Building A Great Return And A Better World With Your Savings

There is a conventional “wisdom” that investors must tolerate lower returns for investing according to their values. For example, if you want to exclude oil, or tobacco or cluster bombs from your portfolio, you would have to hire somebody at significant expense to identify those suspect companies, and then pay again as those companies you have excluded out-performed during their up-cycles.

Well, the evidence is in after a decade or more of experimentation and peer-reviewed research: values-based investing can produce very competitive performance and long term risk reduction compared with non values-based alternatives. Or as Harvard Business School’s professor Robert Eccles says, “it is in investors own self-interest to pay more attention to so-called ‘sustainability’ issues for producing stable, long-term returns.”

The case for performance

Consider the following evidence on performance, comparing the ESG (environmental, social & governance) returns vs. a non-ESG “benchmark”:

Example 1. The ESG (orange) line for U.S. equities excluding the 200 fossil fuel companies with highest carbon reserves vs. the S&P 500 (purple) shows no divergence, and at times even a slightly superior performance:

Source: Eikon

Example 2. Or returns from a range of ESG indexes (compare ESG Index Return vs. Benchmark):

Source: CERES Blueprint for Sustainable Investing

Example 3. Or returns from a range of ESG funds (compare Fund Return vs. Benchmark):

Source: CERES Blueprint for Sustainable Investing

Example 4. And consider this different kind of study which compares similar companies over time, one set with a strong ESG program, and another similar set of companies without an ESG or sustainability emphasis. The group of companies with superior sustainability profiles out-peformed their peers in terms of both stock market value and financial performance:

Example 5. Another important point is that just like with regular investing, your choice of what sector and fund you invest in can significantly affect returns. This study looked at where there was statistically material out-performance using ESG filtering. Note that the three green-shaded bars for the sectors “Consumer Discretionary”, “Health Care” and “Industrials”, all produced a statistically relevant out-performance over time:

Example 6. And, finally, consider these quotations from asset owners who are responsible for vast sums of public or investor money:

Sustainability in its simplest form is the ability to continue and to propser. There are both risks and opportunities ahead. The ESG framework we’re adopting will help us make better investment decisions for the long term.

— Anne Simpson, Senior Portfolio Manager and Director of Global Governance, California Public Employees Retirement System (CalPERS)

“Our goal is simple: we want long-term sustainable economic growth. And we have found from experience that comprehensively integrating environmental, social and governance considerations into the investment process is essential to achieving that goal.” — Thomas P. DiNapoli, New York State Comptroller, Sole Trustee, New York State Common Retirement Fund

The premise underlying sustainable investing is elegant in its simplicity: companies that do a better job of integrating environmental, social and governance (ESG) standards into their business models are better positioned than their less-enlightened competitors to provide investment performance over the long term. Therefore, identifying and investing in those companies is arguably a smarter way to invest — avoiding the risks associated with substandard ESG performance while capturing the returns associated with sustainability leadership.
— Joe Keefe, President & CEO, Pax World Management

New investment follows competitive performance.

You might ask yourself whether investors have actually been convinced by this accumulating evidence. Are they actually moving their money into ESG investments? Could this story on performance alongside the increasing signs of stress on our planetary boundaries be a catalyst for investors to change?
Consider this evidence on the growth of sustainable & responsible investing, (another form of values-based, ESG investing) over the last ten years:

Source: US SIF Foundation

And consider this recent media coverage on the uptick in assets under management in these funds:

U.S. Managed Assets with Socially Responsible Criteria Rise — Reuters

Beyond profits: Millennials embrace investing for social good — LA Times

Philanthropies, including Rockefellers, and investors pledge $50bln fossil fuel divestment — Reuters

The evidence is fairly clear of a shift in how investors are thinking about the “return” on their money. I recently attended an ESG investors conference in Chicago, and the atmosphere there was euphoric. It’s boon times. For example, Leslie Samuelrich, President of Green Century Capital Management reported “a 135% increase in assets under management over the last 24 months that is driven by all of our funds being fossil fuel free.” Others reported overflowing new customer events, and increasing numbers of high net worth individuals looking at their planet and wanting to see their money help repair it.

Doing well and good

Increasingly, a good “return” is about both performance and actually doing “good”. The most exciting part of this story is that there are huge pools of investor dollars, especially for those holding long-term positions in their pensions, 401ks or endowments, where assets have yet to be deployed for the “good” of their owners and the world.

Dr. Andreas Heopner, Associate Professor of Finance, ICMA Centre, Henley Business School, summarizes this way: “based on the presented evidence, there are clearly opportunities to generate value for those who consider ESG issues in their investment decision-making.”

When you can, why not do well and good at the same time?

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