Does socially responsible investing hurt investment returns?

October 08, 2019 | Thomas De Mello


One key finding from a new RBC Global Asset Management (RBC GAM) report states that multiple research studies show there is a clear correlation between strong sustainability business practices and company performance.

By The Corporate Governance and Responsible Investment Team, RBC GAM

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 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.