The persistent myth of ESG underperformance
Performance concerns remain a key negative influence among investors considering sustainable investment products, despite a growing body of evidence to the contrary.
Performance concerns remain a key negative influence among investors considering sustainable investment products, despite a growing body of evidence to the contrary.
Only 19 per cent of financial advisers who recommend so-called ESG investment products - which weigh up environmental, social and governance factors - cite performance as their key motivation, according to a US report released last week.
More than half of the respondents have either used an ESG product in the past 12 months, or plan to within the next year. Of those who don't use ESG investments, 35 per cent attribute this to performance concerns.
And yet there is increasing evidence linking ESG investing principles and solid investment returns.
Just last month, Jeremy Grantham, chief investment officer of asset manager GMO – which oversees about $74 billion in funds under management – told attendees at a Morningstar conference in the US that eliminating some sectors entirely was not particularly harmful over the long term. Grantham found that removing energy from the Standard & Poor's 500 stock index for the past 30 years increased performance by .03 per cent annually.
Locally, however, the "jury is still out" on ESG fund performance, according to Tim Murphy, director of manager research, Morningstar Australia.
"Over the short term … an ESG fund may be doing better than a non-ESG fund because the investments it has are doing well on a cyclical, rather than a longer-term basis," Murphy says.
Figures from last year's Responsible Investment Association of Australia report are less equivocal. The report suggests that funds with core responsible investment strategies are outperforming equivalent Australian and international share funds, and multi-sector growth funds, over most time horizons.
The RIAA identified similar drivers of ESG investment – values/beliefs, environmental risks, increased demand from institutional and retail investors. Performance concerns are also a top detractor, along with a lack of awareness, and capacity constraints stemming from insufficient product availability and a shortage of qualified advice.
ESG investing 'asks corporate leaders to assume a greater level of social responsibility'
The higher relative costs of investing in green funds versus their non-ESG equivalent is a key issue. Research from actuarial firm Rice Warner suggests rates of return between ethical investment options and non-ethical investment options do not vary materially.
"However, the small amount of assets in these options usually means they are more expensive as they lack scale benefits," Rice Warner says in a recent report on ethical investments.
"This has created a risk that superannuants will trade off their emotions against value in products. Unfortunately, this risk has been realised, with some products on the market which appeal directly to a member's sense of social obligation."
Looking beyond the performance figures, Morningstar's US-based head of sustainability research, Jon Hale, uses the term "sustainable capitalism".
"It acknowledges those central facts and asks corporate leaders to assume a greater level of social responsibility, taking into account the concerns of all stakeholders, not just those of shareholders. In essence, it asks investors to do the same thing as they evaluate companies and, as shareholders, engage with them.
"None of this is to say that firms should no longer maximise shareholder value; it is to say that shareholder value is maximised when managers take a more holistic, responsible long-term view," Hale says.
He references the head of BlackRock, Larry Fink, who adopted a "greed has to go" theme in his January 2018 CEO letter.
"When the CEO of the world's largest asset manager, with more than $6 trillion of investor assets, makes these claims, it's safe to say the whole world is watching," Hale writes.
"I doubt that what Fink says in his letter is going to create 'a firestorm in the corner offices of companies everywhere' [quoting New York Times columnist Andrew Sorkin] because it already reflects the thinking of a growing number of corporate executives."
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Glenn Freeman is a senior editor, Morningstar Australia.
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