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Environmental, Social and Governance Factors and Portfolio Performance

July 9, 2013

For decades, institutional investors throughout North America and Europe have been advocating improvements to the environmental, social and governance (or “ESG”) characteristics of publicly traded companies, in the belief that doing so will improve the long-term performance of their portfolios. Many investors also incorporate ESG factors into their security selection processes. In fact, according to the Global Sustainable Investment Association, a network linking the professional associations for responsible investment in Europe, Canada, the United States, Asia, and Australasia, US$13.6 trillion is currently invested using some kind of ESG factor for portfolio construction, corporate engagement, or both. This represents 21.8% of assets under management in the regions studied, with the proportion being higher in Europe (where almost half of all invested assets are subject to ESG strategies) and lower in the United States (where only 11% are). So what effect is all this activity having on performance? Academic research has reached several conclusions on the subject.

For more information and for citations to the academic studies mentioned above, readers can consult Ten Things to Know about Responsible Investment and Performance, a report released in 2011 by GMI Ratings. The document is publicly available here. Another good resource is Sustainable Investing, a literature review produced by Deutsche Bank Climate Change Advisors in 2012, available here.

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