Why responsible investing can drive long-term returns

OBSERVATIONS | JUNE 2019

Responsible investing continues to grow in popularity. As the space evolves, the data increasingly shows that incorporating ESG factors into equity investing can improve long-term risk-adjusted returns.


In our March 2018 Observations piece, Can an eye to ESG enhance long-term portfolio performance?, we highlighted the importance of responsible investing and explored the key drivers of this trend. Importantly, we concluded that environmental, social and governance (ESG) criteria is increasingly being shown to reduce risk and potentially increase return over the long term.

In this article, we provide further evidence that ESG investing shouldn't come at the expense of returns - in either equities or fixed income.

Key points are:

  • Over the past 12 years, the ESG Leaders index has outperformed the MSCI All Country World Net Return index by 0.67% on an annualised basis, and with less volatility.
  • In emerging market equities, this outperformance is even more pronounced, where the MSCI Emerging Markets ESG Leaders index has outperformed its parent index by 3.65%.

 

  • ESG leaders tend to outperform traditional equity indices as these businesses are less likely to be involved in environmental disasters, corporate governance issues, human rights and labour rights violations, which could incur significant cost to those businesses and negatively affect the share price.
  • While the return differential is smaller in fixed income, we provide evidence that returns don't have to be sacrificed and risk can be mitigated by focusing on sustainable bonds.
  • As with traditional approaches to investing, we believe in the importance of active management in this space, as well as appropriate diversification. At Crestone, we have built a strong product offering for our clients in this area, and have identified several active managers that we believe can offer solid risk-adjusted returns and diversification over the long term.