Socially responsible investing from an academic perspective: value proposition and reality

Transcription

1 Socially responsible inveing from an academic perspective: value proposition and reality Research Center for Financial Service Steinbeis University Berlin

2 2 klimaneutral natureoffice.com DE gedruckt

3 Foreord Dear reader In discussions about the advantages and disadvantages of socially responsible inveing (SRI), one of the assertions repeatedly put forard is that such invements perform poorly compared ith conventional invements. Our on udies have also confirmed that this idespread preconception is the greate impediment to any decision in favour of SRI rategies. This situation prompted us to support a research project entitled 'Socially responsible inveing from an academic perspective: value proposition and reality' conducted by the Research Center for Financial Services at Steinbeis University in Berlin. It is the fir udy to analyse the difference in performance beteen SRI and conventional inveing approaches. The Steinbeis udy is based on an analysis of 195 other academic udies relevant to this issue and on its on calculations. The results ere no surprise: The frequently harboured preconception that SRI delivers orse returns than conventional inveing is false. The majority of udies did not classify suainable invements as having a orse risk/return profile. Intereingly, the inclusion of suainability aspects tends to have a rather positive impact across all asset classes. Some of the udies analysed indicate that active management of suainable invements can be advantageous. SRI seems to be subject to loer event risk. Very rict screening and exclusion criteria may have an adverse effect on the performance of suainable invements because of the rericted invement universe. In the case of suainable funds, the greate performance potential is often derived from using a bein-class approach. We ould like to think that the results of this meta-udy can provide further conructive imulus for the SRI market as a hole. I hope you find these research results intereing. Kind regards Alexander Schindler Member of the Board of Managing Directors, Union Asset Management Holding AG

4

5

6 Introduction Study to analyse performance differences beteen SRI and conventional inveing Meta analysis ith an assessment of the idea of 'active suainability management' Over the la fe years, the issue of suainability has unmiakably gron in im - portance both in general terms and specifically in relation to invements. Inveing suainably, referred to as socially responsible inveing (SRI), covers a hole range of different types of invement. SRI focuses on environmental, social and ethical criteria, hich are applied in invement decisions in different combinations and ith varying degrees of rigour. The special demands placed on such invements often give rise to a discussion about the relative performance of SRI compared ith conventional inve - ing. To anser the queions raised in connection ith this issue, the Research Center for Financial Services at Steinbeis University Berlin, ith financial support from Union Invement, conducted a udy ith the title 'Socially responsible inveing from an academic perspective: value proposition and reality'. The objective of this research project as to compare the differences in performance beteen SRI and conventional inveing approaches. The project planned to carry out an overall analysis as ell as analyses specific to particular asset classes. It also aimed to address in detail the differ - ences beteen active and passive approaches in SRI. For the purposes of the analysis, a meta-udy as conducted. The aim as to use the many exiing udies of this subject matter to ensure that our analysis had significant depth and breadth as ell as a high degree of objectivity. In addition to conducting the mo comprehensive metaudy to date in this area, e also analysed the potential performance of different SRI management approaches. 6

7 Starting point The SRI market has experienced rong groth in the la fe years. According to data published by the Suainable Invement Forum, more than 20 billion had been inveed in suainable invement products by the end of 2011 in Germany alone. When cuomer deposits and invement certificates are included, the volume rises to over 60 billion. With the subantial expansion in the range of suainable invement products available on the market, many inveors facing the decision as to hether to inve in an SRI product, are asking themselves if inveing ith a good conscience also means they have to accept loer returns. Currently, there is ill a idespread vie among inveors that inveing in capital market products focused on suaina - bility results in a drop in performance. A key factor responsible for this perception is an oft-quoted performance comparison beteen suainability and conventional capital market indices (Figure 1). Currently, there is a idespread vie that suainable invements mean orse performance Figure 1: Performance comparison beteen global indices Indexed performance FTSE4Good Global Index Do Jones Suainability World Index MSCI World As in the case of other performance comparisons, the queion that comes to mind in a comparison beteen suainable and conventional invements is ju ho reason - able or meaningful the comparison actually is. Is it possible to use a simple comparison of performance beteen to indices to come to a definitive judgement about the quality of different invements or is there a risk of comparing 'apples and oranges'? For example, although the performance of the suainability indices shon in Figure 1 is not as rong as that of MSCI World, the reasons for this are not immediately clear. In particular given that SRI rategies cover many more aspects than ju indices, the queion is hether suainable invements are intrinsically disadvantaged in terms of performance simply because they are suainability-related or hether there are other reasons for the under-performance of the index. To arrive at valid ansers to this queion, it is fir necessary to carry out a holiic analysis of suainable invements, such as relevant funds. This then needs to be folloed by an analysis of the actual drivers behind the differences. Does comparing the performance of SRI and conven - tional invement indices equate to comparing apples ith oranges? SRI covers many more aspects than ju indices 7

