A new report from DB Climate Change Advisors, a unit of Deutsche Bank Group, is a must-read for any advisor trying to understand sustainable investing and whether it contributes to long-term value and performance.
The report, released recently, concludes sustainable investing can be a clear win for investors. "We believe that ESG (environmental, social and governance) analysis should be built in the investment processes of every serious investor, and into the corporate strategy of every company that cares about social value. ESG best-in-class focused funds should be able to capture superior risk-adjusted returns if well executed," says Mark Fulton, managing director, global head of Climate Change Investment Research.
To draw this conclusion, DB Climate Change Advisors looked at more than 100 academic studies of sustainable investing, as well as 56 research papers, two literature reviews and four meta studies.
This review, says Fulton, uncovered some surprising results:
100 percent of academic studies showed companies highly rated on corporate social responsibility (CSR) and ESG factors had a lower cost of capital for debt (loans and bonds) and equity.
89 percent of the studies showed companies with high ESG ratings exhibited market-based outperformance.
The most important ESG factor is "governance," and counts most with investors and the market in general.
88 percent of studies of actual SRI fund returns show neutral or mixed results.The review found that SRI fund managers may have struggled to capture outperformance, but they have not lost money in the attempt.
The report, Sustainable Investing: Establishing Long-Term Value and Performance, also tries to cut through the confusion about what sustainable investing is by describing its evolution and defining key terms. It uses the term "sustainable investing" as the umbrella for all forms of SRI, including ethical and ESG investing, although other observers have used "socially responsible investing" or some other term as the umbrella.
To read the report, click here.