Does it pay to invest in ESG ETFs?

06 December 2021 by National Bank Investments
A person hugs a tree in the forest.

Promoting positive change through investing can yield benefits for your portfolio.

A wave of public outcry is encouraging businesses to take on more responsibility for how their actions are shaping the world. Front and center is the role companies are playing in tackling key issues such as climate change, inclusiveness, and inequality. 

And as powerful enterprises become more aware of their environmental and social impact, so are the individuals or entities that invest in these companies.

Is “doing good’ really the only reward for socially responsible investors?

Will investing in socially responsible companies translate to higher investment returns, or will ESG exclusions have a negative impact on your portfolio? 

The chart below compares the returns of a global socially responsible investment (SRI) index with that of a traditional global index like the MSCI World Index1. In this particular case, the performance of the SRI index outperformed the traditional index consistently, suggesting that investors wouldn’t necessarily be sacrificing returns by adhering to a portfolio composed of only socially responsible companies.

Comparing the performance of a global SRI index with a comparable traditional index

Evaluating the vast body of industry research on ESG

Upon examining growing research on the subject, investors could expect portfolios of companies that have high ESG rankings to post higher risk adjusted returns than those that do not.

Below is a summary of some key findings2:

  • Companies with high absolute ESG rankings and those with improving sustainability scores were shown to outperform their peers. 
  • Companies with better governance and shareholder rights outperformed on a range of metrics.
  • Environmental and social factors have a strong link with equity returns, although this varies by geographic region and industry sector (example: environmental factors tend to have a stronger significance on returns in the Energy and Materials sectors).
  • Companies that adhere to ESG criteria are less likely to be impacted by disruption by external or regulatory changes, have better risk management practices and therefore are subject to lower downside tail risk. 

Why invest in these strategies?

Investing in actively managed ETFs with ESG at the core is the best of both worlds.

1. The cost effectiveness of ETFs combined with the benefits of active management.

2. The integration of ESG screening in the investment process seeks to:

  • mitigate risk through ESG exclusions;
  • select in class sustainability rated companies;
  • exert influence through active engagement. 

Nice guys finish last? Not necessarily. 

Investing in socially responsible companies doesn’t necessarily mean you’d be sacrificing investment returns. On the contrary, incorporating both financial and non-financial considerations could lead to a more holistic view of the company and improved equity returns!

 

1Source : RBC Global Asset Management, Does Socially Responsible Investing Hurt Investment Returns, Bloomberg (2019)

2Source : ESG Factors and Equity Returns – A Review of Recent Industry Research, Principles for Responsible Investing

 

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