8 Study design and random sample ructure A total of 195 udies ere analysed as part of the metaudy A meta-udy as carried out to help address the queions raised above. Rather like the groth in the invement product universe and the increase in the sums inveed in suainability-related invements, the number of academic publications on the topic of suainability has also risen significantly in the la fe years (Figure 2). Our analysis took into account 195 other udies that are relevant to the issue of suainability and that satisfy academic requirements. The huge breadth of the topic means that udies ith a ide variety of core themes and methodologies ere included. Figure 2: Analysis periods and publication years of udies relating to the performance of SRI and conventional inveing Number Analysis Analysezeitraum period Publication year The majority of the udy results ere published in journals The advantage of a meta-udy is that the va amount of SRI research data already in exience can be used to produce a valid, objective overvie of research results and trends. Having a large number of udies ith a variety of core themes and methodol - ogies also facilitates an examination of many different areas of the topic. In addition to carrying out a meta-udy, our analysis also addressed the further development of approaches and rategies related to 'active suainability management' and the potential performance of a range of products using this approach. In terms of regional breakdon, mo of the udies ere focused on North America (Figure 3). In addition, 34 udies ere global in scope and 11 udies focused on Europe as a hole. To date, there has been little udy of individual countries in Europe or of Asia. More than half of the udies ere published in journals. Hoever, only around 25 articles appeared in journals ith at lea an A ranking. The other udies ere published, for example, in the form of papers. 8

9 Figure 3: Regional breakdon of the udies The bulk of the udies focused on the US market Excluding meta-udies; there as also one udy from each of Libya, Sitzerland, the Netherlands and Belgium; some udies ere counted more than once because individual udies cover several countries; udies focusing on more than to continents ere considered global udies 9

10 Overall results The majority of udies did not classify suainable invements as having a orse risk/return profile A number of cluers ere created in this meta-udy for the purposes of analysing the udies and evaluating the results. In each case, a separate analysis as carried out on the results of published meta-udies and on other papers relating to equities, bonds and loans, funds, indices and multiple asset classes. In addition, relevant udies ith intereing details beyond a simple performance comparison beteen SRI and conventional inveing ere assigned to a 'Miscellaneous' category. All udies, regardless of their nature or scope, ere given an equal eighting for the purposes of evaluation. Across all asset classes and in both absolute and relative terms, there ere only very fe udies (or in some cases no udies at all) that clearly classified SRI as having a orse risk/return profile (Figure 4). Figure 4: Results overvie for the udies analysed Analysis focus of the udies Number of udies analysed Study results relating to the impact on invement returns from the inclusion of suainability aspects Positive Neutral Negative Mixed* Overall result Meta-Studies Studies ith direct comparisons beteen performance of SRI and conventional inveing Equities 55 Bonds and loans 18 Funds 74 Indices 11 Multiple asset 7 classes Total (performance analysis 178 in the narroer sense) Positive Negative result result Average Miscellaneous** 17 Total (overall) *) Studies ith partially positive, negative and/or neutral results. **) The udies in the 'Miscellaneous' category ere concerned ith SRI performance in its broade sense but did not amount to genuine performance udies because they tended to focus more on an analysis of variables such as gearing or enterprise value. In the case of udies evaluated ith a neutral result, it as not possible to identify either significant advantages or disadvantages for SRI in comparison ith conventional inveing. In addition, one udy concerned purely ith methodological considerations as classified as neutral. Over the analysis as a hole, suainability aspects actually tended to have a (slightly) positive impact The above results sho, for example, that 21 udies in the equities analysis cluer classified SRI as generating more positive returns. In the same cluer, 20 udies came to the conclusion that there ere no significant differences beteen SRI and conventional inveing. Ju one udy concluded that SRI had a orse risk/return profile. 10

11 Similar results ere also evident in the bonds and loans cluer. Of the 18 udies analysed, nine came to the conclusion that SRI as advantageous for inveors, hereas ju to of the udies reported SRI to be disadvantageous. In addition to this underlying positive trend, there ere large numbers of udies across all cluers that found there ere neither better nor orse returns from suainable invements. Based on this data, any atement to the effect that SRI per se means loer returns compared ith conventional inveing can be considered untenable. In fact, suain - able invements offer a similar pattern of returns and even tend to be more beneficial. The frequently repeated assertion that SRI is disadvantageous in terms of performance can largely be attributed to the results of 'simple performance comparisons' beteen indices, hich are often referred to ithout consideration of the actual value drivers. Hoever, these results are potentially misleading and also only have limited value for practical purposes. This is because indices only represent a comparatively simple form of SRI in hich, for example, there is no active suainability research. This gives rise to significant relative performance differences hen indices are compared. These differ - ences are not attributable to the issue of suainability, but are rather more to do ith parameters such as the index universe and regional focus as ell as the average size of businesses and the sector mix ithin the index. The assertion that SRI results in orse performance is not tenable Result for funds Specifically in relation to invement funds, the comparisons carried out beteen suainable and conventional funds orldide again tend to sho that there are no significant differences beteen the returns from the to types of funds overall. To facilitate conclusions for different subdivisions in addition to a global conclusion for the asset class, our analysis created several cluers based on the variety of data available ithin the random samples (Figure 5). Suainable funds do not underperform conventional funds at all Figure 5: Summary of the results from udies analysed in the funds cluer Analysis focus of the udies Number of udies analysed Study results relating to the impact on invement returns from the inclusion of suainability aspects Positive Neutral Negative Mixed Overall result SRI funds v. conventional 30 funds SRI funds v. conventional 17 indices SRI funds v. conventional 16 indices and funds SRI funds v. conventional 3 and suainability indices 1 2 SRI funds v. SRI funds 5 5 *Total *) Three udies did not have a specific classification 11

