ACCORDING to the latest study from Credit Suisse's in-house think tank the jury is still out on whether ESG and sustainable investing really outstrips traditional investment offerings.
Published by the Credit Suisse Research Institute, in collaboration with London Business School and Cambridge University professors, the 2020 edition of the Credit Suisse Global Investment Returns Yearbook features a dedicated chapter on ESG investing.
Investment products with an ESG connection had a total value in 2018 of US$31 trillion. Today, the figure is probably closer to US$40 trillion the think tank says.
The report recognizes that around the world investors are concerned about environmental, social and governance issues and as a result asset managers are coming under pressure to show they invest responsibly.
Drilling into a large body of research on ESG investing the report authors probe whether investing responsibly enhances returns, or whether it involves sacrifice.
ESG investing takes many forms. Customary exclusions were of so-called sin stocks, such as tobacco, alcohol and gambling. Traditionally, these have performed well, so excluding them involved sacrifice.
However, recent research shows that sin stock returns can be explained by factor returns. Investors can compensate for their exclusion by choosing “virtuous” stocks with the same factor exposures.
Sin stocks have only a small weighting in the world index. But there is increasing pressure from investors to make large-scale exclusions. Climate change is leading to demands that fossil fuel stocks be excluded from portfolios.
Although relatively new there is a wide body of work with sometimes conflicting results on the performance impact of ESG investing depending on time-periods and approaches chosen, but there is no unequivocal evidence yet showing that ESG funds outperform on a sustained basis.
Most studies find neutral to mildly negative relative performance. Similarly, on average, ESG indices appear to show neutral performance.
The research institute conclusion is that, while on balance, there is no unambiguous evidence that ESG enhances risk-adjusted returns, there is equally no evidence that investors need to pay a high price for their principles.
In Asia where a massive generational transfer of wealth is taking place, ESG funds have been gaining traction. For altruistic investors however, strange as it may seem, the performance might not be the principal or only motivation for investing in an ESG or sustainability fund.