European investors benefit from sustainable strategies – RCM research
Europe’s investors are integrating environmental and social governance rules into their investment approach more than US and Asian counterparts, which may be benefiting their portfolios, research by institutional manager RCM shows.
Research that links MSCI data with RCM’s internal ratings for best to worst in class companies, depending on how well they meet environmental, social and corporate governance standards, shows portfolios using a “best in class approach” outperformed in all regions over five years.
In Europe, portfolios run between December 2005 and September 2010 returned 1.9%, against the MSCI Europe index performance of 0.3%.
Global “best in class” portfolios returned 1.3%, against the MSCI World index which lost 0.3%. US portfolios following best in class stock selection returned 0.5% against a loss of 1.5% for the MSCI US index during the period.
By comparison, portfolios following “worst in class” stock selection as per RCM’s criteria underperformed the benchmark during the five years. In Europe, worst in class portfolios lost 2.2% off their investments against an index performance of 0.3%. In the US, portfolios made a smaller loss relative to the index, shaving off 1.8% against 1.5%.
Global worst in class portfolios suffered a 0.8% loss against a 0.3% loss for the MSCI World index.
Industry commentators said the retrospective research adds weight to the case for adopting a sustainable approach to investing.
“It is a good articulation and analysis of what we’ve been saying for the past five years”, said James Gifford at the UN PRI which compiles signatures of firm pledging to follow a responsible investing approach.
Emma Hunt at consultancy Towers Watson meanwhile said the research goes some way toward proving sustainability enhances the investment process.
“You don’t think about sustainability as a separate strategy. It’s part of your investment process,” she said.
Head of the UK’s sustainable investment and finance association (UKSIF) Penny Shepherd said it “explains what modern approaches to ESG are all about”. A separate survey of corporate pension funds UKSIF will release in August 2011 shows once firms have begun using sustainable strategies, they continue in practice, she added.
For European investors, the business case for using a sustainable approach is more entrenched in their strategies than in the US and Asia, according to RCM’s global head of sustainability research Bozena Jankowska.
In Asia, investors are yet to be won over by the logic of sustainable investing, partly because it is a relatively new approach to stock selection and also because they tend to prefer familiar big brands, she said.
“In India and China, sustainable investing is not part of the fabric in the way it is in Europe,” said chief investment officer at RCM Andreas Utermann.
To help makes the case for sustainable investing outside Europe, the firm has hired one analyst to tap the Hong Kong market, yet to be named, and made recent hires in the US.
But habit is a barrier, said Utermann. “People will do what they’ve always done.”
“This is a difficult process. People are emotional about the topic. You need to win the hearts and minds,” he added.