Climate Action

Sustainable investments outperform the market, study shows

New research has found that companies which invest on the basis of environmental concerns often receive higher returns.

  • 14 August 2018
  • Adam Wentworth

New research has found that companies which invest on the basis of environmental concerns often receive higher returns.

The study from risk analysts Axioma tracked the performance of portfolios which had incorporated environmental, social and governance (ESG) factors into their investment strategies.

An estimated 80 per cent of leading companies now use ESG metrics to support their investments, up from only 20 percent in 2011.

Data was compiled on the performance of ESG investments over the past nine years for developed markets in Europe, Japan and the US. While the market was slow to start and sometimes underperformed, a notable change has occurred in the past three to five years.

“Our analysis indicates that, in general, increasing exposure to ESG rarely underperforms the market, and often outperforms the market, especially during the last few years,” said lead author Anthony Renshaw.

There are some exceptions, such as in the US prior to 2016 and Japan until 2015 when ESG did marginally worse, otherwise it has either matched or done better than traditional factors, the data suggests.

However, analysts caution that ESG investing remains in its infancy with regulatory changes also impacting the degree of confidence in the data.

The market for sustainable investment is evolving at a rapid pace, helped by stronger growth in the market and policy efforts on the national level. Green bonds, for example, are expected to increase by 30 per cent in 2018 alone, reaching $200 billion.

The European Union is taking an active role in making sustainable finance a key pillar of the sector; in March, it unveiled a long-awaited action plan to accelerate these changes. New rules have since been released which could force investors to disclose how they are accounting for environmental and climate risks in their investment decisions.