Responsible investing is about being careful where you put your money. But it’s also about delivering a return. So how does it fare compared to other strategies?
Pretty well, it seems.
One study, by MSCI (Morgan Stanley Capital International) Research, examined the performance of ESG-rated companies in developed and emerging markets for more than a decade until the end of 2023 and found that top-rated companies consistently outperformed lower-rated peers.
A meta study of academic papers from Rockefeller Capital Management covering five years to 2020 found, among other positives, that ESG investing appears to provide downside protection, especially during social or economic crises.
Another, from Abrdn, formerly Standard Life Aberdeen, a global investment company and asset manager, found ESG analysis can help deliver a similar return, while reducing investment risk – itself a bonus.
“Numerous academic studies, and studies of studies, have come to a broad conclusion that there is a mild positive impact financially,” says Ian Halstead, director of investment services at L & vestment Services, a division of Cantor Fitzgerald Ireland, adding that it stands to reason.
“Oil and gas companies, which today constitute a very small part of world markets, are also dying industries, certainly post-growth,” he explains. “If you exclude the current spike occurring as a result of the war in Ukraine, over the last 10 years they haven’t performed particularly well.”
Ditto arms manufacturers – although, given the current impetus to tool up, that might change. Regardless, makers of things such as cluster munitions and chemical weapons are likely to remain taboo for many investors.
“By and large, excluding companies that are on the edge of what is acceptable to society is never a bad thing because it creates a positive dynamic in your portfolio. You are also less likely to be fined, regulated or have additional red tape applied to you,” says Halstead.
He points to the tobacco industry as a possible indicator of what may be on the way for currently heavy carbon emitters in years to come in terms of possibly swingeing class actions.
Once you move beyond the broad brushstrokes of responsible investing and into the nitty gritty of what to actually invest in, doing your homework – or taking advice – pays dividends.
“Responsible investing can deliver the same returns as standard portfolios but an investor needs to be aware of what they are investing in and whether or not the strategy being employed is suitable for their financial needs,” says Deirdre Timmons, sustainable finance lead and director, ESG reporting and assurance, at PwC Ireland.
“For example, a responsible investment fund that avoids investing in certain sectors may end up being very concentrated in others, and if economic conditions result in a downturn for those sectors the fund may underperform a more widely diversified fund in those circumstances.”
That is why wealth managers work to seek out the best investment opportunities for a given level of risk “while considering both diversification and sustainability as drivers of long-term return”, explains Conal Cremen, chairman of the Sustainable Investing Committee at RBC Brewin Dolphin.
That should become easier to assess. “The coming years will be very telling in this regard as institutional investors in Europe will have access to a slew of sustainability-related data emerging from the Corporate Sustainability Reporting Directive which requires companies to report on a range of environmental, social and governance information both good and bad,” says PwC’s Timmons, adding: “This should provide those investors with a wealth of opportunity and more efficient risk management.”
Risk is a hugely important part of the equation when it comes to assessing possible returns on any responsible investment.
“You can never look at the return in isolation. The question is, would you prefer the same return for more risk or less – because it makes a difference. After all, the same return for less risk is a very desirable thing,” points out UCD accountancy professor Fabiola Schneider. That is particularly so for institutional investors such as charities and pension funds, but often for individuals too.
What constitutes a return also matters. “With impact investing you are targeting a specific outcome, so you invest in something to make a change,” adds Schneider.
If you’re a charity, for example, achieving change can be return enough. “The literature shows that certain investors are very happy to forego returns if they get the outcome they want,” she says.
