In terms of assets, GSIA’s study found the largest three regions were Europe, the US and Canada, respectively. And, globally there are $22.89trn (£17.65trn) of assets being professionally managed under responsible investment strategies, a 25% increase since 2014. In all regions except Europe, which tightened its definition of sustainable investing, sustainable investing’s market share has grown. In relative terms, responsible investment now stands at 26% of all professionally managed assets globally. And, clearly, sustainable investing now constitutes a major force across global financial markets.
In Europe, total assets committed to sustainable and responsible investment strategies grew by 12% from 2014 to 2016 to reach $12.04trn, with 53% of total professionally managed assets in Europe now using responsible investment strategies. Sustainable, responsible and impact investing in the US continues to rise, with total SRI assets at the beginning of 2016 standing at $8.72trn, up 33% from $6.57trn in 2014.
Of this total, $8.10trn is held by institutional investors, money managers and community investment institutions applying various environmental, social and governance criteria in their investment analysis and portfolio selection. Impact investing was the fastest growing strategy with growth of 385%, albeit the assets remain relatively small ($107.2bn).
Stephen Hine, director of external affairs at UK-based Eiris, which merged with French headquartered ESG rating agency Vigeo in October 2015, reflected on performance: “While we do not systematically track performance, studies show that on average sustainable funds perform on par or better than their peers. Of course, this may vary from fund to fund and from time to time,” he said.
“Incorporating financially material ESG factors that can affect the long-term financial sustainability of companies is at the very least a prudent form of risk management, and can offer and assist not only in maintaining beta but in creating some degree of alpha,” the Canadian added.
Research from academic and industry publications have consistently found that ESGweighted portfolios will not underperform conventional portfolios. There is also a growing body of research that portfolios with higher or improving ESG ratings can result in better risk-adjusted returns.
MSCI’s executive director, head of ESG Ratings, Americas, Noel Friedman, said: “Many of these studies have focused on the effect of ESG integration on risk and have found that companies with lower ESG ratings tend to have higher costs of capital, higher volatility, and that poor corporate governance can weaken risk management capabilities.”
Echoing this, a recent Barclays study on sustainable investing and bond returns found that bonds with high MSCI governance scores experienced fewer credit rating downgrades. In other findings, Credit Suisse’s research came to the conclusion that ESG information “can add alpha to portfolio performance”. JP Morgan has found that the return profile of MSCI ESG indices “appears no worse than investing in MSCI regional benchmarks”.
Friedman added: “These findings are supported by MSCI’s own research and the performance of ESG indexes. For example, MSCI’s ACWI ESG Index, consisting of companies in each sector with higher MSCI ESG ratings, outperformed the MSCI ACWI index in eight of the last nine years.”
Furthermore, an MSCI paper titled ‘Can ESG Add Alpha’ that analysed the stock returns of two strategies constructed with MSCI’s ESG data, found that an ‘ESG Tilt’ strategy that over-weighted stocks with higher ESG ratings, and an ‘ESG Momentum’ strategy that over-weighted stocks that have improved their ESG rating during recent time periods. “We found that both of these strategies outperformed the global benchmark during the last eight years, while also improving the ESG profile of the portfolios,” Friedman pointed out. A significant part of this outperformance was “not explained by style factors alone”, with Friedman explaining that MSCI’s own research shows that ESG factors were also drivers of return.
