A recent RBC report helps debunk the myth that socially responsible investing hurts returns

 

Here’s some good news for investors who want to align their ethical beliefs with their investing practices: there is a clear correlation between strong sustainability business practices and company performance. This is according to key findings from the 2019 RBC Global Asset Management report, Does socially responsible investing hurt investment returns?

 

The booming universe of responsible investing

 

Responsible Investing (RI) has been around for over a hundred years, and involves applying social and environmental factors to choose investments. With almost US$31 trillion invested globally in RI mandates as of 2018 – a 34% increase from 2016 – this approach to investing is growing quickly. * RI is an umbrella term that captures many types of investing approaches under it – including socially responsible investing (SRI), engagement, screening, sustainability-themed investing, integration of environmental, social and governance practices (ESG),and impact investing. Presently, SRI mandates rule the RI world, with $19.8 trillion in assets.*

 

SRI: the principles of principled investing

 

SRI is a portfolio construction process that attempts to avoid certain investments according to defined ethical guidelines. In other words, SRI is values-based, and involves the formal integration of social values into the traditional investment process. It focuses on screening out or excluding particular investments based on a defined set of values. An example of this may include screening out investments in companies affiliated with the tobacco, alcohol or gambling industries.

 

Doing right doesn’t have to hurt

 

While SRI appeals to many, one question continues to linger for individual and institutional investors: does adopting SRI help or hinder investment returns? RBC Global Asset Management’s report concludes that there is a clear correlation between strong sustainability business practices and company performance. The report looked at dozens of independent, third-party academic and industry studies and concluded that SRI does not result in lower investment returns.

 

Here are some of the key findings:

 

● There is a positive relationship between stock price performance and strong governance practices, strong environmental performance and high employee satisfaction.

 

● The use of aggregated sustainability scores to determine the impact on performance has demonstrated evidence of a positive impact.

 

● Companies with high environmental, social and governance ratings outperform the market in the medium term (three to five years) and long term (five to 10 years).

 

● Strong corporate responsibility practices improve operational performance of firms.

 

● Corporate social responsibility considerations in stock market portfolios do not result in financial weakness.

 

● Companies that prioritize sustainability manage environmental, financial and reputational risks better, which increases likelihood of reduced volatility of cash flows.

 

Is SRI right for you?

 

While evidence continues to mount that SRI doesn’t hurt – and may even enhance – investment returns, it is important to review whether SRI is right for you. But investing according to one’s principles is getting easier and more widespread – and that truth is undeniable.

 

* Global Sustainable Investment Alliance, Global

  Sustainable Investment Review, 2018.