ESG roundup: RCM on ESG performance, SLI on 'comply or explain' approach

EUROPE - The introduction of environmental, social and governance (ESG) criteria into the stock-selection process not only does not hurt investor portfolios, it shows a probability of outperformance over the longer term, according to new research from Allianz Global Investors subsidiary RCM.

The asset manager's research tested the impact of ESG issues on portfolio performance between 2006 and 2010.

The results showed that investors could have added 1.6% a year to their investment returns over the period by allocating to portfolios that invest in companies with above-average ESG ratings.

Bozena Jankowska, global head of sustainability research at RCM, said: "The perception that corporate efforts to become more sustainable reduce the value of companies and of investors' portfolios is well established, but until now, there has been a dearth of evidence, and perceptions have been based on largely unfounded assumptions and only thin academic research.

"Our study provides empirical evidence to challenge this misconception - a misconception that is holding back the evolution of the sustainability sector and the wider corporate world."

Returns from portfolios of European companies represented the largest and most consistent spread between the best in class and worst in class companies, reflecting greater integration of ESG factors in Europe than in the US, RCM said.

While there is no certainty that such behaviour will persist in the future, the asset manager said the five-year period covered in the study was eventful enough to encompass a growing market, a crash and a subsequent rebound.

Jankowska added: "This study adds to the growing body of research that demonstrates the introduction of ESG values into corporate strategy can lead to increased efficiency and innovation, and a consequent boost to revenues and profits.

"As ESG data becomes more widely reported, consistent and interpreted, investors can apply this information to the investment process with confidence. As market participants incorporate this information, we expect the impact on returns to increase going forward."

Elsewhere, Standard Life Investments (SLI) has conveyed firmly to the European Commission that the 'comply or explain' approach to corporate governance, which is well-established in the UK and many other member states, is critical to the competitiveness of European companies in the global arena.

Commenting on the Commission's Green Paper on corporate governance, SLI said comply-or-explain gave companies the flexibility they needed to implement corporate governance arrangements best suited to their business needs while also addressing shareholder concerns.

Guy Jubb, head of governance and stewardship, said: "We look to the Commission to build on the well-established 'comply or explain' approach in a way that enables companies and their shareholders to have a meaningful and, when necessary, robust dialogue about corporate governance issues, especially when companies do not comply with best practice.

"Investors are looking for good quality, informative explanations that will demonstrate why non-compliance is in the best long-term interests of the company and its shareholders.

"The very successful launch of the UK Stewardship Code demonstrates the determination of the investment community to play its part, and this cannot be ignored by the Commission when it develops its proposals, which will shape the future framework of European corporate governance for many years to come."