Stock pickers in developing economies who base investment decisions on social parameters have generated substantial above-market returns in the past few years, according to the Institute of International Finance.
Returns from emerging-market indices that allocate more to companies that score well on environmental, social and governance factors are “strikingly higher” than for the broader regional gauges, analysts including Emre Tiftik, the institute’s deputy director for global capital markets, wrote in a note dated February 14.
“A focus on ESG might offer some cushion for EM investors, particularly during stress episodes,” the report said.
MSCI’s Emerging Market ESG Leaders has outperformed a wider regional gauge on a total return basis by 103 percentage points during the past decade, data compiled by Bloomberg show. To be sure, the excess returns reflect a higher weighting to technology companies and an increased exposure to countries such as South Africa at the expense of others including Brazil.
Sustainable investment is well entrenched in developed countries, particularly in Europe, where it controls the largest share of assets globally. Even so, the strategy faces accusations of green washing — using eco-friendly branding as a public relations exercise without generating meaningful social benefits — and is viewed sceptically by some investors whose sole concern is whether or not it is profitable.
The criticism may be misplaced, according to the IIF, whose report shows that it has been possible to make excess returns using ESG strategies during the past decade, at least in some parts of the global economy.
“Relative performance indicators for Europe also suggest that firms with higher ESG scores tend to outperform their counterparts, though this has not been the case in the US,” the IIF’s report said.