ESG Investing and Firm Efficiency - The Costs and Benefits of Efficiency Screening Intensity

This study investigates the effect of SRI efficiency-screening intensity under joint consideration of financial and ESG criteria in the analysis of the firms’ efficiencies derived from multidirectional efficiency analysis for US and European firms. A number of usual asset allocation strategies are implemented reflecting common SRI fund and ESG index portfolios. The portfolio results indicate a significantly negative screening effect on financial performance for mean-variance strategies for the US and no significant effect for the EU. A significantly positive relationship can be documented between SRI efficiency-screening intensity and financial as well as ESG performance for naive and value-weighted asset allocation strategies. Depending on the level of transaction cost and the chosen efficiency estimation approach, either medium or high intensity is preferred. The results suggest that SRI efficiency-screening based on ESG is a viable approach for SRI fund management, but also indicate a potential application for conventional investors as well