Majority of academic and broker research supports ESG performance link

A majority of academic and broker research has concluded that integrating environmental, social and governance factors (ESG) into investment decisions could match or improve current performance. In a review of the major research available in the market, the United Nations Asset Management Working Group of its Environment Program Finance Initiative (UNEPFI) and Mercer, the investment consultant, found that out of 20 academic studies, 10 found a positive relationship between ESG factors and performance, seven were broadly neutral, and three negative. The report, called “Demystifying Responsible Investment Performance” found that ten similar studies by brokerage houses gave three positive reviews and seven neutral indicators. No brokers concluded that performance could be negative as a result of ESG integration.
UNEPFI said the research would reassure investors that introducing ESG criteria into their investments was not a barrier to good returns: “The argument that integrating ESG into investment analysis and decision making will only lead to underperformance simply cannot be made.” It said the findings bolstered existing reports such as the Freshfields legal paper, published in 2005, whichconcluded that scheme trustees would not be flouting their fiduciary duty by looking at environmental and social concerns.
The report said that investors should instead be focusing their resources on finding the right asset manager and selecting the most appropriate investment style and judging the ensuing investment results over a suitable time period.
Regarding the latter point, it added that the short-term mindset of “many in the financial world is highly incompatible with the long-term horizon necessary to integrate ESG factors more effectively and for investors to act more responsibly.”
It said more rigourous research was still needed in order to improve the comparison between investments that includ ESG criteria and those that follow more traditional financial approaches, and to make any linkages more distinct. Consequently, it said it would issue a further report on the impact of ESG issues within different investment sectors and on the valuation models for assessing companies.
(see downloads to left for full report)