In recent years the growing demand for financial products with an eye on sustainability has turned Responsible Investing from representing a small niche into a global investing trend. Along with this, Environmental, Social and Governance (i.e. ESG) indicators have gained popularity among investors because they can meet two goals at the same time: reduce a portfolio’s risk exposure and improve its efficiency. However, ESG seems not to be enough to make an investment strategy by itself. Our experiments show that although it does not hurt historical returns, ESG-screened portfolios lead to very similar results in terms of risk, performance and correlation.
Rather, ESG appears to be a consistent and solid starting point to design a well-rounded investment approach to put performance and sustainability together. So we ask: what do we need to turn values into value?
In recent years, themes like climate change, pollution, natural resource scarcity and population growth caused a fundamental shift in the way investors think about their investments. In this sense, it has become evident that social and environmental risks are indeed investment risks and therefore they represent an additional source of value-creation or destruction. So, keeping an eye on sustainability can help achieve two goals at the same time: reducing a portfolio’s risk exposure and improving its overall efficiency.