What are the benefits of socially responsible investing?

The efforts made and the amounts spent by asset management companies to assess the ESG performance of companies in their investment universe are not only due to a fad or regulatory pressure.

Socially responsible investing is a beneficial approach over the long term, whether we are interested in the financial materiality or the impact materiality of our investments.

Improving financial performance

ESMA has published its fourth annual report on the performance and cost of EU investment products.

This report looks at the market over a period of ten years and in particular compares the performance of funds according to their ESG approach. He draws four main conclusions:

👉🏼 ESG funds are cheaper than non-ESG funds, with the exception of ETFs.

👉🏼 ESG equity, bond, and mixed funds outperformed non-ESG funds.

👉🏼 Funds classified under article 9 of the SFDR performed better than article 8 funds, despite slightly higher costs.

👉🏼 Impact strategies perform better than other ESG strategies.

This study is based solely on financial data, as it is not possible to access relevant extra-financial data for all the funds analyzed.

The entry into force of the SFDR in March 2021 is a major advance in terms of ESG reporting that will make it possible to better compare the extra-financial performance of funds in the years to come.

Enough to couple these financial results with environmental, social and governance outperformance!

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Generating 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 investment governance criteria.

Investors are ready to accept a lower return in exchange for a positive social impact. This is the product of the extra-financial characteristics of companies and their operating capital.

The authors of this article highlight several consequences:

• The more diverse the tastes of investors when it comes to ESG, the more money is directed to green assets and the more the return on these assets decreases.
• When investor or consumer interest in virtuous businesses increases, they offer a better return than the rest of the market.
• Investing in green businesses generates a positive social impact in two ways: the investments of these companies are increasing compared to others, and the overall market is tending to improve its ESG performance.

Extensions of this model, including an ESG perception factor, climate risk and social impact measurement, complete the study:

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Many factors must 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 by identifying synergies between phenomena already taken into account.