Insights Blog

Responsible Investing and ESG Investment Performance Concerns

Written by Commonfund Institute | Jun 6, 2016 8:01:24 PM

Discussions about whether responsible investing strategies help or hurt investment performance are complicated by the fact that, there are several broad categories of responsible investing practice and they influence portfolios in different ways. Click here for more on the responsible investing categories.

Many institutions have concerns about whether and how to apply ESG investing practices to their portfolio. These reservations stem partly from their past experience with SRI and partly because ESG investing has only recently become more widespread. While there are many concerns about responsible investing, the most common concerns relate to the impact of ESG investing on performance, its interaction with fiduciary duty and its application to different asset classes. Through a review of studies and academic papers, we attempt to provide some context for considering these concerns.

ESG Investing and Investment Performance

Preliminary studies suggest that while integrating ESG issues into fundamental investment analysis procedures can improve investment performance, it is too early to draw comprehensive conclusions. ESG skeptics point to the efficient market hypothesis, which holds that available information about potential investments is rapidly assimilated and reflected in security prices, and argue that if ESG issues were truly material they would already be integrated into most investors’ fundamental evaluation process. ESG proponents counter that if the efficient market hypothesis operated as its adherents claim there would be no material advantage in choosing companies with strong ESG characteristics and that it is precisely because ESG analysis has not been fully integrated into mainstream investment procedures that it represents such an opportunity now. As the methods for identifying those ESG issues that are truly material to specific investment strategies become more refined, more useful studies will no doubt be produced on the impact of integrating these considerations into the portfolio.