Investors can add as much as 160 basis points annually to their global equity portfolios by investing in companies with above-average environmental, social and governance ratings, according to a report by RCM.
In a research report that compares performances of various equity portfolios between December 2005 and September 2010, the fund manager concluded that “investing in companies that operate best-in-class on ESG metrics does not detract from performance,” said Bozena Jankowksa, global head of sustainability research at RCM. “Best-in-class portfolios do not show added volatility. … Even in extreme market conditions, performance was not negatively impacted.”
RCM used data provided by MSCI ESG Research to construct portfolios of different quality stocks from an ESG perspective. The global best-in-class equity portfolio returned 1.6 percentage points above the average global portfolio. The U.S. best-in-class equity portfolio returned 2 percentage points above the average U.S. portfolio, according to the report.
“This is important not only because it makes the performance argument, but also explains what modern approaches to ESG integration is all about,” said Penny Shepherd, chief executive at U.K. Sustainable Investment and Finance, a London-based industry group promoting ESG investing, commenting on the report. “Too often we still work with people who think that ESG is about avoiding a particular industry sector or particular companies. While that's part of the spectrum, it's not where the center of gravity (of ESG investing) has been in the past few years.”
Emma Hunt, senior investment consultant at Towers Watson who is also familiar with the report, said the challenge will be how RCM and other managers will use the information to spur ESG integration into the broader investment process.
“The trick for RCM is not to think about (ESG) as a separate strategy,” Ms. Hunt said in a press briefing about the study. “Just do it because it's core to the investment process.”