Nice guys finish last? Not necessarily.

28 October 2021 by National Bank Investments

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A wave of public outcry is encouraging businesses to take on more responsibility for how their actions are shaping the world. Front and center is the role companies are playing in tackling key issues such as climate change, inclusiveness, and inequality.

And as powerful enterprises become more aware of their environmental and social impact, so are the individuals or entities that invest in these companies.

Is “doing good’ really the only reward for socially responsible investors?

Will investing in socially responsible companies translate to higher investment returns, or will ESG exclusions have a negative impact on your portfolio?

The chart below compares the returns of a socially responsible investment (SRI) index with that of a traditional global index like the MSCI World Index. In this particular case, the performance of the SRI index outperformed the traditional index consistently, suggesting that investors wouldn’t necessarily be sacrificing returns by adhering to a portfolio composed of only socially responsible companies.

Comparing the performance of a global SRI index with a comparable traditional index (2008-2019)

Source : RBC Global Asset Management, Does Socially Responsible Investing Hurt Investment Returns, Bloomberg (2019)

Evaluating the vast body of industry research on ESG

Upon examining growing research on the subject, investors could expect portfolios of companies that have high ESG rankings to post higher risk adjusted returns than those that do not.

Below is a summary of some key findings:

Companies with high absolute ESG rankings and those with improving sustainability scores were shown to outperform their peers.
Companies with better governance and shareholder rights outperformed on a range of metrics.
Environmental and social factors have a strong link with equity returns, although this varies by geographic region and industry sector.
Companies that adhere to ESG criteria are less likely to be impacted by disruption by external or regulatory changes, have better risk management practices and therefore are subject to lower downside tail risk.

To conclude, investing in socially responsible companies doesn’t necessarily mean you’d be sacrificing investment returns. On the contrary, incorporating both financial and non-financial considerations could lead to a more holistic view of the company and improved equity returns!

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