A recently published white paper from RCM provides evidence of outperformance generated through best-in-class ESG investing. Because it examined a sizable number of stocks (more than 900 spread across three geographic portfolios) over a period encompassing a wide range of market conditions (December 2005 to September 2010), it raises the conversation about ESG investing to a broader market level than the specialty niche to which it is too often confined.
The RCM team used the widely-available MSCI ESG research to divide companies chosen from the MSCI US, Europe and World indices into five tiers of ESG ranking from A (best) to E (worst). They then compared the performance of these constructed portfolios against their respective indices for the 12/05 to 9/10 period.
- A best-in-class portfolio (A and B ranked stocks) outperformed its index by 1.6% (Europe), 1.6% (World) and 2% (US).
- A worst-in-class portfolio (D and E ranked stocks) underperformed its index by -2.5% (Europe), -0.5% (World) and -0.3% (US).
These portfolios achieved their results with volatility similar to that of their respective indices, so at the aggregate level, the hypothetical investor in these portfolios was not asked to assume additional risk for the outperformance.
The white paper is, certainly one more data point of a growing number that support the idea that integrating ESG factors into investment decisions can benefit investors. But consider it important for another reason –we are now at the point where a large enough number of companies can be evaluated by their ESG posture over a long enough period that ESG performance can increasingly be examined on a much wider scale. Investors should expect – and demand – that their managers and fiduciaries provide that analysis.