As discussed in an earlier blog, The Nomenclature of Impact Investing, ESG (Environmental, Social, and Governance) investing and SRI (Socially Responsible Investing) are two of many acronyms used for impact investing. Despite its growing popularity, some investors have voiced their concern regarding a returns trade-off. ESG investors and managers, including the 1,500 signatories of the UN Principles for Responsible Investment, will point to numerous studies showing that returns need not be sacrificed when investing in ESG issues. However, it appears that some still need convincing. This past month, the California Public employees’ Retirement System (CalPERS) announced a request for asset managers to show historical performances of ESG investing in order to prove outperformance of cap-weighted benchmarks or benchmark segments. So, with what seems to be ambiguity in the space of ESG investing, where can we find clarity?
Evidence in favor of ESG investing can be found in past research. One U.S. study found that socially responsible investing (SRI) funds performed in-line with non-SRI funds during an economic expansion, significantly outperformed during an economic contraction, and performed better during a crisis. Another study reports that investing in sustainability has usually met and often exceeded the performance of comparable traditional investments on both an absolute and a risk-adjusted basis across asset classes and over time. While this type of evidence would incline investors toward investing in a socially and environmentally responsible way, there are still, and will likely always be, some naysayers. Regardless, the momentum is noticeably on the “pro” side for ESG investing. CalPERS information request and research will hopefully continue to prove, as these studies show, that including ESG criteria has no negative bearing, but rather a positive impact, on long-term performance.
We will follow CalPERS research progress and are confident that the results will lead them to agree that “investors can have their cake” (i.e., positively contribute to our environment and society) and “eat it too” (i.e., maintain strong financial performance and reduced risks).
 Darwall and Koedijk (2005) and Areal, Cortez, Silva (2010) from http://funds.rbcgam.com/_assets-custom/pdf/RBC-GAM-does-SRI-hurt-investment-returns.pdf