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Jul 9, 2019

Quick summary

Socially responsible investing (SRI) has been around for more than a century. It involves applying social and environmental factors to choose investments. The principles appeal to many people. Yet, one question lingers for individual and institutional investors alike: if I adopt SRI principles, will it help my investment returns? Or hurt them?

This research paper seeks to answer this compelling question. The report looks at dozens of independent, third-party academic and industry studies. Many of these studies are themselves reviews of hundreds of other studies. This research tends to approach SRI in one of four ways:

  1. Index comparison: compares the performance of SRI indexes with traditional indexes
  2. Mutual fund comparison: compares the performance of SRI funds with traditional investment funds and/or market indexes
  3. Hypothetical Portfolios: compares hypothetical portfolios of companies ranked highly against ESG (environmental, social and governance) factors with the performance of lower-ranked companies
  4. Company performance: compares the financial performance of companies that score highly on measures of corporate social performance with those that do not.

The report surveys research from each of these categories. The overarching conclusion: SRI does not result in lower investment returns. Not everyone agrees, of course. But there is certainly support for individual investors and trustees of institutional funds to pursue SRI strategies. There is also reason for confidence that SRI will see deliver returns similar to traditional investment options – or even better..

Key findings

Many major studies reviewed by RBC GAM found a clear correlation between strong sustainability business practices and company performance. Findings include:

  • Stock price performance often goes hand in hand with strong governance practices, strong environmental performance and high employee satisfaction.
  • Companies with high Environmental, Social and Governance (ESG) ratings tend to outperform the market in the medium term (three to five years), as well as in the long term (five to 10 years).
  • Companies with high ESG ratings have a lower cost of debt and equity.
  • Strong ESG practices improve operational performance of firms.
  • Considerations around corporate social responsibility (CSR) in stock market portfolios do not result in financial weakness.
  • Companies that prioritize sustainability also manage environmental, financial and reputational risks better. This helps smoothen out their cash flows.

Despite the strength of this evidence, disputes continue over the quality of the data and the most appropriate methodology to use. No definitive answer has yet emerged to satisfy all critics of SRI.

Interestingly, research suggests that traditional funds are now becoming more and more like an SRI fund. They have been decreasing their exposure to the socially sensitive sectors traditionally excluded from SRI funds. This trend will likely grow as ESG risks continue to emerge around the world.

Read the full report

Disclosure

This document is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM. This document does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction. This document is not available for distribution to people in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc. (RBC GAM Inc.), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

In Canada, this document is provided by RBC GAM Inc. (including Phillips, Hager & North Investment Management) which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment advisor. In Europe this document is provided by RBC Global Asset Management (UK) Limited to professional and institutional investors only. RBC Global Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Global Asset Management (Asia) Limited to professional, institutional investors and wholesale clients only and not to the retail public. RBC Global Asset Management (Asia) Limited is registered with the Securities and Futures Commission (SFC) in Hong Kong. Any funds/strategies referenced in this document are not registered in, nor may not be sold, issued or offered in Hong Kong, China, Singapore, Korea or Taiwan and this document does not contemplate the marketing, offer, issue or sale of any funds/strategies in these jurisdictions.

This document is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.