The term ethical/environmental investment over time has evolved into other ways of analysing company behaviour and is associated with the terms of SRI (Socially Responsible Investment) and more recently ESG (Environmental, Social and Governance).
When ethical funds were in their infancy, a common assumption was that funds which incorporate environmental, SRI and ESG characteristics, and in particular those with a strict ethical screen applied, must involve a trade-off with performance. Over time the debate about performance has turned on its head. We believe that considering these issues in investments makes sound financial sense, as well as being the right thing to do, this view is increasingly backed up by research and evidence. Numerous studies find a link between company-level ESG performance and their financial and operational performance; in particular, there is evidence that taking ESG into account can help to protect against volatility and downside risk. Investing in companies which consider the impact on their stakeholders (e.g. employees, the environment and suppliers) may actually improve long term performance, as their products may command a premium in the market, they may be less likely to be sued and their employees may be happier and therefore more productive.
We find that strong ESG performance can be a signal for quality, which can support stock selection. Looking at the track record of SRI funds in practice, although some market conditions may see them deviate from mainstream benchmarks, the evidence shows that SRI portfolios have performed in line with mainstream peers over the long term, and may have superior risk characteristics.
ESG momentum matters; promising new research shows how investor engagement can lead to positive ESG momentum and financial outperformance.
ESG/ethical investment is an important part of this movement to help change corporate attitudes. The aim is to consider the impact of the investment decisions and to return a profit, but not at any cost. It is about education and influencing corporate behaviour.