[MUSIC] Hi, so in today's lecture we are going to try and answer a very important question, which is whether sustainable investing performs in line with traditional investing. So to answer this question I've structured the lecture in three different parts. In the first part we're going to review a couple of theoretical arguments for why sustainable investing or sustainable fund management would out or underperform traditional investment. In the second part of the lecture, we are going to look at how researchers and academics have tried to address this question of whether sustainable investing performs in line with traditional investing. And in the third part, we're going to review the empirical evidence, that is the empirical research that exists to answer the question. So let's start by reviewing some of the theoretical arguments that have been put forward In favor of the view that sustainable investing underperforms or outperforms traditional investing. So one argument that has been put forward to support the view that sustainable investing under performs traditional investing relates to screening. So screening is this idea that you exclude certain assets from your portfolio, which reduces risk adjusted performance because it restricts you in the extent to which you diversify your portfolio. Another argument that has been put forward to support the view that sustainable investing underperforms traditional investing is that sustainable investment requires additional research in terms of E, S, and G. So because sustainable investors have to gather additional information or data relating to E, S, and G. That will result in higher costs, and therefore higher fees, which would reduce the returns of sustainable investment. Another argument relates to the size of the investment firms. So, historically, a lot of sustainable investing firms were rather small. So smaller firms, or smaller investment firms also tend to charge higher fees. Now let's move on to the theoretical arguments that would favor the view that sustainable investing outperforms traditional investing. One commonly used argument relates to mispricing. The idea here simply is that the market does not price these ESG issues correctly. So to give you a concrete example, think about employee satisfaction. It might be the case that investors do not understand the financial value of employee satisfaction. Because they don't understand it, it's not priced in the short run so the market prices is in the long run, so that would lead to risk-adjusted odd performance. Another argument favoring the view that sustainable investing outperforms traditional investing relates to risk. So, neglecting environmental and social issues can lead to catastrophic events. Just think about the BP oil spill in the Mexican Gulf a couple of years ago, or about the emissions scandal at Volkswagen. So both these instances are related to environmental issues. And to neglect, or to some sort of neglect on the corporate side which has led, or will probably lead, to extremely high losses. Another argument that is put forward favoring the view that sustainable investment outperforms traditional investment is related to performance. So the idea simply is that corporate sustainability can lead to product and process innovation. So by embracing environmental efficiency, for instance, a company can build up know how that it will be able to apply internally, but also sell to other outside companies. So by developing a cleaner production technology, The company can potentially generate higher revenues because it offers new products. On the cost side, the argument is somewhat similar, if you have a company that generates large amounts of waste. Or pollution or a company that is characterized by poor working conditions that sort of shows a very inefficient use of resources natural resources in the case of waste and pollution and human resources or human capital when it comes to employee relations or employment conditions. Now a final argument that has been put forward to support the view that sustainable investing outperforms traditional investment relates to reputation. So by being a sustainable company, a company can attract new customers that care about the sustainability of the company that provides the products and services. In a similar spirit, being a sustainable company might allow a company to retain and attract the most talented people. Especially in days or times when employees care more and more about purpose and about the business model and the ethics of a company. [MUSIC]