Warming to responsible investing

Similarly, in the asset management world, there has been an increasing proliferation of funds that purport to address these particular issues through various investment strategies, all housed under the labels of Social Responsibly Investing (SRI), Responsible Investing (RI), or ESG.

ESG investing for equity fund managers usually consists of one or a combination of the following strategies; negative or positive screening, integration, or engagement. In short:

• Screening is the process of limiting your investment universe to stocks which fall into a certain category. For example, not investing in tobacco or alcohol companies is implementing a negative screen.
• Integration is the process of acknowledging and incorporating ESG, or non-financial risk, into a fundamental analysis of a company. For example, placing a higher multiple on a company with exceptionally strong corporate governance.
• Engagement refers to fund managers effecting positive behaviour for the shareholder in the underlying corporate by leveraging their ownership in that corporate. This could be through, for instance, dissuading management from a poor capital investment decision, such as further mine exploration (due to the risk of sunk assets), rather than returning capital.

The traditional view was that pursuing socially responsible goals would be detrimental to fund performance. Early global studies found evidence supporting all outcomes – some arguing that ESG has a negative effect on performance, some arguing the opposite, and some saying no measureable effect at all.

More recently, research has trended to documenting a positive performance effect from ESG. Compelling evidence is published in two metastudies (studies that summarise the findings of multiple research sources); Clar, Feiner, and Viehs, 2014 (University of Oxford), and Fulton, Kahn, and Sharples, 2012 (Deutsche Bank). Both papers reviewed data from over 200 studies worldwide and concluded that there are a myriad of benefits to a responsible investing strategy. These included a lower cost of capital, better operational performance, and a stronger share price performance. The New Zealand Super Fund has cited these as major validation for its belief that "responsible investing pays off."