Investors signed up to the Principles for Responsible Investment (PRI) performed better, on average, than non-signatories during the five-year period to 2018, according to analysis carried out by CEM Benchmarking.

The Canadian firm also found that being a PRI signatory did not increase costs.

The company, which has been benchmarking performance and costs for large institutional investors since 1992, used PRI signatories as a proxy for funds that incorporate environmental, social and governance (ESG) factors into investment decision-making. The nature and degree of this incorporation can vary across signatories.

The question of responsible investing’s implications for investment performance is a contentious one. CEM Benchmarking said measuring the impact on portfolios had proved to be a difficult task “as performance databases and ESG data sets are often unconnected”.

It considers itself able to make a unique contribution because of certain features of the CEM database, which now comprises 340 institutional investors with $10.3trn (€8.7trn) in assets under management.

The features that it identified are that the investors provide thoroughly vetted and reviewed standardised data directly on an annual basis, and that the CEM database includes fully loaded fund costs, self-reported benchmarks and asset class level performance. It also said the database also did not suffer from survivorship bias.

Of 68 PRI signatories in the CEM database, 42 had five consecutive years of data.

“We believe that is a pretty good sample, especially when we are comparing all the data from one database and it is an apples to applies comparison,” Kam Mangat, vice president at CEM Benchmarking, told IPE.

The current study stops at 2018 because the firm started the research when it was confident that its database had been thoroughly vetted, which takes some time. The paper it publicised this week is a version of the research it did for clients last year. It is hoping to update its study this autumn for year-end 2020.

In its paper, the firm highlighted that PRI signatories in its database had some notable characteristics that set them apart from non-signatories, such as that the former were larger and more internally managed. Almost half of the PRI signatories that participated in the database were European funds, whereas more than half of the non-signatories were based in the US.

In terms of performance, CEM found that over the five years to 2018, the 42 PRI signatories had a higher average net return than non-PRI signatories in three of the four countries examined – Canada, the UK and the US.

Dutch PRI signatories had a slightly lower five-year average net return compared with non-PRI signatories, with the CEM study authors saying this appeared to be primarily because non-PRI signatories in the Netherlands are often corporates with larger fixed income allocations focussed on immunising their liability.

Caution: more data needed

The key takeaway, said Mangat, is that being a PRI signatory did not have a negative impact on performance. He and his co-authors did sound a cautionary note that a longer time series is needed.

“The fact that PRI signatories in the CEM database did well over a 5-year period is encouraging,” they wrote, “however note that responsible investing is primarily focused on long-term performance and risks, and we need more data to understand the implications on long-term performance.”

CEM Benchmarking also looked at net value-added, and found that it was higher for PRI signatories, even accounting for the fact that they are larger and more internally managed than the non-PRI signatories.

As concerns costs, according to the study PRI signatories were lower cost than non-PRI signatories on both an absolute basis, and relative to a benchmark that adjusts for each fund’s size and asset mix differences.

The benchmark costs analysis suggested that PRI signatories were more cost effective in running their investment programmes by 0.9bps, while non-PRI signatories were higher cost by 1bps. The costs analysis is based on 2018 data.

The study can be downloaded from CEM Benchmarking’s website, here.

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