Responsible investment does not diminish returns

Incorporating environmental, social and corporate governance (ESG) factors into investment decisions does not jeopardise returns and may even lead to financial benefits, according to a major new study from the UN and investment consultancy Mercer.

Launched today, the Demystifying Responsible Investment Performance report assessed 20 academic studies and 10 broker research reports and found that most concluded that considering ESG factors in investment decisions had a neutral or positive impact on returns.

Of the 20 peer-reviewed academic studies, half found a positive relationship between ESG factors and performance, seven neutral and three negative.

Danyelle Guyatt of Mercer's investment consulting division said that where research had found that responsible investing leads to weaker returns, the studies had tended to focus on relatively unsophisticated means to determining ethical and environmentally responsible investments.

"Where the research has shown a negative impact, it has tended to look at situations where investors have screened out whole sectors and industries," she explained. "But now the market is leaning away from screening and towards fully integrating ESG factors into how they think about any company."

She added that where studies had looked at this more in-depth approach to determining investments based on ESG performance they tended to find a strong link between environmental, social and financial performance.

Mercer's global head of responsible investment, Jane Ambachtsheer, predicted that environmental and social concerns are likely to become more closely linked to investment returns in the future.

"As society places increased emphasis on the importance of issues such as climate change, workplace safety and human rights, these factors will become arguably more relevant to company performance and investment returns, rather than less so," she said.

However, Guyatt warned that despite the apparent correlation between ESG and investment returns, investors still had to carry out extensive research to identify those firms boasting the most ethical and sustainable practices.

"It still requires considerable skill on the investment side to identify the leading companies in terms of ESG," she said. "But the skills in the market to do this are improving with a lot of brokers developing their own ESG research capacity."

The research came a day after Mercer announced it had begun a search on behalf of Dutch pension fund PGGM for high-performing emerging markets equities managers that place ESG factors at the core of their strategy.

"As far as we are aware, this is the first major emerging market equity mandate that explicitly places environmental, social and corporate governance factors at the heart of the mandate," said Emma Hunt, European leader of responsible investment at Mercer. "Within this search, we expect to see a number of innovative processes and products as investment managers begin to respond to increasing demand in this area."