Exchange traded funds (ETFs) that track companies with good environmental, social and corporate governance (ESG) metrics have gone from strength to strength in recent years, according to analytics firm IHS Markit.
The research company's ETF analytics database saw a record $950m (£731m) of assets invested into SRI funds in 2016.
According to the firm, 2017 is shaping up to be an even better year for SRI, with investors shifting more than $800m (£615m) to socially responsible funds year to date, propelling their assets under management (AUM) above the $5.5bn (£4.2bn) mark.
Simon Colvin, research analyst at Markit said: “These large investments come from both sides of the Atlantic, but European investors are more eager to invest with a conscience. Interestingly, at the start of 2016, socially responsible ETFs in Europe had less than half the AUM of their North American counterparts, but Europeans have contributed roughly 60 per cent of the new inflows since then.”
Markit‘s signals integrated ESG Rating, which ranks compliance to the Principles for Responsible Investment framework, shows that investors haven’t foregone returns by investing in socially responsible strategies over the last five years.
The top 10 per cent of North American shares by ESG Rating represent the best performing end of the market returning 1.24 per cent a month on average, nearly a third more than the 0.94 per cent all of North American shares since 2012.
Mr Colvin said short sellers are much less sceptical of stocks that score well with socially responsible metrics.
“The current group of North American shares in the top 10 per cent of the ESG Rating have, on average, 1.8 per cent of shares out on loan. This figure is less than half of that seen worldwide.”
Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit.
But Mr Colvin said scoring well on ESG metrics isn’t a cure all against short sellers.
“Plenty of short targets are still present among high scoring firms. This short selling is more likely driven by company specific forces than the fundamental sector vulnerability that has made some pure play socially responsible firms the favourite short targets of the last decade.”
Mr Colvin gives the example of Hanes Brands, the socially responsible clothing manufacturer, as the top target, with more than 17 per cent of its shares shorted, despite scoring in the fourth percentile of the ESG Rating.
“Its current high short interest reflects the headwinds in North American retail and revenues,” he said.
Darius McDermott, managing director at Chelsea Financial Services emphasises that with anything ethical, the way stocks are screened is key and selection depends on what the manager of a fund is looking for.
He said: Most ESG products will take a couple of views, one, best in class or two positive/negative targeting.