Marry Value and Values
Environmental, Social and Governance factors can add value
There is extensive academic research and practical experience showing that taking account of environmental, social and governance factors can add value to portfolios. For example, an award-winning analysis of 52 studies (involving 33,000 observations) of the relationship between corporate environmental and social performance and corporate financial performance concluded that there has been sufficient research to prove a positive association between the two. Another analysis showed that of 50 academic studies into the relationship between corporate ethics and financial performance, 33 showed a positive relationship (“doing well by doing good”), 13 were neutral (“doing well and doing good”) and only four showed a negative relationship. The Responsible Investment Association Australasia Annual Benchmarking Report for 2013 showed that five-year returns had been stronger in all core Australian responsible fund categories compared with the benchmark and average mainstream funds and that these funds had delivered better returns than the benchmark and the average of all mainstream funds in all but one category across 1-, 3-, 5- and 10-year time periods.
Consideration of Ethicial Issues can Improve Performance
Many investors and business leaders now believe that consideration of ethical issues and values does not compromise financial performance and can often increase return and reduce risk. They cite factors such as attracting, retaining and enhancing the productivity of employees; improving customer sales and loyalty; increasing supplier commitment; contributing to environmental sustainability; reducing legislative demands; and strengthening community and Government relations. They believe that management quality can be improved, and when combined with enhanced relationships with stakeholders, this can result in improved financial performance for shareholders.
Recognising the importance of the business case for responsible investing, Jay Youngdahl, a lawyer and a Senior Fellow at the Initiative for Responsible Investing at Harvard University, noted the marriage of investment “value” and “values” is at the heart of responsible investment. He highlighted that truly responsible investment requires both and a marriage of equals. The sections that follow expand on the values' dimension.