What are the benefits of socially responsible investment?
The efforts undertaken and the expenses incurred by asset management companies to evaluate the ESG performance of the companies in their investment universe are not only due to a passing trend or to regulatory pressure.
Socially responsible investment provides long-term benefits, whether we are interested in the financial materiality or the impact materiality of our investments.
Improve financial performance
ESMA has published its fourth annual report on the performance and cost of EU investment products.
The report reviews the market over a ten-year period and, in particular, compares the performance of funds according to their ESG approach. It draws four main conclusions:
👉🏼 ESG funds are cheaper than non-ESG, with the exception of ETFs.
👉🏼 ESG equity, bond and hybrid funds outperformed non-ESG funds.
👉🏼 Funds classified Article 9 of the SFDR outperformed Article 8s, despite slightly higher costs.
👉🏼 Impact strategies performed better than other ESG strategies.
This study is based on financial data only, due to the lack of access to relevant extra-financial data for all the funds analyzed.
The entry into force of the SFDR in March 2021 is a major step forward in terms of ESG reporting, which will make it possible to better compare the extra-financial performance of funds in the years to come.
This will provide the opportunity to couple these financial results with environmental, social and governance outperformance!
Generate a lasting positive impact
In "Sustainable investing in equilibrium", Lubos Pastor, Robert F. Stambaugh and Lucian A. Taylor propose a market model that takes into account environmental, social and governance criteria in investments.
Investors are willing to accept a lower return in exchange for a positive social impact. The latter is the product of the extra-financial characteristics of companies and their operating capital.
The authors of this article highlight several consequences:
The more diversified investors' tastes in ESG are, the greater the amount of money directed toward green assets and the lower the returns on those assets.
When investor or consumer interest in green companies increases, these companies offer a better return than the rest of the market.
Investing in green companies generates a positive social impact in two ways: the investments of these companies increase relative to others, and the overall market tends to improve its ESG performance.
Extensions of this model including an ESG perception factor, climate risk, and a social impact measure complete the study:
Many factors need to be taken into account in order to capture the full exposure of assets to ESG issues and risks. These results could therefore be refined by taking into account new indicators or highlighting synergies between phenomena already taken into account.