Asset Management

Navigating ESG

A guide to finding the right ESG investment

Academic research shows that companies heeding environmental, social and governance (ESG) standards often manage their risks better and post higher profits than their peers, with favorable effects on the share price. Judging by the growing market share of ESG-oriented products, investors concur with this view.

Between 1990 and 2000 investors thought that inclusion of ESG factors in investment decisions would mean giving up performance. But this thinking is outdated. There is evidence that ESG investments can enhance returns, partly by selecting companies which are better run, and partly by avoiding event-related risks. An extensive meta-review of over 2,000 academic studies on the effect of incorporating ESG factors into investments found strong evidence ESG improves the risk/return profile of investments. Eleven times more studies identified a positive effect than a negative effect for emerging market investments, while the effect was similar but less pronounced for developed markets.

There are three core ways in which ESG improves investment results: