Butz, Christopher. "Decomposing SRI Performance - Extracting Value Through Factor Analysis." Pictet Quants, September 2003.

Studies the influence of sustainability factors on the performance of 288 listed European companies (90% of the MCSI Europe index) for the January 1999 - July 2003 time period. Weekly returns were obtained from Datastream. The sustainability factors used were derived from the proprietary Pictet Sustainable Value Chain (February 2002 scores), which breaks sustainability scores into "environmental" and "social" components. Mergers and bankruptcies were discarded from the data set, which authors acknowledge introduces some survivorship bias, although the impact of this is not quantified.

Using the sustainability scores as active weights, the authors construct hypothetical zero-cost long-short portfolios and compare them with the underlying universe. They do this in three ways: First, using an equal-weighting scheme, they find that the sustainable portfolio underperforms its benchmark by -11% over the observation period. Second, they use a "fundamentally correct weighting and aggregation strategy" (optimization on fundamental factors), finding underperformance through the review period of -3%. The authors note that "this is a rather surprising result, since the majority of empirical studies conducted over the past years suggest that there is in fact a rather positive correlation between sustainable behaviour and financial performance." Finally, they compute information ratios for each of the social factors and optimize to increase exposure to these higher return factors. This yields outperformance of 1.6%. The authors acknowledge that the performance tilt, although positive, was "based on knowledge accumulated over the entire observation period," i.e., in-sample, diminishing the conclusiveness of this finding.

The authors repeat their analysis using only environmental and only social factors. They find that social factors had a notably greater positive impact on returns than environmental factors, which they note "sharply contradicts the findings of other studies."