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ESG Pushes Past Personal Values To Better Financial Returns

Investing with the goal of doing good doesn’t have to mean sacrificing investment returns. While some investors may have been held back by this myth in prior years, 2020 challenged that common belief as more Americans modified their investment portfolios with an ESG — short for environmental, social, and governance — approach in mind. 

Numerous studies have shown that companies that include ESG factors in their operations perform better than their non-ESG counterparts. They’re also more resilient in times of turbulence, such as during the global coronavirus pandemic market crash that occurred in March of last year.

“For years, it’s been this myth that investing sustainably means you’re sacrificing performance,” said Sarah Bratton Hughes, head of sustainability North America at Schroders. Referring to the Global Investor Study 2020 that Schroders conducted, Hughes said that 55% of investors in the U.S. believe that investing sustainably will offer them more favorable returns. “So, instead of costing them performance, which was historically what Americans have thought, they now think if they don’t invest sustainably, THAT will cost them performance.”

Hughes said that across all generations there appeared to be a shift in mindset on the need for sustainable investing. The study showed a continued increase from Generation X – who already had surpassed Millennials in 2019 – and even some increase across the baby boomers.

Schroders’ Global Investor Study 2020 surveyed more than 23,000 people from 32 locations globally, including 2,000 in the U.S. The study also found that only 4% cited they will not invest in sustainable funds due to a perception that they would offer inferior returns, down from 27% in 2018.

While 2019 was primarily marked by climate initiatives, 2020’s Covid-19 crisis and inequality protests in the U.S. have swung the pendulum toward the social, or “S”, aspect of ESG, explained Hughes.

“Throughout this cycle, sustainability has proven that it’s no longer a bull-market luxury,” she said. “A market pullback was a true witness test for sustainability. And we hadn’t really had one of this magnitude where the whole world was in crisis together. So, I think that people started realizing that these externalities or impacts that companies create on society can and will be passed back on them in forms of societal protests or costs.”

And now, these beliefs and strategies have been backed up by real numbers.

As part of a study examining the performance of ESG investments, in 2019 the Bank of America (BofA) Global Research team analyzed thousands of publicly listed companies about their ESG practices. The study used three leading ESG data providers to back test stocks from 2007 to 2019. BofA Global Research found that firms with the highest ESG scores and practices performed better than those with lower scores within their sectors. 

The study revealed that U.S. companies with high ESG rankings outperformed their counterparts by “at least  3% every year for the past five years.” In Europe, the results were even more impressive, with an average excess return of 4% per year during the five years. 

The BofA Global Research study also noted that “in the U.S., ESG is the best measure we’ve found for signaling future earnings risk, and is superior to leverage or other risk and quality factors.” 

Schroders’ Hughes said that the major gap for people and investors to understand how ESG works is on the education side. Her firm is launching an important initiative in 2021 to educate people on the benefits of including ESG in investment decisions. The goal is to show that ESG is not just about personal values – it can also result in better financial returns. This acceleration in ESG education, integration, and quantification can be seen across the whole of the investment industry.

“It’s about translating from these issues and crystallizing them into hard dollar terms. I really think that that would move the needle,” she added.


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