Research: Perception That ESG Will Negatively Impact Returns Is False

(August 1, 2011) — New research by RCM, a company of Allianz Global Investors, shows that introducing environmental, social, and governance (ESG) criteria into an investor’s selection process does not negatively impact performance, and instead, may actually enhance it.

“The perception that corporate efforts to become more sustainable reduce the value of companies and of investors’ portfolios is entrenched, but is based on largely unfounded assumptions and only thin academic evidence,” the research paper claims. “It is imperative to challenge this perception empirically because it is holding back the evolution of the nascent sustainability sector and of the wider corporate sector.”

The research — which tested the impact of ESG issues on portfolio performance over the period 2006 to 2010 — found investors could have added 1.6% per year over five years to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.

While sustainability used to be perceived as a peripheral issue for many investors, it is increasingly becoming a component of the overall investment approach. The paper continues: “Modern investors are increasingly seeking to avoid blow-ups in their portfolios, eschew investments with questionable governance standards, and use material ESG data as a filter for capturing investment opportunities and managing related risks.”

Additionally, RCM’s research shows that returns from portfolios of European companies represented the largest  and most consistent spread between best-in-class and worst-in-class companies. According to the research, the disparity reflects greater integration of ESG factors in Europe than in the US.

The Principles for Responsible Investment (PRI) initiative, backed by the United Nations, has added credibility to the embrace of sustainable investing. In September of last year, a group of institutional investors, with approximately $558 billion in assets under management, pushed global listing authorities and stock exchanges to demand that sustainability reporting become a part of their listing rules. According to a statement by Aviva Investors, this coalition of investors aimed to write to the CEOs of stock exchanges to make their demands, part of an engagement initiative launched by Aviva Investors and facilitated by the UN-backed Principles for Responsible Investment (PRI) in 2009. The mission of the group is to encourage a global listing environment that requires companies to become more mindful of a sustainability strategy.

“We…believe that stock exchanges can play a crucial role in helping to create more sustainable global capital markets because of their ability to directly influence and monitor the operations and strategy of companies seeking to access the equity markets. We are sending a strong signal that, all things being equal, Aviva Investors would prefer to trade on stock exchanges that maintained this listing provision,” said Paul Abberley, CEO of Aviva Investors London, in a statement.

Separately, the Institutional Investors Group on Climate Change (IIGCC) has outlined a list of guidelines to help pensions understand climate-related risks and opportunities in their portfolios. A report released in June by the IIGCC revealed that twice as many investors are asking stock and bond managers about their global-warming policies compared to two years earlier. However, integration of these policies into investment mandates has been slow to take hold.

“The fact that asset owners now question their asset managers about their climate change policies prior to making a selection is a clear signal of increased awareness on climate change in the investment community,” said Ole Beier Sørensen, the new chairman of IIGCC. “This progress will be further strengthened if attention to climate change is applied throughout the decision‐making process, from investment manager selection to Investment Manager Agreements.”

The London-based Institutional Investors Group on Climate Change has around 58 members who manage about 5 trillion euros ($6 trillion).