Could ESG investing lead to better returns?

Industry insider explains why engagement is crucial and the anti-RI argument is just plain wrong

Could ESG investing lead to better returns?

The perception that responsible investing hurts returns is an outdated and naive 30-year-old argument, according to an industry insider.

Jamie Bonham, manager of corporate engagement at NEI Investments, said research clearly points to a nexus between shareholder and societal values and the fact you can’t sustainably achieve just one of these aspects.

He said: “If you’re not addressing both, you are just not going to be a long-term viable business in the market.”

NEI Investments manages about $6 billion in assets, with Bonham tasked with assessing portfolios and engaging companies around their material ESG risks. NEI offers a number of investment opportunities under the Ethical Funds brand umbrella.

One environmental area that remains at the forefront of investors’ minds is fossil fuels and it’s something that will be in the spotlight on Sunday when people around the world mark Earth Day.

Bonham said companies simply can’t be credible if they are not addressing this issue and investors expect them to be fully engaged. He added there is clear upside to an ethical portfolio.

He said: “At the very worst, if you look at the academic research out there, there’s no impact [on returns]. So what you’re getting is societal gains for no impact on returns versus a sizable amount of research that point to an upside. So that is actually mitigating risks.

“That original perception came from those first baby steps into RI where it was just about your exclusions – we won’t own this company and that company, and that’s good. It was a step needed to get the movement going but it was a very naïve approach in those early days.

“If you look at ESG now, it’s a very complex and nuanced approach that is research and fact-based. There is no trade-off to do it now and, if anything, there is an upside.”

Bonham highlighted the pipeline issue in the news and said that if such a company was not talking about community and indigenous engagement, that is the most material risk. In terms of fossil fuels, he believes the Taskforce on Climate-Related Financial Disclosure, led by Michael Bloomberg and Mark Carney, has really brought the issue to the masses.

He said: “Climate is the one everyone is really focused on one right. That’s kind of always been the case if you’ve been within the RI circle but the TCFD has really put it on the agenda for mainstream investors. It’s a game-changer for the attention the issue gets and we’re seeing evidence of that now – all the biggest investors are onboard now.”

Exxon losing a shareholder vote over its strategic response to ESG issues last year was another sign that this area was not becoming optional for companies hoping to attract investors and satisfy shareholders. Bonham said engagement is the only way to change the effect we are having on our planet.

He said: “This is the most viable way to create change and have an impact. You can avoid a company but you haven’t really changed it and if you think of something like climate and you think it is a major systemic risk to the markets, then it’s incumbent on you to do something proactive. For us, that comes down to engagement.”