It is now widely accepted that the integration of environmental, social and governance (ESG) insights into investment decision-making at a minimum does not sacrifice performance. Analysis and studies from Morgan Stanley, Bank of America, Deutsche Bank, Harvard Business School, Oxford, MSCI, TIAA-CREF, and UBS, among others, point to this conclusion.
The most extensive review of academic research concluded that 90% of 2,200 individual studies found a non-negative relationship between ESG and corporate financial performance, and 63% showed positive findings.
There are also several studies that demonstrate that better management of ESG issues corresponds with a reduction in downside risk, lower cost of capital, lower loan and credit default swap spreads, and higher credit ratings. Credit ratings firms are now incorporating ESG due to its broad acceptance and relevance.
The volatile market response to the coronavirus pandemic demonstrated that ESG strategies provide downside protection. We conducted a review of ESG mutual funds and ETFs available on the Envestnet platform and found that these ESG strategies outperformed their non-ESG peers, across U.S. equity, international equity and fixed income, over both a four-month and 12-month period.
In the first quarter of 2020, 70% of sustainable equity funds finished in the top halves of their Morningstar categories, and 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts. BlackRock found that 94% of sustainable indexes outperformed during that time. Findings from MSCI and S&P found similar results.
It can be challenging to generalize performance studies. However, many of these findings have been noted as empirically well founded, and as historical data on ESG strategies becomes available for analysis through multiple market cycles, further research will be done on the topic.
Adding Value Across Approaches
There are a wide range of approaches to sustainable investing, including:
- Negative screening for values alignment.
- Integrating ESG factors into the investment process for risk mitigation.
- Investing with a thematic focus on an area like climate change, diversity or water.
It is common for sustainable funds to incorporate a combination of these approaches. Frameworks also vary based on market, geography, industry and asset class.