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Ethical finance

Demystifying responsible investment performance

Environmental, social and governance factors in responsible investment performance.

Authors: ; The Asset Management Working Group; Mercer
Publisher: United Nations Environment Programme Finance Initiative, 2007

Full text of document

This report features a diverse set of academic and broker studies that analyse responsible investment performance at both the company/stock and fund/portfolio level, including thematic studies which bolster the materiality of Environment, social and Governance (ESG) factors. The aim is twofold – to demystify responsible investment performance, and to encourage more in-depth academic and practitioner research on ESG factors.

Key studies reviewed in this report articulate a number of profound messages. These include:

  • a variety of factors such as manager skill, investment style and time period are integral to investment performance. The argument that integrating ESG factors into investment analysis and decision-making will only lead to underperformance simply cannot be made
  • more rigorous quantitative ESG research is vital to improve the comparability of ESG criteria with traditional financial criteria, and to make the linkages more distinct
  • from a macro perspective, it is clear that the short-term mindset of many in the financial world is highly incompatible with the long-term horizon necessary to integrate ESG factors more effectively and for investors to act more responsibly
In conclusion, the paper argues that looking forward, there is likely to be continued innovation among practitioners and academics on the materiality of ESG factors to support further progress. In terms of brokerage firm research, collaborative efforts among asset owners and asset managers via the Enhanced Analytics Initiative (EAI), for example, will continue to be key drivers for encouraging further research on the integration of ESG factors into research reports and buy/sell recommendations. On the academic side, more research is needed to examine the link between the different approaches towards integrating ESG into investment decisions (beyond screening) and portfolio performance, including the effect of engagement and integration into stock selection.