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Researching the area of responsible investing has been encouraging in no small part because of the significantly increased interest and appetite in rewarding actors and players that are contributing to the world positively, whether this is done by addressing their gender pay gap or taking steps to mitigate the effects of climate change.
However, we were also interested in what makes a compelling argument for scepticism (or downright opposition!) to integrating sustainability or ESG criteria in investment. At first glance, concerns around underperformance remain, with some in the investment world viewing the concept as more of a charitable initiative rather than a way to boost returns. With Apple’s recent profit warning sending tech stocks tumbling (and tech stocks are heavily relied upon by a not insignificant number of responsibly or sustainably minded funds), it is perhaps more understandable than ever that some would worry that ethical and/or sustainable approaches do not make financial sense.
Then there is also the Norwegian state pension fund (the world’s largest sovereign wealth fund, no less), which ‘missed out’ on 1.9 percentage points on the return on its benchmark compared to the performance it would have had, had it chosen to continue to invest in tobacco and armament companies. The other side of the story of course is that excluding companies deemed to have breached human rights or caused significant environmental damage, such as US-based retail giant Walmart, have also boosted the fund’s return – albeit only by 0.8%.
Of course, there is no standardised definition of ESG, SRI, or related terms such as sustainable investing, and variations in the investment process mean measuring the performance of funds that incorporate ESG or similar principles can be challenging. Corporate behaviour and responsibility is of course multi-dimensional, which does not make things easier.
Other critics maintain that at times clients wanting to invest in a more responsible way by excluding particular sectors or integrating particular principles into their investing end up in costlier funds that are not too dissimilar from your run-of-the-mill index fund.
Having said that, sceptics overlooking sustainable or ethical stocks because they don’t think they will perform well means that these are more likely to be undervalued and found by bargain seeking investors.
And finally, there is what we think is the strongest argument in favour of companies with a lot of ESG momentum performing outstandingly well – the large and ever-expanding body of research (both academic and not!) demonstrating ties between long-term corporate performance and ESG criteria filtering into the investment process. Empirical evidence linking lower risks and a boost in returns to environmental social governance screening has consistently been produced over the last few years, although there have also been studies that have concluded that knowledge around the topic remains fragmented.
There is no doubt that both sides of the debate have their own vocal proponents, but of course this is simply the roundup of the press around the issue – we’ll get right back to analysing what private investors, intermediaries, and asset managers think about the ethics vs performance dilemma! Perceptions, worries and fears around responsible investing will all revealed in detail in our upcoming Responsible Investing Review, of course, available in spring 2019. We have spoken in-depth to over 60 experts on the issue, including private investors, financial advisers, discretionary fund managers, and more, and have consulted over 1400 stakeholders through quantitative means.
The first issue is due for publication in spring 2019 and will include insight from all angles:
• Surveys measuring appeal, preferences and take-up among professional and private investors
• Deep-dive commentary from industry experts, including fund ratings agencies, fund buyers, fund managers and stewardship specialists
• Analysis of ESG/responsible assets, flows and performance
• Comprehensive review of government regulation and trade association guidance supporting the growth of ESG investing
• Findings-led predictions on the growth potential for responsible investing
Research in Finance is uniquely placed to produce such a report. We have access to each audience via our own proprietary panels.
(Only 10 delegate spaces remain at the breakfast briefing)
Subscribing firms will receive 2x report copies, soft copy for internal use, plus the opportunity for two of your team to attend a breakfast briefing where RiF will present some key findings at their London HQ – space at this briefing is limited after a successful launch phase.
NEW – Subscribing firms can take the option to place a 1000 word content piece in the participant report which is distributed to all respondents – plus available to members of the RiF Panel.