ESG myth #1

Investing responsibly means I have to sacrifice returns

Smashing the myths, in this article Peter Smith from Aviva Investors shows that you don’t have to sacrifice returns to invest responsibly #ad

Smashing the myths  #1 – investing responsibly means I have to sacrifice returns...or do I?

By Peter Smith, Investment Director at Aviva Investors

Over the past number of years, Environmental, Social or Governance (ESG for short) investing has evolved, on the one hand this has been driven by investors becoming more aware of the need to consider environmental, social and governance issues within their investment decision making process but to a large extent ongoing European regulation around these matters is pushing ESG to the top of many investors agenda. 

With this continued focus on ESG investing the question on many people’s lips is “Do I have to sacrifice performance to invest responsibly?”

ESG; Evolving through time

For many years responsible investing focussed on excluded certain sectors and industries possibly focusing on removing so called “sin” stocks from their funds. This rather basic approach does not specifically consider performance or investment returns as a driving part of the investment process. 

With the advent of big data and companies providing more and more information about the key environmental, social and governance factors that impact on their business both now and into the future, investors can now analyse companies based on detailed ESG metrics as well as standard financial criteria like profitability, revenue growth and debt. 

In a report issued in 20191, covering the period 2005 to 2015, it was found that ESG analysis could have helped investors avoid 90% of company bankruptcies that occurred within the S&P 500;  15 out of 17 company bankruptcies during this period involved companies with poor ESG scores over the previous 5 years1. At Aviva Investors we believe that using material and relevant environmental, social and governance information in the investment process will lead to better informed investment decisions and ultimately better outcomes for our clients.

1. Bank of America Merrill Lynch Research Report 2019

A focus on performance 

In the past investors have felt that they needed to sacrifice performance in order to investment more responsibly, but investors can now “do well” while “doing good”. As a simple way to illustrate this the graph below details the standard MSCI World Index and compares it against an ESG index, the MSCI World ESG Universal Index (an index that’s tilted towards better ESG companies)

Over most time periods investors have not had to sacrifice returns in order to invest responsibly and have in fact witnessed a slight uplift in performance by investing in better ESG companies.

Source; MSCI, as at 31 May 2021. The MSCI Indices used are net of dividends reinvested and are calculated gross of DWT

Warning: Past performance is not a reliable guide to future performance.

At Aviva Investors we use our own ESG scoring system known as Elements to score each company and government bond that we invest on a scale of 1 to 10, a score of 10 being the best and 1 being the worst. We recently conducted research using this ESG scoring system and compared the performance return of the best ESG scoring companies (top 1/3) versus the worst ESG scoring companies (bottom 1/3), the performance uplift for those better scoring ESG companies is material.

Over the 3 years under review, there was a credible performance uplift for better scoring ESG companies.

Source; Aviva Investors, as at 31 Oct 2020

Warning: Past performance is not a reliable guide to future performance.

It should be noted however that there can and will be periods of underperformance of an ESG fund when compared to its standard counterpart. Taking the UK equity market as an example, it is heavily weighted to the tobacco, oil, and mining sectors with companies such as Shell, Rio Tinto, British American Tobacco accounting for over 25% of the index, these are companies that tend not to score highly from an ESG perspective. If you have a period where these types of stocks perform well ESG funds which may hold little or no weight in these names will underperform the broader index.

5 out of the top 10 companies in the MSCI UK Index are in the oil/gas, mining or tobacco industries. If ESG funds exclude these industries it could lead to sigificant deviation in returns versus a standard UK index.

Source; MSCI, as at 31 May 2021. 

Warning: Past performance is not a reliable guide to future performance.

It is possible to do well while doing good?

Although there has been some trepidation amongst investors that they would need to give up performance to have a better conscience by investing more responsibly, the data suggests this is no longer the case. As we continue to move in the direction of investing in better ESG companies, Aviva Investors believes that this will improve both investment returns and provide for a more sustainable future.

Putting your investments where your values lie

If you have an Aviva Savings, Investments or Pension policy, or are looking to open one – good news, there is a range of ESG funds from Aviva Investors available across them all.

Interested in aligning your investments with your conscience? Find out more about Aviva’s investment options.

Watch our short video to learn more about ESG investing. 

As with all investments, it is worth speaking to a Financial Broker first to make sure it is the right choice for you. Find a our local financial broker.

Interested in ESG investing?

Visit our responsible investing page to learn more about ESG investing.


Important information to consider.

Warning: Past performance is not a reliable guide to future performance.

Warning: The value of your investment may go down as well as up.

Warning: These funds may be affected by changes in currency exchange rates.

Warning: If you invest in this product you will not have access to your money until you retire.