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How do ESG decisions affect investment returns?

  • ,  Chief Executive |
  • 03 Oct 2018
  • Updated 29 Oct 2018

ESG: Integration, Engagement, and Alpha Generation 

Although previous research may have questioned the investment impact of excluding 'sin stocks,' it is now widely argued that ESG methodologies add value.  The ESG conversation is moving beyond discussions of exclusion and onto issues concerning the integration of ESG into investment processes and ways for active investors to engage with portfolio companies on ESG concerns. 

The papers below all focus on the subject of how ESG decisions impact portfolio returns.  The themes of ESG integration, engagement, and utilising ESG as a conduit to alpha generation are examined in this round up of some of the best white papers from the last couple of years.

ESG impact

Podcast: How Equity Investors Utilise ESG to Generate Alpha (State Street, 2018)
Is it possible for equity investors that are alpha-seeking to glean an information edge from ESG considerations? State Street’s Anna Lester and Chen He talk through ways to put ESG to work, boosting returns while managing risk.

How ESG Engagement Creates Value for Investors and Companies (PRI, 2018)
It is widely accepted that engaging with companies has the potential to create value, but how this happens is poorly understood.  This PRI report explores the process of value creation via engagement in more detail.

ESG and performance in 7 charts (Fidelity International, Apr 2018) 
(For compliance reasons, this paper is only accessible in the UK & Europe)
These seven charts highlight the most critical aspects of the unique relationship between ESG and investment performance. 

ESG's Evolving Performance: First, Do No Harm (Axioma, Jul 2018)
Axioma evaluates the historical investment performance of ESG, concluding that adding ESG exposure occasionally underperforms, but often outperforms the market. 

Guidance and Case Studies for ESG Integration: Equities and Fixed Income (UN PRI/CFA Institute, 2018)
This detailed report (169 pages) is a collaborative effort between UN PRI and the CFA Institute. It provides important global insights into the ESG integration techniques of leading portfolio managers and analysts around the world.

Investment Insights: ESG That Spans Portfolios (Neuberger Berman, Sep 2018) 
(For compliance reasons, this paper is only accessible in certain geographies)
Measuring and managing the ‘impact’ of investments across asset classes is becoming increasingly feasible – whether seeking to encourage change or to improve financial performance.

Research Brief: Integrating ESG in Portfolio Construction (QMA, Jun 2018)
QMA suggests a unique method of ESG investing that can not only rank companies on ESG metrics with or without these metrics being reported, but can also generate comparable alpha to non-ESG portfolios.

ESG: Improving Your Risk-Adjusted Returns in Emerging Markets (GMO, Mar 2018)
GMO's Binu George and Hardik Shah discuss the conflux of ESG/responsible investing and the emerging market landscape.

Research reveals why "sin stocks" outperform (Robeco, Sept 2017)
Why have so-called "sin stocks", such as alcohol and tobacco companies, historically outperformed their relevant indices? Robeco points to research which indicates that this outperformance emanates from an exposure to risk factors.

Tobacco's Investment Returns and Societal Costs (DWS, Sep 2017)
(For compliance reasons, this paper is only accessible in the United Kingdom)
This report provides a detailed examination of the tobacco industry’s investment returns, external societal costs and how investors are engaging with or divesting from the industry.

ESG issues significantly impact emerging debt returns (Robeco, 2017)
Robeco explains how ESG analysis is fully integrated into the investment process of their Emerging Debt strategy. The differences in ESG profiles are considerable between emerging countries, and changes can happen quickly.

The impact of ethical investing on returns, volatility & income (Newton, 2017)
With the rise of ethical and faith-based investing, this report was commissioned to study the effects of imposing ethical constraints on a portfolio of investments.  

(Note - this is an update to a previous blog on the same subject, from September 2017)