There exists a widespread consensus among mainstream academics and investors that socially responsible investing (SRI) leads to inferior, rather than superior, portfolio performance. Using Innovest’s well-established corporate ecoefficiency scores, we provide evidence to the contrary. We compose two equity portfolios that differ in eco-efficiency characteristics and find that our highranked portfolio provided substantially higher average returns compared to its low-ranked counterpart over the period 1995-2003. Using a wide range of performance attribution techniques to address common methodological concerns, we show that this performance differential cannot be explained by differences in market sensitivity, investment style, or industry-specific components. We finally investigate whether this eco-efficiency premium puzzle withstands the inclusion of transaction costs scenarios, and evaluate how excess returns can be earned in a practical setting via a best-in-class stock selection strategy. The results remain significant under all levels of transactions costs, thus suggesting that the incremental benefits of SRI can be substantial.

corporate environmental performance, eco-efficiency, performance measurement, socially responsible investing (SRI), style analysis
Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M), Corporate Culture; Social Responsibility (jel M14)
ERIM Report Series Research in Management
Erasmus Research Institute of Management

Derwall, J, Günster, N.K, Bauer, R, & Koedijk, C.G. (2004). The Eco-Efficiency Premium Puzzle (No. ERS-2004-043-F&A). ERIM Report Series Research in Management. Retrieved from