An impact investment strategy

Abstract

Impact investing is based on using the ESG framework as a tool to evaluate firms that engage in generating positive impact. Most impact investors and fund managers now integrate the ESG framework in their investment and stock-picking process. However, due to lack of standardisation of ESG reporting, it remains a challenge for investors and the public to identify the truly sustainable companies. We propose an additional measure of tax avoidance to identify firms that are socially responsible. When firms indulge in excessive tax avoidance behaviour, it may be viewed as unethical or socially irresponsible. We integrate the empirical association between corporate social responsibility and tax avoidance into an investment strategy based on impact. We adopt an investment strategy based on firm‐level ESG ratings and tax avoidance practices. In a pure impact investment strategy based on ESG and tax avoidance, we find that investing in high‐ESG rated firms and low tax avoidance firms yields a buy and hold abnormal return of 3.4% per annum and 11.4% in a 3 years investment horizon. Next, if impact investors were to combine traditional investment strategies based on risk with impact measures, we find that portfolios of high‐ESG and high price‐to‐book‐ratio firms earn a buy and hold abnormal return of 21.2%, while a portfolio of low tax avoidance and high price-to-book portfolios earns 29.8% in the long run. Collectively, our results suggest that, whilst impact investing does provide investors a return, it does not necessarily outperform traditional investment strategies. Our results are robust to other risk factors and the sector of the firm.

An empirical analysis of corporate sustainability bonds

“…Increased investor awareness will make sustainability bonds a popular investment opportunity. This finding supports previous studies that examine investors who integrate ESG criteria into their investments (Juddoo et al, 2023; Mocanu et al, 2021; Starks et al, 2018). For firms, the findings of this study will inform them on how sustainability issuances would make the firms more appealing and attractive to ESG investors, thus enabling firms to expand their investor base.…”

“…Finally, this study provides evidence of the market reaction to sustainability bonds and compares the results to traditional bonds. This contributes to the growing literature on sustainable finance and impact investing (Baker et al, 2022; Cunha et al, 2021; Flammer, 2021; Hachenberg & Schiereck, 2018; Hong et al, 2020; Juddoo et al, 2023; Park, 2018; Secinaro et al, 2020; Yu et al, 2016).…”

“…Shareholders recognise and welcome firms' commitment towards the ESG agenda and regard it as value‐enhancing. Furthermore, impact investors who value the ESG commitment of firms will be drawn towards instruments issued by firms that aim to enhance the ESG initiatives alongside offering a financial return (Barber et al, 2021; Juddoo et al, 2023).…”

“…However, little is known about the stock market reaction to sustainability bond announcements, whose proceeds are primarily used for environmental and social causes. Furthermore, most of the empirical research in the field of sustainable investing focuses on equities (Barber et al, 2021; Juddoo et al, 2023), green bonds (Flammer, 2021) and ethical fund performance (Madhavan & Sobczyk, 2020). Hence, this study attempts to fill the gap by analysing the performance of sustainability bonds.…”