Performance & SRI
Sustainable and responsible investing (SRI) spans a wide range of products and asset classes, embracing not only public equity investments (stocks), but also cash, fixed income and alternative investments, such as private equity, venture capital and real estate. Sustainable and responsible investors are like other investors in seeking a competitive financial return on their investments. The evidence is clear that sustainable and responsible investors do not have to pay more to align their investments with their values, or to avoid companies with poor environmental, social or governance practices.
In October 2007, the Demystifying Responsible Investment Performance report issued by the United Nations Environment Programme Finance Initiative (UNEP FI) analyzed 20 influential pieces of academic work and 10 key broker studies exploring links between different approaches to responsible investment and investment performance. This comprehensive review found that SRI investment strategies are competitive with non-SRI strategies from a performance standpoint.
In November 2009, Mercer issued a report, Shedding Light on Responsible Investment: Approaches, Returns and Impacts, in which it reviewed a further 16 academic studies on SRI and financial performance that were published after the 2007 UNEP FI review. It found that of these 36 studies, published between 1995 and 2009, 20—more than half—found evidence of a positive relationship between ESG factors and financial performance, and only three found evidence of a negative relationship. It concluded that “a variety of factors, such as manager skill, investment style and time period, is integral to how ESG factors translate into investment performance; therefore, it is not a ‘given’ that taking ESG factors into account will have a uniform impact on portfolio performance, and we expect significant variation across industries.”
Ten Things to Know about Responsible Investing and Performance, a 2011 report by GMI Ratings, reviewed academic literature on the financial performance of sustainable and responsible investing approaches and found that that SRI portfolios perform comparably to conventional ones and that an SRI approach does not have to be bad for diversification. The GMI Ratings paper draws in part on an academic paper summarizing 51 influential studies published in English since the 1990s on responsible investment.
Sustainable Investing: Establishing Long-Term Value and Performance, a 2012 meta-analysis by DB Climate Change Advisors of more than 100 academic studies, finds that incorporating environmental, social and governance data in investment analysis is “correlated with superior risk-adjusted returns at a securities level” and that SRI approaches that merely employ exclusionary screens, while showing little upside, do not underperform.
Additionally, numerous studies demonstrating that SRI mutual fund performance is comparable to that of non-SRI funds can be found at www.fsinsight.org—a compendium of all the major academic studies on SRI.
The growth of sustainable and responsible investing in recent years strongly suggests that an increasing number of investors believe that returns from SRI strategies are comparable to those of more conventional investments. The assets engaged in sustainable and responsible investing practice currently represent 11.3 percent of the $33.3 trillion in total assets under management tracked by Thomson Reuters Nelson. From 1995, when US SIF Foundation first measured the size of the US sustainable and responsible investing market, to 2012, the SRI universe has increased 486 percent, while the broader universe of assets under professional management in the United States, according to estimates from Thomson Reuters Nelson, has grown 376 percent. (Find more information in our Report on Sustainable and Responsible Investing Trends in the United States.)
Ample evidence of the competitiveness of sustainable and responsible investing is also found in the increasing investment in SRI by state pension funds, university endowments, and foundations. These fiduciaries are obligated by law to seek competitive returns for the portfolios they manage. The fact is that a growing number of major US fiduciaries are taking environmental, social and corporate governance (ESG) criteria into account in investment analysis and selection, engaging in shareholder advocacy or directing assets to community investing.