Sacrifice Nothing: A review of empirical research on financial performance of sustainable and impact investments

• Despite evidence, a myth persists that sustainable and impact investment strategies financially underperform conventional strategies. This report is intended to address that myth, clarify the purpose and use of environmental, social, and governance (ESG) analysis, and highlight key sustainable investment approaches and issues.
• ESG analysis seeks to identify and evaluate material environmental and social considerations that may influence long-term investment performance. “Materiality” implies that an ESG factor is reasonably likely to impact the financial condition or operating performance of a company. The analysis looks to see whether the relevant governance structures within asset managers, strategies, and underlying investments are equipped and motivated to govern effectively. The evidence shows that ESG analysis enhances the predictive insight provided by fundamental financial analysis.
• Sampling from more than 1,200 studies in the past two decades, including 80 reports published in the past three years alone, our assessment supports the conclusion that managers deploying ESG analysis to construct portfolios can achieve competitive returns while meeting the requirements of fiduciary duty. Some would argue it is an essential element of fiduciary duty.
• In this report, we address myths that have persisted despite the academic studies. We also seek to describe the consensus view among the studies identified in our bibliography. We lay out the rationale for ESG integration by investment analysts and by corporations in their respective business practices, and where possible we provide insight into the relevance of specific research for investment decisions.
• Lastly, we highlight the discipline used at Pathstone to evaluate investment managers who integrate ESG considerations into their research process. It is a critical endeavor to select strategies where the skill of the manager can offset the potential risks to portfolio construction when applying an ESG lens.

Please see PDF for full report.