Can Socially Responsible Investing and good returns coexist? Yes.
/Do the right thing. It will gratify some people and astonish the rest. Mark Twain
Over the last few years, there has been a significant increase in the interest in environmental, social and governance (ESG) investing. According to a paper released recently, over $8trn of the $40trn of money managed in the USA is now under some form of Sustainable and Responsible Investing (SRI) or ESG, up 33% since 2014 and up fivefold from $1.4trn in 2012.
In many respects Australian fund managers have been caught unready for this change. If we look at the Mercer survey data for January 2017, the Global Equities strategy section contains 127 global funds that are sold in Australia. Of this, only 5 are classed as SRI funds. It is somewhat better for Australian equities with 157 funds in the survey, of which 13 are SRI.
One reason could be that there is a view amongst many people (and particularly fund managers) that SRI results in lower returns for investors and the investors have to pay a price to be responsible.
In some ways this misconception, of accepting lower returns for being ethical, goes against another tenant of conventional investing wisdom: buy good businesses. The grandfather of long term investing, Warren Buffett, discusses a lot in his letters to shareholders the importance of ethics and the quality of the character of the people running the businesses he owns.
Now admittedly he is discussing the character of the people rather than the nature of the business, and some people would find owning Coca Cola unethical.
What do the Statistics Say?
UBS recently published an excellent summary of academic literature2 looking at this question of whether SRI negatively affects investor returns. The conclusion was that it did not.
Verheyden, Eccles & Feiner (2016)3 wanted to look at whether a portfolio manager would be put at a disadvantage in terms of performance, risk and diversification if he/she were to start from a screen based on ESG criteria. The empirical evidence shows that all ESG-screened portfolios have performed similarly to their respective underlying benchmarks, if not slightly outperforming them. Put differently, the findings of the paper show that – at the very least – there is no performance penalty from screening out low ESG-scoring firms of each industry.
What does this mean for fund managers?
Investors globally are demanding more focus from their fund managers on ESG issues. The implication of these studies is that ESG does not detract from returns and investors are therefore not irrational to ask for more focus on ESG and SRI issues.
But it also says running a positive screen and a negative screen is a better way to generate returns for investors whilst also satisfying investor’s ethical investment needs.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
Speak to Wynyard Park Private Wealth on the suitability of Socially Responsible Investing that is relative to your own circumstances.
Source: Morphic Asset Management
2 Academic Research Monitor: ESG Quant Investing. Dec 2016. Please email us if you’d like a copy of the paper.
3 ESG for All? The Impact of ESG Screening on Return, Risk, and Diversification. Verheyden, T., Eccles, R. G., & Feiner, A. Journal of Applied Corporate Finance, 28(2), 47-55, 2016
