RI and Performance

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RI Performance Myth

Despite evidence to the contrary, a 2014 NEI investor survey confirms that most investors and their advisors believe that responsible investments will underperform their traditional investments. 

Critics of responsible investment argue that considering ESG performance will reduce the size of the investment universe and, according to modern portfolio theory (introduced in 1952), reduce portfolio efficiency and generate lower risk-adjusted returns.

Responsible investors agree that integrating ESG factors will eliminate companies from their investment universe, but argue that the remaining companies will be better long-term investments.

Historically, ethical investing and socially responsible investing (SRI) have been based, at least in part, on values-based exclusionary screening. There have been many studies on the performance of those funds relative to traditional investments.

The results have shown that they have achieved results similar to or slightly better than their non-SRI counterparts. There has been no penalty for investing according to one’s values.

A 2012 RBC Global Asset Management study concurred. They looked at four distinct bodies of evidence:

  • SRI indices relative to traditional indiceses
  • Performance of SRI funds relative to traditional funds
  • Relative financial performance of hypothetical stock portfolios compared to conventional portfolios and indices
  • The linkage between corporate social responsibility (CSR) and improved financial performance
The chief finding in their research was that SRI did not hurt investment returns.

In the past decade, the focus of many of those funds has gradually changed. Responsible investment (RI), defined as the integration of ESG factors into the selection and management of investments, has become widespread in both retail and institutional funds.

ESG criteria are used to help managers identify risks that are not adequately measured by traditional investment analysis. In doing so they are better able to accurately predict financial performance. This does not diminish a values-based or ethical approach but merely enhances it by identifying the material risks and opportunities associated with ESG factors. It provides the information needed for investors to capture the financial benefits of environmental, social and governance leadership.

In the 2012 report Sustainable Investing, DB Climate Change Advisors looked at:

  • 100 academic studies,
  • 56 research papers,
  • two literature reviews
  • and four meta studies on responsible investing from around the world.[/heading] 

Their analysis showed that ESG factors are consistently correlated with superior risk-adjusted returns at the securities or stock level. The market rewarded companies with the best ESG performance with higher share prices. Those findings were supported by 89 percent of the studies they examined; 85 percent of the studies showed a correlation between ESG performance and accounting-based outperformance or earnings per share.

If price performance and earnings per share aren’t enough, their findings also showed that companies with good ESG ratings have a lower cost of capital in terms of both debt and equity.

Almost every comparison of RI versus traditional investment returns points to better long-term risk adjusted returns when ESG issues are taken into account.

In the RIA’s quarterly mutual fund reports there are top-performing RI mutual funds in every major category.

Social indices offer further evidence of positive performance by responsible investments. The Jantzi Social Index (JSI®) and the MSCI KLD 400 Social Index have demonstrated outperformance since inception.

Jantzi Social Index

MSCI World SRI Index



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