Environmental, social and governance (ESG) factors correlate with superior risk-adjusted returns, according to a major new review of academic research conducted by Deutsche Bank.
The bank’s DB Climate Change Advisors arm has conducted a comprehensive review of the literature called Sustainable Investing: Establishing Long-Term Value and Performance and found strong support for the idea that corporate social responsibility (CSR) and ESG help investment returns.
“By applying what we believe to be a unique methodology, we show that CSR and most importantly ESG factors are correlated with superior risk-adjusted returns at a securities level,” says Mark Fulton, the bank’s Global Head of Climate Change Investment Research.
“The evidence is compelling: sustainable investing can be a clear win for investors and for companies,” Fulton adds. But he points out that many socially responsible (SRI) investors using exclusionary screens have “historically struggled” to demonstrate this. The new research breaks “SRI” into different categories to show where value can be found in the “sprawling, diverse universe of so-called Sustainable Investment”.
Fulton adds: “We believe that ESG analysis should be built into the investment processes of every serious investor, and into the corporate strategy of every company that cares about shareholder value.” The report advocates ESG best-in-class focused funds as being able to capture superior risk-adjusted returns if well executed.
Deutsche’s research has been reviewed by George Serafeim, Assistant Professor of Business Administration at Harvard Business School.Serafeim co-authored a major study – “The Impact of a Corporate Culture of Sustainability on Corporate Behaviour and Performance” – which showed that a financial premium for ‘high sustainability’ companies could be perceived after three years. (RI Coverage)
Deutsche looked at more than 100 academic studies of sustainable investing in what it says is one of the most comprehensive reviews of the literature ever undertaken.
All of the studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt and equity. “In effect,” Deutsche says, “the market recognizes that these companies are lower risk than other companies and rewards them accordingly.
“The evidence is compelling: sustainable investing can be a clear win”
“This finding alone should put the issue of Sustainability squarely into the office of the Chief Financial Officer, if not the board, of every company.”
And the research found that 89% of the studies show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company’s exhibit accounting-based outperformance.
“So while Sustainable Investing is the term we use to refer to all these forms of investing, we believe using ESG factors in a best-in-class approach is emerging as the key investment methodology.”