Environmental, social and governance (ESG) investing seeks to deliver positive returns while also evaluating a company’s long-term impact on society, the environment, and the performance of the business itself.
The category has grown significantly in recent years – to $8.1 trillion of the $40.3 trillion assets under professional management in the United States in 20161 – and is drawing particular interest from millennial investors and women.
How Sustainable Practices Can Impact Performance
ESG investing offers a framework for understanding which companies may be best equipped to handle the ways in which the world is changing. How a company responds to challenges like disruptive weather patterns, droughts, mass migrations, food and water shortages, and corporate governance can impact its long-term growth trajectory.
While skeptics still believe that focusing on non-economic attributes of a company can hinder investment performance, a wealth of research suggests that ESG practices may actually enhance returns. ESG-focused companies tend to have a lower cost of capital, better operational performance and less risk than other companies. Most studies show a positive correlation between ESG practices and stock price performance.2
Recognition Fueling Growth
Governments and industry organizations globally are changing their views toward ESG investing, further driving interest. The U.S. Department of Labor issued guidance that opened the door for retirement plans to adopt ESG policies and strategies.3 Outside the U.S., many governments require their pension plans to disclose how ESG factors are incorporated.4
With increasingly rich ESG data available for analysis and strong evidence that ESG-focused portfolios can enhance risk-adjusted returns, the category is likely to enjoy continued growth.
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2Source: “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” University of Oxford and Arabesque Partners, September 2014.
3Source: CalPERS Adopts Environmental, Social, and Governance Strategic Plan, www.calpers.ca.gov, as of August 15, 2016. State Comptroller DiNapoli Positions New York Pension Fund For Low Carbon Future, http://www.osc.state.ny.us, as of December 4, 2015. Long Term Stewardship: A Pragmatic Approach for ESG Integration for Institutional Investment, North Carolina Department of the State Treasurer, as of September 21, 2016.
4Source: Pensions & Investments, January 19, 2015.
The stocks of companies with favorable ESG practices may underperform the stock market as a whole.
These views represent the opinions of the Portfolio Managers at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.