Here’s a little story from Bob to warm your cockles…

For those who don’t already know, I specialise in ethical investments. I help people make investment decisions that make them money AND make them feel good because the companies they’re investing in sit well with them morally.

I’ve noticed that, contrary to popular lore, my clients were not suffering from any kind of reduced portfolio performance by choosing to invest ethically. In fact, I’m pretty proud of that fact that they all do very nicely, thank you. I put this down to the fact that I’m brilliant at my job. But, although that is, of course, true, it turns out that this is not a phenomenon only achieved by me. Ethical investments performing better than regular investments is an actual thing.

Why is this coming to light now?

Barclays’ report into sustainable investing and bond returns

In 2016 Barclays conducted a research study into the relationship between ESG (Environmental, social and governance) scores and corporate bond performance. In a nutshell, what they found was:

  • High ESG bond portfolios can deliver better returns
  • There’s no evidence of these bonds being expensive relative to their peer group
  • ESG factors play out over the long term so there is no greater risk of future underperformance than any other type of bond (in fact, companies with higher ESG scores often have higher credit rating)
  • Good governance had the most positive effect on investment return from corporate bonds, followed by environmental, then social considerations.

They’ve even created a little video to explain what they found out.

What other evidence is there?

Whilst this latest Barclays report is the one that’s really making people sit up and notice, it’s not alone in its findings. Apart from my anecdotal evidence, of course, there have been other studies which have come to the same conclusions.

TIAA Global Asset Management: Responsible Investing: Delivering Competitive Performance

This analysis of leading responsible investing equity indexes over the long term found:

  • No statistical difference in returns compared to broad market benchmarks
  • No additional risk when incorporating ESG criteria.

They did find that there were significant performance variations in responsible investing (RI) indexes over the short term compared to broad market indexes. However, that’s to be expected for a strategy that does not replicate the index, like the RI process. The important thing is that this settles when you look at the long-term view.

So whilst this report did not conclude the same gains as Barclays report, it found no financial compromises in long-term responsible investments.

Deutsche Asset and Wealth Management and Hamburg University: ESG and Financial Performance: Aggregated Evidence from more than 2,000 Empirical Studies

This 2015 article was based on a study of around 2,200 individual studies conducted on ESG investing since the 1970s, drawing all the data together and looking at it again. The results:

  • 90% of the past studies found a non-negative relationship between ESG criteria and corporate financial performance
  • The large majority of the studies actually report positive findings
  • The big conclusion: the positive ESG impact on corporate financial performance appears stable over time.

Oxford University and Arabesque Partners: From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance

This 2015 study categorised more than 200 sources and looked at the overall view:

  • 88% of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which translates to cash flow
  • 80% of reviewed studies demonstrate that good sustainability practices have a positive influence on investment performance.

Morgan Stanley Institute for Sustainable Investing: Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies

This 2015 report found that:

  • Investing in sustainability has usually met, and often succeeded, the performance of traditional investments
  • There is a positive relationship between corporate investment in sustainability and stock price and operational performance
  • Sustainable equity mutual funds had equal or higher median returns and equal or lower volatility than traditional funds for 64% of the periods examined.

These findings were true on both an absolute and risk-adjusted basis, across asset classes and over time, based on their review of US-based mutual funds and separately managed accounts.

There are more reports out there, I could go on, but hopefully by now you’re convinced.

Why this is such great news

Whilst I’ve known for a while now that investing ethically is a positive choice, not a compromise, it’s great to see so much documented evidence in its favour. It’s good news all round:

Great news for investors:

Investors can seek out companies that do business in a way that they agree with, safe in the knowledge that these businesses can still have a strong, enduring business model to help keep their money safe.

Great news for the planet:

If more investors start to take ESG criteria into consideration when selecting their investments, knowing that they’re not going to be compromising on returns and could in fact gain compared to traditional portfolios, companies will have to consider their impact on the environment and society more seriously.

Great news for businesses:

Bond investors tend to look at the long term, so a greater emphasis on ESG factors over the long term may help balance the constant pressure on companies to maximise short-term earnings. This may lead to greater overall stability for the organisation as they’re encouraged to take a broader view.

Great news for us:

Critically, as the Morgan Stanley Institute report concluded, investors should remember that there is still a wide range of returns and volatility across the spectrum of sustainable investments, just as there are for traditional investments. So manager selection is crucial. That’s where a bit of help from someone like me can ensure you end up making the most of all these potential benefits.

In fact, the only downside I can see is that if ethical investing becomes “mainstream” in the coming years, I might need to find something new to “specialise” in…

 

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice. The value of investments may fall as well as rise and you may not get back what you put in.

GreenSky Wealth Limited is authorised and regulated by the Financial Conduct Authority. FCA No. 629624. Tax advice, Wills and estate planning are not regulated by the Financial Conduct Authority. Registered Office as above. Registered in England and Wales, Company No. 07103441.

Sources:

https://www.investmentbank.barclays.com/content/dam/barclaysmicrosites/ibpublic/documents/our-insights/esg/barclays-sustainable-investing-and-bond-returns-3.6mb.pdf

https://www.tiaa.org/public/pdf/ri_delivering_competitive_performance.pdf

http://www.tandfonline.com/doi/pdf/10.1080/20430795.2015.1118917

http://www.arabesque.com/?tt_down=51e2de00a30f88872897824d3e211b11

http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf