[MUSIC] Now let's start looking at how researchers have addressed this question. So typically, you can separate the studies in two camps or in two groups. The first set of studies analyzes investment funds. So this is the fund level analysis in which researchers has tried to study the risk and return characteristics of sustainable and traditional mutual funds for instance. The second set of studies directly compares sustainable and unsustainable companies. So the second set of studies is carried out at the firm level. Let's start with the first set of studies, the fund level studies or the level analysis. An important thing to note upfront, is that sustainable investing is a form of active fund management. As you have seen with Professor in the previous lecture on active versus passive fund management. There are very few, if any active fund managers that consistently generate risk adjusted performance after fees. So this applies to traditional investors or in traditional fund managers as it does apply to sustainable fund managers. So in the camp of the first set of studies, the fund level studies, what researchers have typically looked at is that look at where the traditional active fund managers perform better than sustainable fund managers. And most of the research finds no statistically significant differences in risk adjusted excess returns between these two groups of fund managers. Now the second set of studies the firm level studies looks directly at whether more sustainable companies turn out to be profitable. These studies are important because they allow to separate effects and the fund level from effects at the firm level. Because you know from Oliver lecture that issues such as luck and skill or fees, play an important role in determining fund performance. Now if you look at the firm directly you can rule out these effects at the fund level and create a link or correlation between sustainability and profitability at the firm level. So it is a cleaner and better approach looking at the directly at the characteristics of sustainable and unsustainable firms. These firm level studies have typically focused on three areas. The first area of study is to ask the question whether sustainable firms show higher operating performance. So is it the case that sustainable firms have higher cash flows for instance? The second area of study has focused on risk and the cost of capital, and typically researchers have ask the questions of whether most sustainable companies have lower risk or lower cost of capital. Finally, the third areas or third groups of studies has combined the first two aspects to directly answer the question of whether most sustainable firms have higher market values. Now let's talk a little bit about the typical study. So the typical study in this firm-level chem tries to establish a correlation of sustainability measure on the one hand and a financial performance or financial risk measure on the other. So the idea is for instance to study or to analyze where the companies that have high sustainability score, tend to have low risk or companies that have a high sustainability score have high cash flows. Now let's go get the evidence of hundreds of studies that have been published on this topic. So there's a recent review article that has been published that examines hundreds of academic studies, industry reports, newspaper articles and books to come to a conclusion of whether there is a correlation between let's say, firm performance and sustainability performance. And in reviewing the studies that look at operation of performance, 88% of the reviewed research in that article, shows that good ESG practices, good sustainability practices correlate positively with operating performance. A sort of similar picture arises when stock market performance is correlated with ESG performance or sustainability performance. So 80% of the studies that are interested in looking at that correlation between stock market performance and sustainability performance, establish it positively. So those studies that look at the cost of capital or the risk of the cash flows of the company, they typically show or the majority up to 90% show, that there is a negative correlation. So typically companies with a high suitability score tend to have a lower cost of capital or a lower risk. Now there is a important caveat to this research which is that correlation does not imply causation. That is to say we do not know where the companies with high sustainability performance have high stock returns, because they have high sustainability performance. In other words, we don't know whether sustainability causes financial performance or whether it is the other way around. So in this lecture, we have started by reviewing a couple of theoretical arguments for why sustainable fund management might under or out perform traditional fund management. Then we've talked a bit about academic evidence that shows that there's typically no performance difference between sustainable fund management and traditional fund management. We've ended the lecture by looking at the evidence on the correlation or potential correlation between sustainability on the one hand and firm performance at the other. Typically what this research shows is that there tends to be a positive correlation between sustainability or ESG performance on the one hand and firm performance at the other hand. [SOUND]