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Portfolio > Portfolio Construction > ESG

Popular Paradigm: SRI, ESG Assets Continue to Grow

By Ed McCarthy, CFP, RICP

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Investors’ interest in sustainable investing continues to grow.

According to the most recent statistics from the Washington, D.C.-based U.S. SIF: The Forum for Sustainable and Responsible Investment, “After eliminating double-counting for assets involved in both strategies, the overall total of SRI assets was $6.57 trillion — a 76% increase over the $3.74 trillion identified in sustainable investing strategies at the outset of 2012. As a result, assets managed with SRI strategies accounted for nearly 18% of all professionally managed assets in the United States at the start of 2014.”

A persistent notion has been that investing with an SRI or ESG (environmental, social and corporate governance) focus involves a trade-off between social value and investment return. But a steady stream of research has debunked that idea. A 2015 meta-study from Oxford University and Arabesque partners examined the results of over 200 studies and reports found that: “80% of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance.”

Also, research released in March 2015 from the Morgan Stanley Institute for Sustainable Investing showed similar results. “Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time, based on our review of U.S.-based mutual funds and separately managed accounts (SMAs),” according to the report.

In addition, “Sustainable equity mutual funds had equal or higher median returns and equal or lower volatility than traditional funds for 64% of the periods examined,” according to the Morgan Stanley report.

Changing Responsibility

Interest in ESG-investing is growing not only because it fits well with investors’ beliefs, but “because it’s becoming requisite in terms of being a fiduciary in the first part,” says Edward Kerschner, CFA, chief portfolio strategist with Columbia Threadneedle Investments in New York.

The recent Department of Labor ruling “puts the onus of fiduciary responsibility on wealth advisors, and it also made clear that considering ESG factors is part of that fiduciary responsibility,” he explained. Thus, financial advisors who do not consider ESG factors “might not be in the spirit, if not the letter, of the [DOL] requirements,” explains Kerschner, who is part of a firm that manages about $11 billion in ESG strategies.

Research supports the idea that scoring well on ESG-metrics is a marker of corporate success, the portfolio manager points out, and financial advisers should consider it in their evaluations. “If you take that [analysis] one step further, one can even make the case that ESG investing is not a fad, but it’s going to become a permanent part of the investment decision process; and in fact, every company will have to score well on ESG to be viewed as a successful company,” he said.

A Corporate Perspective

Companies can use a variety of methods to implement ESG practices in their organizations.

Cemig (CIG, CIG.C), one of the largest companies in Brazil’s power sector, cites sustainability as a core business principle. The company’s stock has been part of the Dow Jones Sustainability Index World (DJSI World) for 17 consecutive years. “We see 17 consecutive years in this index as continuing recognition of Cemig’s determination to maintain its sustainable growth, motivated by creation of value for stockholders, employees and suppliers, and the well-being of society,” said Raul Lycurgo Leite, acting chief finance and investor relations officer, in a statement.

As part of the company’s focus on sustainability, Cemig — which stands for Companhia Energética de Minas Gerais — has the created Intelligent Energy Program to improve energy efficiency. As described in the company’s 2015 Annual & Sustainability Report, it consists of several multiannual and socio-environmental projects to develop energy efficiency in communities with low-purchasing power and at non-profit and charitable institutions, with a goal of fostering culture change toward the rational use of electric energy.

“We believe that Cemig has established a position as one of the most sustainable companies in the world — reflecting its vision of the future, and its commitment to best corporate governance practices,” the executive explained.

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