You will see that our findings support or partially support eight of our hypotheses, including several sub-hypotheses. The most persuasive findings relate to corporate financial performance. A variety of studies see neutral or positive evidence that companies that have pursued substantial environmental and social policies since the 1990s perform better than lower credentialed peers on accounting measures such as return on equity and return on assets, and in terms of stock market performance over time.
In addition companies with higher ESG ratings exhibit lower share price volatility than peers with lower ratings. Good ESG performers generally have better risk management processes and governance procedures that mean they are less exposed to idiosyncratic risk incidents.
We also found positive evidence relating to the performance. Studies of comparative investment performance found that portfolios which have exposure to companies with strong ESG scores perform better than those that do not. However, this research is typically based on a relatively short timeframe, given that integrated ESG funds have only become a staple of responsible investing in recent years.
However, studies including longer established ethical funds showed mixed results. In part this reflects the ‘negative exclusions’ that have often been applied by ethical funds in sectors such as alcohol, tobacco and gaming. This reflects the inherent limitations of comparing historical data around ESG performance.
3. The power of positive investor sentiment towards responsible investment
We have seen a huge surge in demand among investors for responsible investment. Morningstar data shows that US$21bn of new assets were invested in mutual funds or ETFs based on environmental, social or governance themes during 2019, nearly four times the previous record set in 2018. This has been accelerated by the COVID-19 pandemic which has brought increased focus on corporate behaviour - investors, especially younger people are increasingly looking to invest in line with their values. As a result firms are under increasing pressure to demonstrate their responsible investment credentials.
We believe that responsible investment will become increasingly important as time goes on, and financial advisers and asset managers must continue evolving how they operate to meet this demand. There are four key attributes that asset managers and financial advisers alike can use to develop strong responsible investing capabilities. This includes organisations with limited resources, and those which have taken few steps so far to implement ESG principles. Those attributes are:
- Listening and engagement. Listening to the end investor can help firms to gather more insight and data on consumer sentiment and trends. EY’s Future Consumer Index shows that enhancing environmental and social impacts is one of the leading factors that makes consumers willing to share their personal data.
- Leadership and purpose. It’s important for firms to lead by example and demonstrate the values consumers seek. The impact of COVID-19 makes it even more important for firms to incorporate ESG principles into their own operations and conduct, not just their investment decisions or advice.
- Consistency and communication. Using internally consistent sets of ESG definitions and assumptions, aligned to global regulatory standards, will help to build a robust ESG framework, to make performance comparisons and to build trust and transparency with staff, investors and stakeholders.
- Training and culture. Training, education, leadership and culture are all essential to fully implementing ESG frameworks, and to increasing awareness of the benefits of responsible investing.
We expect regulatory change, evidence of no detriment to returns and fast-growing demand to drive sustained growth in responsible investing. Meeting those needs will generate powerful revenue growth for financial advisers and asset managers. Those that fail to keep up risk being left stranded as the whole industry shifts onto a more sustainable footing.