Asset managers can create better-performing portfolios by excluding stocks with lower environmental, social and governance (ESG) ratings, according to new research.
The study by New Amsterdam Partners used the Thomson Reuters Corporate Responsibility Ratings, which screens the ESG ratings of almost 5,000 companies.
Analysts compared randomly selected, equally weighted portfolios to identically selected portfolios that had the lowest ESG rated stocks removed. Across most of the years measured, the latter set of portfolios achieved higher mean returns.
“Clearly, asset managers can actively use ESG information and exclude the worst ESG stocks to enhance their stock-picking and portfolio construction ability,” said Indrani De, a co-author of the study.
This new study is the latest of many that indicates sustainable investments and ESG-focused companies offer superior returns for shareholders.
One Moneyfacts study found that UK ethical and sustainable investment funds generally performed better than their mainstream counterparts in 2013.
It reported that the average ethical fund delivered returns of 24% over a 12-month period, compared with the 18% growth displayed by the average non-ethical fund.
In an interview with Blue & Green Tomorrow in April, the president and CEO of the US-based firm Pax World Management Joe Keefe argued that the misconception that considering sustainability means sacrificing financial performance is “finally withering away”.
“At the same time, there are certain emerging demographics, like women and younger investors, who are much more interested in aligning their investments with their values and are therefore accelerating interest in and demand for sustainable investing strategies,” he said.