Socially responsible investing (SRI) has become a main theme on capital markets. According to the Global Sustainable Investment Review, a total of 21.4 trillion US-Dollars has been invested into sustainable investment approaches. Particularly for institutional investors, responsible investing is becoming a prime concern. Union Investment finds that about two-thirds of institutional investors are considering sustainability criteria in their investment processes - mainly for stocks, alternatives and real estate investments. But also private investors are using ESG criteria in their stock selection. In another survey, Union Investment finds that good governance regarding employee relationships, transparent production processes and environmental consciousness are investment criteria for most of them.
However, the value created by considering environmental, social and governance (ESG) criteria in investment processes are still questioned by academia. Some researchers argue that sustainable investment practices increase returns as the market does not price in social benefits, increasing the return of high-rated ESG stocks, and the likelihood of unfavourable news for unsustainable companies is underestimated, lowering the return of low-rated ESG shares. A study from NN Investment Partners and the European Centre for Corporate Engagement (ECCE) at the Universität Maastricht reveals, for example, that considering absolute ESG scores and the score’s dynamic improves portfolio returns. On the other hand, many academics also point out that the return differences between sustainability-screened and non-screened portfolios are insignificant, and some even find an underperformance of SRI-screened portfolio compared to their conventional counterparts.
In the latest issue of their ETF white paper series, UBS analyses a new data set of daily stock and bond returns from October 2007 to March 2016, which thus includes a number of major market corrections including the financial crisis, the European debt crisis and large-scale central bank interventions, challenging returns overall. Analysing the value of the SRI screening process in isolation, only rule-based, highly transparent SRI-screened portfolios were considered in their analysis, which investors can easily add to their portfolio using an index tracking solution.
Their sophisticated analysis thereby yields, that in fact, the return of SRI portfolios and conventional portfolios differ only insignificantly. But taking into consideration risk characteristics, the study shows that investors can expect higher risk-adjusted returns compared to traditional, i.e. non-SRI-screened, portfolios. Thereby, emerging markets SRI-screened portfolios had the most attractive risk-return trade-off followed by UK stocks. Similarly, the study shows that also bonds selected on an ESG basis have improved risk-adjusted returns. Only for the US market, ESG investing does not seem to improve risk-adjusted returns.