Achieve Sustainable Returns Sustainably
We do not inherit the earth from our ancestors; we borrow it from our children.
ESG investing (as seen in the chart below), also known as socially responsible investing or sustainable investing, has been gathering momentum over the last few years. A lot of people seem to be talking about it, not least the product providers and thematic investors who - at first glance - appear to want you to buy into this new fad.
With the recent rise in media coverage, ESG investing has gone mainstream thanks to better access to information and an increased interest from those seeking to make an impact through their investment choices. Investors are beginning to realise that their investment objectives and personal values can be unified. Whilst ESG investing has been around for some time, it has really taken off in the past 2 to 3 years (as evidenced in the chart below).
The moral implications of doing good aside, does ESG investing make a difference to your returns? After all, if your investments continue to lose money over the long-term, it is unlikely that you will stick to that strategy despite your best intentions. So, what does the evidence say?
In a study published in 2014, researchers from Harvard found that companies that adopted ESG principles early on had established processes for stakeholder engagement, were more long-term oriented, and showed higher measurement and disclosure of non-financial information. In essence, the study showed that these companies were well-run. More importantly, these companies significantly outperformed their counterparts over the long-term, both in the stock market and accounting performance.
In a separate study conducted by a team of German academics, they aggregated empirical data from multiple sources, studies on ESG, and financial performance. They found that companies with strong ESG principles significantly outperformed their counterparts in many regions around the world, even in asset classes such as emerging markets, corporate bonds, and real estate.
Investment managers of today have reliable access to research that show how ESG factors affect companies, allowing them to make better investment decisions. Globally, more than 11,000 companies report on how they incorporate ESG principles into their business strategies, resources, and operations. In addition, over 100 organisations produce research on the ESG investment landscape.
We would urge investors and clients to look at the evidence presented by independent academics rather than the people who are trying to sell you investments. The data shows that ESG investing does not mean sacrificing returns. You will be able to keep up with the returns that markets owe you, as well as to generate a small premium over time.
We have incorporated ESG investments into the core equity allocations of many of our portfolios. Over the long term, we believe these allocations to be excellent investment options for anyone interested in aligning their values with their financial choices. Ultimately, what benefits the world will benefit you, and we can help so that what benefits you, will benefit the world.
