ESG Investments Underperform, or Do They?

Many investors from individuals to institutions believe Environmental, Social, and Governance (ESG) investments underperform the market as a whole. Doing good doesn’t translate into doing well. Yet numerous studies have found the opposite. Corporations with high ESG ratings not only outperform the market; they have less exposure to risk.

ESG Outperformed MSCI World Index

“In the world portfolio, the ESG momentum and tilt strategies outperformed the MSCI World Index by 16.8% and 11.2% in active cumulative returns respectively over a 10-year period.” (June 2007 through June 2017). These figures come from a report prepared by the United Nations Principles for Responsible Investment. A group of twenty of the largest institutional investors in the world defined these principles which were released in 2006.[1] The MSCI World Index is an equity index comprised of large and mid-cap companies from 23 developed nations.[2]

You can download the UN report here: unpri.org/investor-tools/financial-performance-of-esg-integration-in-us-investing.

High Sustainability Companies Outperformed Others by 4.8%

An earlier study by two economists, published in 2012 in the Guardian of London, is of special interest to this area. Their study compared 90 high sustainability companies in terms of adoption of what later became ESG metrics to 90 low sustainability companies. All of these corporations were publically traded American companies. They found the high sustainability companies not only outperformed the others but did so with less volatility.

“Over an 18-year period, the high-sustainability companies dramatically outperformed the low-sustainability ones in terms of both stock market and accounting measures. The annual above-market average return for the high-sustainability sample was 4.8% higher than for their counterparts and with lower volatility.”[3]  You can download the article from the Guardian here: theguardian.com/sustainable-business/sustainability-key-corporate-success.

Your Clients Want to Know About ESG Investing

If you have clients who have an interest in ESG investing, then you would certainly want to show them how high scoring ESG corporations have outperformed low scoring ESG corporations. If you haven’t discussed ESG investments with your clients, now is the time to do it. As I mentioned in a previous article, a U.S. Trust survey of HNW clients, investors discovered only 11% of HNW investors have had discussions with their financial advisor on this topic in spite of widespread interest.[4]

Big Corporations Focused On Sustainability

Major corporations have been focused on sustainability as a business strategy for many years, others for a few years. Two corporate titans are IBM and Google. They both report significant actions in the area of sustainability/ESG.

IBM is a leader in energy efficiency, for example, and has long been involved in reducing energy usage. In 2005, the company created a baseline of CO2 emissions from their worldwide operations. Their goal is to reduce carbon discharge by 35% against the baseline by 2020 corporate wide, and they are on track to accomplish this goal.[5] You can download their complete ESG report here: ibm.com/ibm/responsibility/IBM-2017-CRR-Environment.pdf.

Google, the tech star of the equity market, is carbon neutral, meaning they purchase renewable energy to run their operations. (Hydro and wind are the two largest sources of renewable energy in the U.S.).[6] Since Google operates so many data centers which use immense amounts of electricity, they claim their expertise allows them to run their data centers with 50% less power than others.[7]  You can download their recent sustainability report here: google/environmental-report-2018.

Don’t wait until the train leaves the station, and run after it. Your clients want to know about ESG investments now.

Resources: 

[1] https://www.unpri.org/investor-tools/financial-performance-of-esg-integration-in-us-investing/2738.article

[2] https://www.msci.com/world

[3] https://www.theguardian.com/sustainable-business/sustainability-key-corporate-success

[4] ustrustaem.fs.ml.com/content/dam/ust/articles/pdf/insights-on-wealth-and-worth-2018

[5] https://www.ibm.com/ibm/responsibility/2017/assets/downloads/IBM-2017-CRR-Environment.pdf

[6] wikipedia.org/wiki/Renewable_energy_in_the_United_States

[7] https://sustainability.google/reports/environmental-report-2018/

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Contributing Writer: Subject Matter Expert Charles McCain