The majority of academic studies released in the last few years show a positive relationship between ESG factors and financial performance, according to a report from Mercer.
The research firm looked at 16 studies released since 2007. Ten supported the hypothesis that specific ESG factors can make a positive contribution to investment performance, four were neutral and two were negative-neutral.
“The belief that responsible investment will automatically limit the investment universe and thereby limit returns is narrow in its focus and conclusion,” Mercer says. “Responsible investment is a broader practice, and a number of tools are available for integrating ESG into the investment process, including voting, engagement, collaboration, negative and positive screening and ESG integration into valuation metrics.”
Mercer notes that a variety of factors, such as manager skill, investment style and time period, is integral to how ESG factors translate into investment performance. “Therefore, it is not a given that taking ESG factors into account will have a uniform impact on portfolio performance, and we expect significant variation across industries.”
Depending on the sector studied, the results of the tests related to ESG materiality also varied significantly, Mercer found, noting that there is evidence to suggest that globally, corporations are not uniformly disclosing comprehensive information about ESG factors, creating a need for dependency on specialist ESG research firms.
Most of the studies to date have focused on the link between ESG and listed equity investment, the report points out, however this is beginning to change. Future studies will focus on the link between ESG and fixed income and the link between sustainability and property values.
Download the report from Mercer’s website.
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