Despite significant growth in recent years, some skepticism lingers about sustainable investing’s performance potential. Research suggests, however, that a focus on ESG factors may potentially contribute to investment returns.

Companies with Strong ESG Practices Have Better Corporate Finance Performance and Less Risk

Deutsche Bank conducted a survey of 2,200 sustainable investing studies and found positive correlations between strong ESG practices and corporate financial performance for companies in every region of the world.1 In addition, University of Oxford researchers evaluated 200 empirical ESG studies and found that:2

  • 90% of studies on cost of capital showed that sound sustainability standards lower the cost of capital of companies.
  • 88% of the research showed that solid ESG practices result in better operational performance of firms, which ultimately translates into cash flows.
  • 80% of the studies showed that good sustainability practices positively influence stock prices.

Sustainable Funds May Potentially Outperform Traditional Funds

  • The Morgan Stanley Institute for Sustainable Investing found that, after reviewing performance data from 2008 to 2014 for 10,228 open-end mutual funds, that sustainable funds tend to exhibit slightly higher returns and lower volatility than their traditional counterparts, barring a few exceptions.3
  • Calvert Investments and Harvard researchers demonstrated that systematic analysis of ESG data may help increase shareholder value while mitigating risk.4
  • Morningstar found a statistically significant relationship between mutual funds with higher sustainability ratings and lower volatility.5
Can ESG Enhance Investment Returns?

Other Factors Supporting Sustainable Investing

  • More companies report: In 2011, only 20% of the S&P 500 companies published sustainability reports, according to the Governance & Accountability Institute. By 2016, 82% did.
  • More third-party sources are gathering data: Firms including MSCI, Sustainalytics, Thomson Reuters and Bloomberg are gathering and reporting data on companies’ ESG practices, and providing comprehensive ESG scoring on an ongoing basis.
  • More analysts cover ESG: Firms are building out their ESG platforms as an integral part of their business and today, there are more analysts engaged in collecting and evaluating ESG data than ever before.
  • Higher levels of engagement with ESG issues: Today, shareholders, proxy advisors and asset managers are much more active, voting with their assets to persuade companies to adhere to higher ESG standards.

It is our opinion that with increasingly rich ESG data available for analysis and evidence that ESG-focused portfolios may potentially enhance risk-adjusted returns, the category is likely to enjoy continued growth.

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  1. ^Source: “Sustainable Investing: Establishing Long-Term Value and Performance,” Deutsche Bank, June 2012.
  2. ^Source: “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” University of Oxford and Arabesque Partners, September 2014.
  3. ^Source: “Sustainable Reality: Understanding the Performance of Sustainable Investment Strategies,” a white paper published in March 2015 by the Morgan Stanley Institute for Sustainable Investing.
  4. ^Source: “The Financial and Societal Benefits of ESG Integration: Focus on Materiality,” Calvert-Serafeim Research Series, Calvert Investments, June 2016.
  5. ^Source: Higher Sustainability Ratings Can Mean Lower Risk. Morningstar, as of October 13, 2016.