Report: ESG financial link depends on benchmark

While many have tried to establish a link between ESG and financial returns, a new report suggests this may purely be dependent on the reference benchmark index

The degree of outperformance attributed to adopting sustainable investment strategies depends largely on the underlying benchmark index, new research suggests.

In research conducted for a report entitled ESG Investing: A short guide to implementation, family office and asset management group VAR Capital found that the S&P 500 index outperformed the ESG USA Leaders’ Index by 11.7% in the five years to August 2018.

However, when the ESG World Leaders’ Index was compared against the MSCI World Index over the same time horizon, the sustainable index outperformed by 1.24%.

In its commentary accompanying the findings, the asset management group noted the CFA Institute’s prior observations about the main challenges of linking any uplift in performance to the adoption of a sustainable investment approach.

The CFA noted a lack of clarity and consistency in the standards and terminology used by the asset management industry in defining ESG investing. It also stressed there was room for improvement in clarifying the specific differences between ESG, Socially Responsible Investing and Impact Investing.

The VAR Capital report recalled the CFA’s observations of an ongoing lack of quality data and information from companies on ESG, which is partly hampered by a lack of standards, and no official requirement for ESG auditing.

Finally, it noted the lack of transparency in smaller companies and businesses that operate in emerging markets.

In a statement accompanying the report’s findings, Vikash Gupta, VAR Capital’s managing director said that many challenges remain in the process of designing and implementing Environment, Social and Governance (ESG) in client portfolios.

He added: “Clients are now demanding asset management companies to have a view on ESG and VAR Capital is proud to share its view with its clients and the investment community.”