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How to boost investment returns: Invest responsibly

Finance Blogger: Ian Fraser Ian Fraser

It’s official. Caring for the environment and for society can actually benefit your wealth.

And according to a raft of recent surveys, the benefits of investing responsibly are increasingly being recognized by the global fund management industry, puncturing expectations that the financial crisis might put paid to such hopes.

The only real negative to emerge from the recent surveys—and unfortunately it’s a big negative—is that clients, including pension funds and other institutional investors, are not putting their money where their mouths are, with some blaming short-term pressures for the fact they are continuing to invest the vast majority of their funds in traditional ways.

After collating the findings of 36 independent studies exploring the links between environmental, social, and governance (ESG) issues and financial performance, the investment consultancy Mercer concluded that there are strong links between ethical behavior and financial performance.

In their report, “Shedding light on responsible investment: Approaches, returns and impacts,” Mercer collated the results of 16 academic studies, of which 10 (62%) showed a link between ESG factors and companies’ financial performance. Tim Gardener, Mercer’s global chief investment strategist, said: “The report further builds the case that considering ESG factors can add real and measurable value to an investment portfolio.”

The report followed Mercer’s earlier report, “Demystifying responsible investment performance,” in which the consultancy, working alongside the United Nations Environment Program Finance Initiative (UNEP FI), also pored over existing academic research.

However, Mercer acknowledges that integrating ESG thinking into portfolio management is no silver bullet: “A variety of factors, such as manager skill, investment style and time period, is integral to how ESG factors translate into investment performance.”

A separate survey carried out by the US-based magazine Pensions & Investments and the Social Investment Forum concluded that investment consultants’ enthusiasm for ESG criteria remains undimmed, despite economic crisis.

This is reassuring. There was a view that the economic crisis would create an “every man for himself” mindset among investors and set back socially responsible investing by a decade. US consultants quizzed by P&I said they did not believe that ESG investing would be a passing fad, with 88% predicting that client interest in ESG will continue to grow over the next three years and none believing it will decrease.

Even so, up to 59% of respondents to the P&I survey said they believe that ESG integration did not affect portfolio performance, or were unaware whether ESG was having any effect on performance.

A survey by Fair Pensions, a London-based organization that aims to spur UK pension funds into making more responsible investments, revealed that 89% of fund managers see climate change as an “important” or “very important” investment issue. However, many said they were unable to invest accordingly because of clients’ short horizons and “lack of demand.”

This was echoed by a survey from the European Sustainable Investment Forum (Eurosif), in which consultants said there was limited demand for ESG fund options and related service offerings. Consultants also said they wanted clients to be more explicit about their stance on ESG issues.

In the UK, investors surveyed by the EIC Environmental Investment Network said that long-term regulatory frameworks will be needed before investment in environmental technologies and services can be boosted. Respondents to “Environmental investment: The investors’ perspective” said the economic climate is causing investors to delay investment decisions.

Given the rash of plebiscites, it’s amazing that “survey fatigue” has not set in. Currently it seems there is more talk than action in the ESG and SRI (socially responsible investing) area. But at least that’s a start.

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Tags: environmental and social governance , ethical investing , fund management , socially responsible investment , surveys
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