GLOBAL - More academic research has shown that environmental, social and governance (ESG) factors can have a positive impact on portfolio returns.

In its new report, entitled Shedding Light on Responsible Investment: Approaches, Returns and Impacts, global consultancy Mercer summarised 16 academic studies - 10 of which showed a positive relationship between ESG factors and companies’ financial performance. Four studies illustrated a neutral relationship, while two showed a neutral to negative relationship.

The research reviewed in the report included peer-reviewed studies, which apply traditional finance theory to ESG factors and span across a variety of research methods, geographies and investment approaches.

It follows in the footsteps of the 2007 Demystifying Responsible Investment Performance report, in which Mercer and the Asset Management Working Group of the United Nations Environment Program Finance Initiative (UNEP FI) examined the existing academic ESG performance research.

Based on these two reports, a total of 36 studies have been reviewed. Of these, 20 showed evidence of a positive relationship between ESG factors and financial performance, while only three demonstrate evidence of a fully negative relationship.

The academic studies’ results vary in part because of differing research methods and short sample periods. In the past, studies of this kind tended to focus on the link between ESG factors and listed equities. This exclusive focus on equities is beginning to change and Mercer’s new report includes several studies examining the financial performance of other types of investments, such as microfinance funds and hedge funds.

Another key to the interpretation of the Mercer report’s results is an understanding that responsible investment is a broad practice and that there are a number of tools available for integrating ESG factors into the investment process including voting, engagement, collaboration, negative and positive or best-in-class screening and ESG integration into valuation metrics.
The European ESG or social responsible (SRI) market also appears to have been defying the financial crisis, as the number of European SRI mutual funds grew by 27% from 537 to 683 over the last 12 months in the run-up to June 2009. Assets under management rose by 9% to €53bn over the same period, according to the Green Social and Ethical Funds in Europe 2009 Review by rating agency Vigeo Italia.