by Sandrine Tesner based on Andreas Hoepner White paper:
Andreas Hoepner, Lecturer in Banking and Finance at the UK-based University of St Andrews and Deputy Director of its Centre for Responsible Banking and Finance, has published a White Paper on the risk reduction characteristics of ESG investments. The paper is part of regular economic research carried out and made available by Deutsche bank’s Global Financial Institute.
At the outset, Dr. Hoepner draws four conclusions. Firstly, the size of ESG investments has grown tenfold in the past decade, signaling the existence of a fundamental and lasting investment trend enhanced by the increasing availability of online ESG datasets. At the same time, and this is Dr. Hopener’s second point, these datasets are not typically ‘mined’ in finance and other professional courses, providing a competitive advantage to those investors who choose to use them. Thirdly, portfolios integrating ESG data have been proven to outperform their benchmarks. “This is especially true for recently popular ESG criteria such as corporate governance, eco-efficiency, and employee relations,” adds Dr. Hoepner. Last but not least, firms with a strong ESG performance have shown the ability to better manage risks and reduce costs, including the cost of debt through, for example, better credit ratings. One study done in 2011 found that ESG criteria were negatively correlated with bond spreads.
If we use the signatories of the UN Principles for Responsible Investment (UN PRI) as a gauge, assets under management that incorporate ESG criteria top $30 trillion (vs. $3 trillion in 2000). Additionally, some SRI/ESG assets may not be included under the UN PRI denomination.
On the critical issue of whether ESG portfolios outperform their traditional peers, academic research has repeatedly found that the two types of portfolios are on par. Crucially, however, portfolios demonstrating “sophisticated” ESG analysis and management have been found to outperform significantly. Dr. Hoepner concludes that “technical sophistication” is essential to market outperformance. This follows from the common sense and academically demonstrated point that as more and more asset managers rely on similar datasets and analyses, the opportunity of finding markets inefficiencies to profit from decreases markedly.
The paper names several studies that demonstrate that companies that had adopted the best corporate governance behaviors or other Best-in-Class behaviors, including community, diversity, employee relations, environment, human rights, and product, had outperformed their peers. The paper states, however, that most of the studies to date are based on US company information and that studies incorporating global data are urgently needed, particularly when considering the environmental standards that EU directives have imposed on European firms in the past decade and the comprehensive sustainability policies that many large European firms have already developed.
White paper can be downloaded as per link below: