UWaterloo researcher Tony Wirjanto finds that investment strategies built on ESG principles deliver stronger, more resilient returns — even during times of economic stress.
The idea that companies should care about more than just profit — focusing on their environmental, social, and governance (ESG) impact — is transforming how big investment firms manage money. This shift toward sustainable finance is a hot topic, aligning closely with the critical initiatives at the University of Waterloo’s Hub for Sustainability Integration.
Professor Tony Wirjanto, who teaches at the University of Waterloo's School of Accounting and Finance and the department of Statistics and Actuarial Science, is at the forefront of this research. He and his co-author, Haoming Cao, tackled a crucial question in their 2023 study: Is ESG investing a smart way to put your money to work, and how can investors use that ESG information effectively?
Academics have been studying the impact of integrating ESG into investment decisions for a while, but the results haven't always been clear. To find a definitive answer, the researchers compared three different investment approaches:
-
Best-in-Class: Choosing only companies with top ESG scores.
-
Thematic Investing: Selecting companies based on a specific sustainable theme (like green energy).
-
ESG Integration: Blending ESG scores into the traditional formulas used to choose a portfolio.
They applied these strategies to 29 large stocks from the Dow Jones Industrial Average (DJIA) — a list of 30 of the most important, biggest companies in the U.S. stock market — over a five-year period (2014 to 2019).
The study revealed that portfolios built using ESG information not only outperformed the regular DJIA benchmark, but they also remained stronger and more stable during crises. This resilience was particularly noticeable during the COVID-19 pandemic, in line with what other recent studies have found.
Among the three strategies, thematic investing proved to be the strongest performer, consistently exceeding both the best-in-class and general ESG integration methods for most of the study period.
The researchers note that “ESG investing is a preferable investment style, in which the thematic investing strategy outperforms all other strategies considered in this study for most of the time. In addition to achieving consistency between financial and ESG performance, the ESG portfolios tend to mitigate the portfolio risk to some extent and are more favourable in most years, notably during the COVID-19 pandemic, in line with the evidence documented in recent years in the literature.”
This research provides valuable direction for asset managers and policymakers, confirming that sustainability and financial performance truly go hand in hand. The findings make a strong case for the mission of the Hub for Sustainability Integration, showing that considering environmental and social factors is not just an ethical choice, but a key to making smarter, more resilient financial decisions.
The study, titled ESG information integration into portfolio optimization is published in the Journal of Risk Management in Financial Institutions.