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The Actuary The magazine of the Institute & Faculty of Actuaries

ESG investment more likely to outperform over long term

A study by RCM, a company of Allianz Global Investors, tested the impact of ESG issues on portfolio performance over the period 2006 to 2010. The evidence found investors could have added 1.6% a year over five years to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.

RCM said not only does this demonstrate that investors' portfolios are not negatively impacted by the introduction of ESG criteria into the stock selection process, but there is also a probability of outperformance over the longer term.

Global head of sustainability research Bozena Jankowksa said: "The perception that corporate efforts to become more sustainable reduce the value of companies and of investors' portfolios is well established, but until now there has been a dearth of evidence and perceptions have been based on largely unfounded assumptions and only thin academic research.

"Our study provides empirical evidence to challenge this misconception; a misconception which we believe is holding back the evolution of the sustainability sector, and the wider corporate world."

The research revealed returns from portfolios of European companies represented the largest and most consistent spread between best-in-class and worst-in-class companies, reflecting greater integration of ESG factors in Europe than in the US.

RCM said while there is no certainty that such behaviour will persist in the future, the five-year period covered in the study was eventful enough to encompass a growing market, a crash and subsequent rebound.

Jankowska added: "This study adds to the growing body of research that demonstrates that the introduction of ESG values into corporate strategy can lead to increased efficiency and innovation, and a consequent boost to revenues and profits.

"As ESG data becomes more widely reported, consistent and interpreted, investors can apply this information to the investment process with confidence. As market participants incorporate this information, we expect the impact on returns to increase going forward."