Thomas Walker, Kerstin Lopatta and Thomas Kaspereit contribute to the literature on SRI with their study — “Corporate Sustainability in Asset Pricing Models and Mutual Funds Performance Measurement” — which appeared in the November 2014 issue of Financial Markets and Portfolio Management.
Walker, Lopatta and Kaspereit developed a specific sustainability factor that augments traditional asset pricing models. They called their sustainability factor GMU (or “green” minus “unsustainable”). The GMU scores are based on data from the MSCI KLD database, which is considered the gold standard and is widely used in sustainability research.
The GMU factor was tested by splitting stocks into quintile portfolios based exclusively on a sustainability score. Quintile 1 contained stocks with the lowest sustainability scores while Quintile 5 contained stocks with the highest. Portfolios were rebalanced annually. After creating the five test portfolios, the value-weighted returns of these portfolios were regressed on the four factors of market beta, size, value and momentum, as well as the new sustainability factor. The study covered the period from June 1992 through June 2012.