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Financial Planning > Charitable Giving > SRI Impact Investing

Performance Penalty for Responsible Investing is 'Unequivocally' a Myth: Mercer

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Investors using socially responsible criteria hit $12 trillion in U.S. assets under management in 2018, according to US SIF data.

And yet, whether responsible investing means taking a hit to performance is still the number one question Alex Bernhardt gets today.

Bernhardt leads Mercer’s Responsible Investment team in the U.S. market, a position he’s had since 2015. In this position, Bernhardt is constantly talking to people about responsible investing strategies and how to use them.

Mercer’s Responsible Investment team, which was established in 2004, facilitates the integration of environmental, social and corporate governance considerations into investment management processes and ownership practices in the belief that these factors can have an impact on financial performance.

In a session at the Global Responsible Investing Forum in New York, Bernhardt discussed with Bloomberg’s sustainable finance editor, Emily Chasan, the myth of the performance penalty that’s been attached to responsible investing for years.

“It is absolutely a myth, unequivocally,” Bernhardt said.

According to Bernhardt, each of the approaches to responsible investing — which he differentiated as socially responsible investing (SRI), ESG investing and impact investing — has a strong research base that shows there is not a performance penalty and there may be a performance premium in some cases.

In particular when it comes to SRI, which Bernhardt describes as largely involving exclusionary approaches and active ownership-type approaches to creating change, there can be apprehension from investors.

“Number one, the thing that we hear is ‘I don’t want to be constrained. I don’t want to take things out of my universe because I will, by definition, reduce my risk-adjusted returns.’”

Chasan showed some 2016 data from Hermes, FactSet and Sustainalytics that shows the effect eliminating “sin stocks” can have on portfolio performance. According to Bloomberg’s analysis of the data, eliminating certain sin stocks either had a positive effect or showed little difference.

“It seemed that eliminating energy the past few years — has been a good thing. Or there’s not such a huge [difference] that you can’t make it up with other indexes or strategies,” Chasan explained.

Eliminating energy had a 0.5% positive impact on portfolio performance over the last 36 months and last 60 months. Meanwhile, shunning gambling had a nearly 0.1% positive impact on portfolio performance over the same periods, while cutting tobacco had an almost 0.3% negative impact.

As Bernhardt explained it, exclusionary investing does not guarantee a performance penalty but it does guarantee a risk of tracking error that one’s portfolio will not match the index.

“So if you cannot tolerate that kind of basis risk or tracking error than exclusionary investing may not be for you,” he added. “But from a long-term risk-adjusted return standpoint, it’s hard to say there’s empirical evidence that universally leads that you’re guaranteed a penalty.”

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