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.
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 socially responsible investment (SRI) index with that of a traditional global index like the MSCI World Index. 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.
Source : RBC Global Asset Management, Does Socially Responsible Investing Hurt Investment Returns, Bloomberg (2019)
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 findings:
To conclude, 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!
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