“The biggest myth out there right now is that you have to give up return. But you don’t.”
Gail Taylor, Vice-President, Investment Adviser at CIBC Wood Gundy
Morgan Stanley reported this year that although investors understand that a focus on sustainability confers clear competitive advantages to a business, they don’t believe this reliably translates into competitive financial gains. A 2014 NEI investor survey reported similar findings, with most investors and advisors under the assumption that traditional investments perform better than socially screened or responsible ones.
Investors skeptical of RI claim that environmental, social and governance (ESG) screening reduces the size of the investment universe, and therefore reduces portfolio efficiency and returns.
Proponents of RI argue that eliminating ESG offenders improves long-term risk and returns. The reality is that multiple recent studies have compared RI and traditional investments, and the common finding is that RI achieves similar or slightly better results with slightly less risk.
“Almost every comparison of RI versus traditional investment returns points to better long-term risk adjusted returns when ESG issues are taken into account.”
The Responsible Investment Association found that fossil fuel free funds outperformed the index in 2014, but were comparable in terms of risk and longer term traditional benchmarks of 3, 5, and 10-year returns. They also released amutual funds report that showed RI funds among the top-performers in every major category. Social indices, such as the Jantzi Social Index and the MSCI KLD 400 Social Index have outperformed since they were launched.
In a 2012 report, Deutsch Bank found that, “ESG factors are consistently correlatedwith superior risk-adjusted returns at the securities or stock level.” In 85% and 89% of their studies, the best ESG performance correlated with market-based and accounting-based outperformance, respectively.
THE END RESULT
Despite popular belief, RI no longer means accepting lower financial returns. Whether your motivation is values-alignment or mitigating the risk of stranded assets, RI is a comparable and competitive alternative for investors.
As an investor, if you wish to address climate change, the Genus Fossil Free sustainable investment solutions can help you eliminate fossil fuels from your portfolio without sacrificing return potential. Contact us to find out firstname.lastname@example.org.