October 13, 2005
Moskowitz Prize Winning Study Correlates Corporate Eco-Efficiency and Financial Outperformance
by William Baue
The paper finds a significant and positive relationship between Innovest eco-efficiency ratings and
both market-based and accounting-based financial performance metrics.
There is an ongoing debate in academia, as well as in the media and the business and investment
communities, as to whether corporate social responsibility (CSR) pays. The Moskowitz Prize,
awarded annually to the best empirical research in the field of socially responsible investing
(SRI), this year goes to a study that engages in this debate by
focusing more narrowly on the relationship between corporate eco-efficiency and financial
performance. The paper, authored by Dutch researchers Nadja Guenster, Jeroen Derwall, and Kees
Koedijk from Erasmus University and Rob
Bauer of Maastricht
University, finds "evidence that the virtues of a strong corporate eco-efficiency policy can be
significant from a financial perspective."
"If you are interested in the financial
impact of environmental and sustainability practices, I think it is fair to say that this is a
must-read," states Lloyd Kurtz, senior portfolio manager at Nelson Capital Management, on his SRI-related weblog. Mr. Kurtz founded the Moskowitz
Prize in 1996 under the auspices of Social Investment Forum (SIF), and continues to be its "guiding spirit" as the prize
is now hosted by the Center for Responsible Business of the
Haas School of Business at the
University of California Berkeley.
The paper, entitled The Economic Value of Corporate
Eco-Efficiency, seeks to overcome methodological limitations of previous empirical studies on
both the environmental and the financial sides of the equation. First, the researchers chose to
use eco-efficiency ratings from Innovest
Strategic Value Advisors because its methodology reflects not only historical environmental
performance but also identifies future environmental risks and opportunities. Other strengths of
the Innovest method include the fact that it generates monthly as opposed to yearly eco-efficiency
data, and also it rates firm-level eco-efficiency relative to other firms, taking the sector into
On the financial side, because market-based and accounting-based measures each
have their own strengths and weaknesses, the study applies "both measures to ensure that our
results are reliable and consistent." Specifically, the study examines operating performance by
tracking return-on-assets (ROA), and firm value by tracking Tobin's q.
accounts for potential confounding factors, and also addresses the problem of survivor bias that
has led to criticism of previous research on CSR by including not only firms covered by Innovest
recently but also those that have disappeared over time, for example due to mergers. It tracks
between 154 and 408 US firms through 24 quarterly regressions over the period from the end of
December 1996 through the end of September 2002 drawing on financial data from the Compustat US
"I really like Nadja's study because it goes very deep into the 'why',
and looks at both fundamental performance (ROA) and valuation (Tobin's Q)--it really sets a
new bar," states Mr. Kurtz in his blog. "I don't think it's enough anymore to run some numbers and
show a variable was impactful (or not) over a certain time period--Today I think you also have to
explain how it's happening."
In a presentation at SRI in the Rockies, the annual social investing
conference where the Moskowitz Prize is awarded, Dr. Guenster explained the details of the
findings. The study finds a "positive and significant" relationship between eco-efficiency and
both ROA and Tobin's q. A one point increase in eco-efficiency rating corresponds to a 2.1
percent increase in ROA and a 3.4 percent increase in Tobin's q, according to the study.
The study also finds an "asymmetric" relationship between eco-efficiency and both ROA and
Tobin's q. In other words, in regards to ROA, the least eco-efficient firms display
significant operational underperformance relative to the remainder of firms, while the most
eco-efficient firms do not display significant operational outperformance. Similarly, especially
low-ranked companies on eco-efficiency have lower Q values, but high-ranked firms on
eco-efficiency "did not display a significant positive association with Q over the whole
The paper ends by noting the implications of its findings for both managers and
investors, and then extrapolating potential future trajectories.
"Evidently, managers have
little reason to worry that an environmental policy conflicts with the company’s primary financial
objectives," the authors state. "Investors may interpret our results as evidence that corporate
environmental performance is a potential source of information that helps them generate superior
"As for these excess returns, an important avenue for further research
would be to look at the endurance of the observed upward trend in the value of eco-efficient
firms," the paper concluded. "Will these patterns persist in the future? What does this imply
about future returns to shareholders?"