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Devin D. Thorpe

Devin Thorpe

Calvert Releases Paper Quantifying Impacts of ESG Factors in Equity Investments

Study demonstrates portfolios consisting of companies showing the greatest improvement in their ESG profiles outperform comparable broad market indices

BETHESDA, Md., July 22, 2015 – The equities investment team at Calvert Investment Management, Inc. has released a study that finds “empirical evidence across multiple approaches that ESG factors can enhance risk-adjusted investment performance in a portfolio management context.” “ESG” refers to non-financial environmental, social and governance issues.

Natalie A. Trunow, Chief Investment Officer, and Joshua Linder, CFA, Assistant Portfolio Manager, are the authors of the comprehensive study, titled Perspectives on ESG Integration in Equity Investing: An opportunity to enhance long-term, risk-adjusted investment performance. The paper is among the first to demonstrate the positive material impact of ESG factors in long-term equity performance.

In the study, Trunow and Linder note that risks and opportunities relating to non-financial factors can significantly impact companies’ business operations and, in turn, stock prices. They write: “Our analysis suggests that incorporating companies’ non-financial behaviors into investment decisions allows for a more holistic approach to investing, which can improve risk management and the investment selection process.

“In our evaluation of exclusionary ESG screens, we found a consistently positive stock-specific impact in the Calvert Social Index (now known as the Calvert U.S. Large Cap Core Responsible Index) after removing significant sector and risk factor biases through an optimization process. The second phase of our historical analysis moved beyond negative screening to determine whether ESG factors can be used to generate alpha in an active investment strategy. Our results revealed that companies with a commitment to improving their ESG profile tend to produce better risk-adjusted stock returns than companies with declining ESG scores. This finding was consistent across regions, datasets, and throughout various time periods. We also observed an increase in ESG factor efficacy more recently, indicating a possible market inefficiency in pricing publicly available sustainability information.”

The paper uses comprehensive historical analysis over various time periods from June 2000 to December 2014 to evaluate different methods for introducing ESG factors into the investment process. It starts with an assessment of the impact of exclusionary ESG screens on investment performance after accounting for sector and style biases implicit in the screened universe. Second, it examines if ESG factors can add value as stand-alone inputs in stock selection, and whether results are consistent across geographic regions. Third, the study considers whether combining traditional financial factors with ESG information produces better investment performance.

The study includes:

  • An examination of several approaches for introducing ESG factors into the investment process to assess the validity across various investment strategies and regions
  • An assessment of the efficacy of, and differences in, various approaches to incorporating ESG information into portfolio strategy, including traditional negative screening and using ESG inputs as alpha signals
  • An analysis of ESG data in a historical portfolio context to assess its usefulness to industry practitioners in a realistic portfolio format
  • A review of the interaction of ESG data with otherwise traditional investment factors to see if application of ESG information in investment portfolios can improve risk-adjusted returns over and above traditionally used investment factors
  • An assessment of ESG information in both U.S. domestic and European stock market contexts and a comparison of results
  • A review of the history of responsible investment and discussion of major trends in ESG integration in the asset management industry from both a theoretical and practitioner’s perspective

Read the paper’s full text, including detailed explanations of the data used, here.

About Calvert Investments

Calvert Investments is a global leader in Responsible Investing. Our mission is to deliver superior long-term performance to our clients and enable them to achieve positive impact. Founded in 1976 and headquartered in Bethesda, Maryland, Calvert Investments had more than $13 billion in assets under management as of June 30, 2015. Learn more at

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