RCM Sustainability White Paper: “Applying ESG Factors to a Portfolio May Enhance It”

Allianz subsidiary RCM has published its Sustainability White Paper, which analyzed a 5 year period and concluded that applying ESG factors to a portfolio does not negatively impact performance and may enhance it.

RCM described posed the key question as whether ESG is an opportunity or opportunity cost, anddescribed itsconclusions as follows:

The perception that corporate efforts to become more sustainable reduce the value of companies and of investors’ portfolios is entrenched, but is based on largely unfounded assumptions and only thin academic evidence. It is imperative to challenge this perception empirically because it is holding back the evolution of the nascent sustainability sector and of the wider corporate sector. This paper sets out to test the impact of environmental, social and governance (ESG) issues on portfolio performance over the period 2006 to 2010. The evidence indicates that investors’ portfolios are not negatively impacted by the introduction of ESG criteria into the stock selection process. But the results go further than that, and show there is a probability of outperformance over the longer term. Investors could have added 1.6 per cent a year over just less than five years to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings. Returns from portfolios of European companies represented the largest and most consistent spread between best-in-class and worst-in-class companies, reflecting greater integration of ESG factors in Europe than in the US. There is no certainty that such behaviour will persist in the future, but the five-year period covered in this paper was eventful enough to encompass a growing market, a crash and subsequent rebound. The availability and analysis of company-specific ESG data will undoubtedly continue to progress going forward. In the interim, the available evidence may persuade companies, portfolio managers and investors of the value of ESG principles and practice.

The full report is available on the data library at:http://bdti.mastertree.jp/f/uwdlcj89

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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