ESG Investing and Firm Efficiency: The Costs and Benefits of SRI Efficiency Screening

This study investigates the effect of SRI efficiency-screening intensity on a portfolio’s performance under joint consideration of financial and ESG criteria in the analysis of the firms’ efficiencies derived from multi-directional efficiency analysis for US and European firms. Two efficiency estimation approaches relating to the choice of the set of firms are used and several 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 USA 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 screening 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.