The effect of sustainability ratings on asset allocation decisions

BNR Nieuwsradio
Erasmus School of Economics
Erasmus School of Economics

Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income at the Global Investment Center of the Private Bank of ABN AMRO, investigated the sustainability preferences of wealthy private investors and the impact of sustainability ratings on their asset allocation decisions together with Amir Amel-Zadeh of Oxford University and Rik Lustermans of Erasmus School of Economics.

Using a fully anonymised dataset with more than 100,000 participants from ABN AMRO's private bank, the researchers investigated how investors arrange their equity and bond portfolios based on ESG (Environmental, Social and Governance) scores and whether they adjust the portfolio if the scores change.

Determination of ESG scores

According to Mary Pieterse-Bloem, determining an ESG-score is difficult, because it encompasses a broad concept. Most of all, it is necessary to look at whether the business model is green enough. Isn't the company polluting and do they produce sustainably? There is also a social aspect, such as dealing with employees. Lastly, consideration must be given to how the company is run. This ESG-score must be built up by external parties such as Sustainalitics and Morningstar, who collect all the needed data. This process takes a lot of time, which makes determining the score a major cost for banks and companies, says Pieterse-Bloem. With their research she wants to make clear the importance of the ESG-scores and the benefits they bring.

A plausible causal relationship

The results show that investors are responding to changes in the sustainability ratings of their portfolio investments by rebalancing their portfolios with assets with a higher sustainability rating. These investments also appear to outperform traditional investments in Corona time, Pieterse-Bloem argues. Furthermore, the study shows significantly larger investment flows into assets with a high sustainability rating compared to assets with a low sustainability rating. Consequently, more is invested in companies and institutions with higher ESG scores. Investors also react positively if ESG scores improve and negatively if scores deteriorate. Pieterse-Bloem sees a difference of 15% in the monthly average investment flows of her clients. Over the entire measurement period, this amount is around 210 million euros. This is a major difference, Pieterse-Bloem emphasises. By using a quasi-natural experiment and an event study, the research showed a plausible causal relationship between the investment flows of private investors and the sustainability ratings of companies, Mary Pieterse-Bloem concludes.

Mary Pieterse-Bloem

More information

Listen to the entire broadcast of BNR Nieuwsradio here, 12 May 2020 (in Dutch). Or have a look at the original research paper.
Also Fondsnieuws made a podcast about the subject. You can listen to it here.