This briefing paper has been prepared for investment professionals (particularly trustees and investment consultants) interested in the benefits of ESG integration to investment outcomes in the US. 

It is not intended to be exhaustive nor constitute investment advice. ESG integration is defined as the systematic and explicit inclusion of material environmental, social and governance factors into investment analysis and investment decisions.

A May 2017 CFA Institute survey on ESG integration, the backdrop for this paper, reinforced that a proven link between ESG factors and financial performance would be among the top motivating reasons for those US investors that have not done so yet to adopt ESG integration in their investment practice. The survey suggests that there remains variability in the extent and sophistication of ESG integration among US investors relative to the rest of the world. Late adopters in the US would like to see more statistical evidence that companies which demonstrate environmental stewardship and social responsibility, and cultivate a sound and robust governance culture, are consistently rewarded and are therefore better positioned to achieve long-term sustainable positive returns.

Three empirical studies provide important insights on ESG materiality in the US

This paper summarizes the findings from three empirical studies on ESG materiality and should provide the guidance, and ultimately the confidence for US investors who are still doing their due diligence on ESG integration, to fully recognize its value and capitalize on opportunities in the US. The PRI recently conducted a proprietary study using MSCI ESG Research analytics and data to evaluate the relative performance in active cumulative returns from portfolios with improving (i.e. momentum strategy) versus those with high (i.e. tilt strategy) ESG scores against a broad index across geographic regions. In addition, the PRI identified two other empirical studies, by BofA Merrill Lynch Global Research and Calvert Research and Management, which evaluate ESG materiality from equity and fixed income perspectives, respectively. 

US investors should seek answers to how ESG factors are material across various dimensions

The three studies covered in this paper offer insight on the following questions:

  • Does a portfolio that is optimized by ESG performance have an alpha-generating advantage over a broad index?
  • What does an ESG momentum (trending scores) versus tilt (absolute point-in-time scores) strategy convey about alpha generation?
  • How does the US fare in terms of alpha opportunity from ESG integration versus other regions?
  • Is ESG integration effective in both equities and fixed income?
  • Which of the sustainability pillars present the greatest alpha opportunity?
  • How does ESG efficacy vary across market capitalization and credit quality distributions?
  • Do certain industries present a better alpha opportunity from ESG integration than others?