Does ESG boost returns?

by , 8th November 2018

With concerns around climate change increasingly rife – we all know someone who’s suddenly become a vegan – questions around responsible investing are inevitable. The insertion of Environmental, Social & Governance (ESG) or Social Responsible Investing (SRI), or Responsible Investing (RI) in investment is increasingly prevalent and access is now becoming even easier with more funds on offer, but does it boost returns?

Well, the research backs up the ESG trend. According to a recent study from RBC Global Asset Management, 90% of institutional investors believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios. This is a change in thinking, which previously found that integrating ESG factors it diminished returns.

Research from the CFA Institute on EU-based members shows the majority of respondents reporting that ESG factors should be considered by managers when making investment decisions. The “Evolving Future of ESG Integration in Investment Analysis” report finds that 85% of respondents believe it is appropriate, while 44% of respondents found it appropriate for regulators to legislate that ESG considerations be an integral part of the legal fiduciary duty owed to investment management clients.

It also found that only 14% of respondents did not incorporate ESG principles because of no clear link between sustainability and financial performance. The main reason for not including them, for 37% of respondents, was that there are no set standards ensuring the soundness of methodologies.

Long-term play

One thing that is clear about ESG is that it is not a quick pay-off, instead it’s a long-term play. A study from RCM, analysed the impact of ESG issues on portfolio performance over the period 2006 to 2010. “The study found that socially responsible firms in the early years of the time series received less favourable recommendations because the concept was considered a fad, or worse as value-destroying. But this reversed strongly in the later years of the study as the issue fully entered the investing consciousness and analysts evinced approval of strong corporate ESG strategies.”

There are still some hurdles that ESG has to overcome. The consensus from market watchers is that there shouldn’t be any regulations to incorporate ESG, but there seems to be a need for consensus on methodologies. Similarly, there needs to be a balance on incorporating ESG factors but not excluding or eliminating big successful companies in the process.

In these terms, ESG still divides opinion and the concept of poor returns by using ESG factors has been a hard one to break, but research and data is slowly emerging contradicting the theory that ESG factors impact returns.

According to the FT, more than 2,200 academic studies undertaken in the past 40 years have examined the relationship between ESG factors and corporate financial performance. More than 90 per cent of them have found that ESG factors have a positive or neutral impact on financial returns, according to a meta-study by Friede & Busch

This change in thinking now raises the question not whether to incorporate ESG, but how to do it.

This is good news for a space that has been slow to establish itself as part of the investment landscape. The MSCI ESG Leaders Index target companies that have the highest ESG rated performance in each sector of the parent index. The MSCI World ESG Leaders Index is up 10.87% over the last year to 28 September.

There are a number of ESG focused ETFs listed on the London Stock Exchange, the majority are listed below, but there are more to come. Only last month iShares launched a range of ESG ETFs.

The biggest of all these ETFs is the iShares MSCI Europe SRI UCITS ETF (IESG), which has only $374m and was launched in February 2011. In fact, there assets in the ETF listed below is relatively small.

ETF 3M RTN TER INDEX
iShares MSCI Japan ESG Screened UCITS ETF

SAJP

n/a

(23/10/18 launched)

0.2% MSCI Japan ESG Screened Index
iShares MSCI Japan ESG Screened UCITS ETF

SDJP

n/a

(23/10/18 launched)

0.2% MSCI Japan ESG Screened Index
iShares MSCI USA ESG Screened UCITS ETF

SDUS

n/a

(23/10/18 launched)

0.2% MSCI USA ESG Screened Index
iShares MSCI USA ESG Screened UCITS ETF

SASU

n/a

(23/10/18 launched)

0.2% MSCI USA ESG Screened Index
iShares JP Morgan ESG USD EM Bond UCITS ETF

EMES

n/a

(26/09/18 launched)

0.45% JP Morgan ESG EMBI Global Diversified index
iShares JP Morgan ESG USD EM Bond UCITS ETF

EMSA

n/a

(26/09/18 launched)

0.45% JP Morgan ESG EMBI Global Diversified index
iShares MSCI Europe ESG Screened UCITS ETF

SDUE

 

n/a

(23/10/18 launched)

0.12% MSCI Europe ESG Screened Index
iShares MSCI Europe ESG Screened UCITS ETF

SAEU

 

n/a

(23/10/18 launched)

0.12% MSCI Europe ESG Screened Index
iShares MSCI EMU ESG Screened UCITS ETF

SMUD

 

n/a

(23/10/18 launched)

0.12% MSCI EMU ESG Screened Index
iShares MSCI World ESG Screened UCITS ETF

SAWD

n/a

(23/10/18 launched)

0.20% MSCI World ESG Screened Index
iShares MSCI World ESG Screened UCITS ETF

SDWD

n/a

(23/10/18 launched)

0.20% MSCI World ESG Screened Index
iShares MSCI EMU ESG Screened UCITS ETF

SAUM

 

n/a

(23/10/18 launched)

0.12% MSCI EMU ESG Screened Index
Ossiam ESG Low Carbon Shiller Barclays Cape US Sector UCITS ETF

5HEP

-3.42% 0.85% Shiller Barclays CAPE US Sector Value Net TR Index
Ossiam ESG Low Carbon Shiller Barclays Cape US Sector UCITS ETF

5HED

-1.94% 0.85% Shiller Barclays CAPE US Sector Value Net TR Index
iShares MSCI Europe SRI UCITS ETF

IESG

-7.42% 0.30% MSCI Europe SRI Index
Lyxor MSCI EM ESG Trend Leaders UCITS ETF

MESG

-7.53% 0.30% MSCI EM Select ESG Rating and Trend Leaders Net Return USD Index
Lyxor MSCI USA ESG Trend Leaders DR UCITS ETF

UESG

n/a

(11/09/18 launched)

0.25% MSCI USA Select ESG Rating and Trend Leaders Net Return USD Index
Lyxor MSCI World ESG Trend Leaders DR UCITS ETF

WESG

-4.57% 0.30% MSCI World Select ESG Rating and Trend Leaders Net Return USD Index
Xtrackers ESG MSCI USA UCITS ETF

XZMU

-2.58% 0.20% MSCI USA ESG Leaders Low Carbon Ex Tobacco Involvement 5% Index
Xtrackers ESG MSCI Japan UCITS ETF

XZMJ

-4.93% 0.30% MSCI Japan ESG Leaders Low Carbon Ex Tobacco Involvement 5% Index
Xtrackers ESG MSCI World UCITS ETF

XZW0

-3.76% 0.30% MSCI World ESG Lea Leaders Low Carbon Ex Tobacco Involvement 5% Index
Xtrackers ESG MSCI Europe UCITS ETF

XZEU

-7.79% 0.30% MSCI Europe ESG Leaders Low Carbon Ex Tobacco Involvement 5% Index
Lyxor MSCI EMU ESG Trend Leaders DR UCITS ETF

EESG

-8.78% 0.20% MSCI EMU Select ESG Rating and Trend Leaders Net Return EUR Index

 

ETF Issuers Featured in this Article