FINANCIAL MODELLING WITH EXCEL
Modelling a Responsible Investment Strategy
DESCRIPTION OF PROJECT
Responsible investment has risen since the 1990s and major institutional investors are increasingly considering corporate social responsibility as an important part of their investment decisions. Yet there is still a lot of ambiguity and debate in the area, and more work needs to be done to understand potential returns and risks involved.
You are given a universe of over 2,000 largest international stocks for which you have ASSET4 environmental, social and governance scores 2004-2013. You are challenged with the task to select companies from this universe that have robust corporate social responsibility practices and analyse your portfolio.You have to present a report of 2250 words with the motivation, the steps in your analysis and the results.
You can get historical prices from Yahoo Finance, Datastream, etc. Getting the data is part of your project so please exhaust all the available possibilities. Note that you may encounter difficulties when collecting the data (missing data etc) but these are the kind of problems that you will encounter in the real world, so try to deal with them the best that you can. It will be wise to address the weaknesses of you analysis and justify your methods or assumptions.
You should structure your report according to the story you want to tell. But it will most likely include the following:
- A brief overview of the key arguments regarding responsible investment (e.g. reduced diversification versus portfolio of “sustainable” firms and firms with lower risk).
- The way you select the companies. Here you have all the freedom so choose what you think is most interesting for you: e.g. you want to build a “fossil-free” strategy or select companies with the best overall CSR score or focus on a particular industry. The aggregate environmental, social and governance are given to you but feel free to use any additional information you want. You can use theme scores separately or construct composite scores.
- Excellent reports will also outline the potential benefits and tradeoffs of your selection and your hypothesis as to how your selected portfolio will perform.
- To construct the responsible investment portfolio, you can use 5 to 10 stocks.You should also decide on the period of analysis, frequency of the data you are collecting and briefly justify your choices.
- Analyse your constructed portfolio. To do so, you can refer to the structure we followed in class, including
Portfolio risk (standard deviation of returns)
Variance-covariance matrix and the efficient frontier.
- Compare the performance of your portfolio (risk and return over your chosen period) to the performance of the appropriate broad market portfolio (e.g. FTSE100, S&P 500)
- Construct a benchmark portfolio of 5-10 stocks with no CSR screens, based on the risk and return characteristics.
- Compare the performance of your responsible portfolio to the benchmark portfolio.
- Using Solver, find a responsible investment portfolio structure that gives competitive returns compared to the broad market and your benchmark portfolio, and minimum risk.
- Discuss the implications of your analysis, introducing CSR screens, results of your analysis and possible limitations.
- Include references (see some examples below).
Please note that the structure of the report, your discussion and the way you approach the task may be different and as creative as you want them to be, and there is no prescribed “template”. Please, however, make sure that all the points above are included, and the report is written in a coherent way. You can use summary tables and/or graphs to present your results.
Barnett, M. 2007.Stakeholder Influence Capacity and the Variability of Financial Returns to Corporate Social Responsibility.Academy of Management Review, 32: 794-816.
Barnett, M. L.. and R. M. Salomon. 2006. Beyond Dichotomy: the Curvilinear Relationship between Social Responsibility and Financial Performance. Strategic Management Journal, 27: 1101-1122.
McWilliams, A. and&D. Siegel. 2000. Corporate Social Responsibility and Financial Performance: Correlation or Misspecification? Strategic Management Journal, 21: 603-609.
Orlitzky, M., F. U. Schmidt, and S. L.Rynes.2003. Corporate Social and Financial Performances: A Meta-Analysis. Organizational Studies, 24: 403-41.
Renneboog, L., J. Ter-Horst, and C. Zhan. 2008. Socially Responsible Investments: Institutional Aspects, Performance, and Investor Behaviour. Journal of Banking and Finance, 32: 1723-1742.