Public debate persists about the performance and best method of integrating Environmental, Social and Governance (ESG) factors into investment decisions.  Despite growing demand for sustainable and impact investment solutions and a body of evidence to support the effectiveness of sustainable investing from a strictly financial perspective, many investors are still unclear about the relationship between ESG factors and financial performance.

No financial return trade-off between investing for profit or purpose.  Evidence shows that aligning investments with ESG factors can create financial value for investors, particularly investors who are seeking to invest for impact. The literature review conducted by Cornerstone suggests that there is no reduction in investor returns for investment strategies that appropriately and consistently apply ESG factors.

Understanding the range of potential approaches is critical. The ability to develop and implement an investment strategy that effectively integrates ESG factors to drive value creation requires careful planning as well as an understanding of the variety and effectiveness of approaches. We provide an overview of those styles.

Investments do have an impact on broader society, and sustainable investing allows investors to more effectively target and enhance this impact in the context of long-term financial goals. Investors should consult with their trustees, constituents and advisors to construct a long-term investment strategy compatible with long-term financial and mission-related goals.

Background

In 2014, Cornerstone Capital’s report ESG Essentials – A Guide for Investors provided a detailed primer for investors and other market participants on the case for integrating ESG factors into investment considerations. The report outlined major drivers that have intensified the use of these criteria in investment analysis:

  • Long-term investing is the most appropriate approach for most investors: Markets are beginning to recognize the costs of “short-termism” as short-term ownership by active managers has led to lower returns. ESG factors are a critical part of assessing long-term potential risks and opportunities of different companies’ operating philosophies.
  • Investments are global: Global economic forces are creating new paradigms, and the information sought by investors is increasingly aligned with ESG factors. For example, investing in developing markets requires a detailed understanding of company and sovereign corporate governance.
  • Focus on ESG performance by companies is seen as value-generating: Studies show that companies which have integrated ESG performance into operations are generating greater investment returns. Investors are able to identify these companies through the use of an ESG investment lens.
  • Company value is less tangible and new metrics are needed: Intangible assets are increasingly important in assessing company value—assets such as human capital, intellectual property and “brand” now represent 84% of a company’s market value, on average. ESG factors provide investors with a clearer window on the value of the intangible assets of companies.

These drivers have led to a rapid growth in ESG as part of mainstream finance.

Please read the complete report here.

Sebastian Vanderzeil is a research analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland. 

Craig Metrick is Director, Manager Due Diligence and Thematic Research at Cornerstone Capital Group. Previously, Craig was Principal and US Head of Responsible Investment at Mercer, working with a variety of public and private clients.  Before joining Mercer, Craig was a Director at the Investor Responsibility Research Center (IRRC), which provided ESG research to institutional investors. Craig is a Chartered Alternative Investment Analyst, a member of FTSE4Good US Advisory Committee, and served two terms on the Board of Directors of the US Forum for Sustainable and Responsible Investment (USSIF).

Andy Zheng is a Research Associate at Cornerstone Capital Group. Andy graduated from Bowdoin College with an interdisciplinary major in Mathematics and Economics and a minor in Visual Arts.  He spent his junior year studying abroad at the University of Oxford and the summer prior to that at the Sorbonne in Paris. Andy passed Level I of the CFA Program in January 2014.