfolio?
For individual investors there are many publicly traded ETFs and mutual funds with low management fees in this domain. Investors should read a particular fund’s investment policy statement and factsheet, look at the biggest holdings of the fund, and make sure that the fund aligns well with their own view of SRI.
Students in the Bryant’s Archway Investment Equity Fund Program are currently managing a $2.6 Million portfolio, with $1.9 million in equities. The fund specifically focuses on sustainable investing by recognizing ESG issues of potential and current holdings. Students integrate ESG factors into their investments by considering an investable firm’s relationship with the environment, its relationship with employees, customers, suppliers, and the community, as well as its leadership, ethics, and business practices. Investing with ESG as an important risk factor allows the members of the Archway Investment Fund to express their values, invest in quality and sustainability, and exploit profit opportunities. Students use ESG reports and analytics provided by MSCI ESG, Sustainalytics and Bloomberg.
What should investors avoid when building a sustainable portfolio?
Investors using SRI can potentially get passionate about their investments and exclude other factors in creating their portfolios. They should keep in mind that SRI is one tool in helping them build their portfolios. The portfolios should still be constructed to help them achieve their short-term and long- term life goals. For example, while they may fall in love with a few companies due to their ESG practices, their portfolios should still be well diversified with equities from different sectors to eliminate unsystematic risk.
About Asli Ascioglu, Ph.D.
Professor Asli Ascioglu’s research interests have been focused on market microstructure such as market liquidity, information asymmetry, order execution quality, and more recently on the integration of ESG metrics in portfolios. She has published papers in academic and practitioner journals such as the Financial Review, Journal of Financial Research, Journal of Banking and Finance, the Journal of Trading and Journal of Accounting and Public Policy. She has presented her work at over 25 national and international conferences. Ascioglu earned her doctorate degree from University of Memphis. Her
At Bryant, Ascioglu has taught courses in investments, trading, corporate finance and social finance areas at the graduate and undergraduate level, including in the honors program. She also taught in the Ph.D. program at Bogazici University, Istanbul. Her advising to honors students’ thesis includes investments and trading areas such as an analysis of the flash crash of 2010, the announcement impact of companies going green on their stock prices, and the change in the mission of microfinance companies that go public. She has given numerous lectures and workshops around the world, including the Executive MBA Program at Bogazici University, Istanbul, Turkey and at Universidad del Pacifico, Lima, Peru.