12 The analysis of suainable funds compared ith conventional funds and indices generally did not highlight that the suainable funds ere disadvantageous. Ho - ever, some regional differences ere identified in this regard. In the comparison of the performance of suainable funds again conventional indices, no subantial differences in returns ere identified in mo cases. Furthermore, none of the udies comparing the performance of suainable invement funds again suainability and conventional indices came to the conclusion that the performance of SRI funds as orse by comparison. Studies that only compared different SRI funds ith each other frequently came to the conclusion that the screening procedure used by the funds had a significant impact on performance. In this regard, a fe udies classified funds ith be-in-class approaches as having the be returns as a result of the benefits derived from the composition of the portfolio or the invement universe. Differences beteen SRI funds There are four general types of management approach for SRI funds Based on our on assessments using the results from this meta-udy among other things, e have developed a model that can be used to classify suainable invements. This involves a breakdon into four management approaches for SRI funds. It is possible to make a diinction beteen active and passive approaches at the level of both portfolio management and suainability research (Figure 6). Figure 6: Matrix shoing active and passive management options for SRI funds (ith product examples) Only active suainability managers combine active portfolio management and active suainability research Suainability research Passive Active Based on atic SRI research Dynamic real-time SRI research using SRI index or SRI database 1 2 Active SRI research overlay for passive product (Does not currently exi in the market in practice) SRI index (ETF based on SRI index) Active suainability manager (Integrated active approach ith suainability as risk filter) 3 4 Active funds, e.g. ith atic SRI filters Passive Portfolio management Active 12

13 At portfolio management level, it is possible for invement activity to be active or passive, as is also generally the case ith any other type of invement. Either the manager makes the decision at his or her discretion ithin the frameork of the invement guidelines or the approach is modelled exclusively on an index portfolio. In addition to active and passive approaches at portfolio management level, it is also possible to choose beteen active and passive approaches hen it comes to the suainability research that is required for all suainable invement. Passive sus tainability research relies solely on exiing indices, ratings and databases. An active suainability manager has the option of managing the suainability and returns requirements in line ith inveor requirements In contra, active suainability research represents a dynamic approach, alloing fund managers to use their on market observations to incorporate information relevant to the suainability assessment as circumances change. Suainability as a risk filter The benefits of an active suainability manager, ho combines active portfolio management ith active suainability research, lie in the opportunity for the manager to make active use of the suainability issue as a risk filter. Only an active suain - ability manager can effectively manage all the types of risk arising in connection ith suainability and thereby potentially improve the invement returns (Figure 7). Figure 7: Risk types that can be taken into account by an active suainability manager using suainability as a risk filter Event risk Reputational risk Suainability as a risk filter Regulation risk Only active suainability managers are in a position to use suainability as a risk filter Based on ongoing active research, active suainability managers have the opportunity to respond immediately or even proactively to events relevant to suainability. They can also combine suainability research ith analysis of fundamentals. In addition, an 'exposure approach' can be used to exercise through the associated discussions direct influence over the companies concerned. The use of an active suainability manager also offers inveors additional opportunities because the degree of freedom enjoyed by the manager means it may be possible to incorporate individual suainability requirements and criteria. Active management facili tates a fa response to events 13

14 Conclusion The issue of suainability has become much more important in the la fe years. Currently, it is often maintained in discussions that SRI automatically involves a loss of returns for the inveor. Hoever, this assertion is based on an inadequate level of detail in analysis and a large body of academic udy can be used to sho that it is unfounded. Inveing ith a good conscience does not mean loer returns! Across all asset classes, there are hardly any udies shoing that SRI involves a orse risk/return profile for the inveor. On the contrary in fact; there tend to be more udies shoing that SRI can actually bring advantages. In summary, it can therefore be ated that any decision to opt for suainable invements does not automatically result in better or orse returns than if the funds ere directed toards conventional invements. As ith invements in general, it is particularly critical here suainable invements are concerned to select the 'right invement' for the inveor. There are no numerous options available in this regard as a consequence of the significant expansion in the range of products on offer over the la fe years. Nevertheless, in the case of SRI, inveors mu be especially aare that in contra to many other invement decisions they have to try to combine the be of both orlds. As far as possible, a suainable invement mu find the optimum ay of satisfying both suainability and capital market objectives (returns requirements, etc.). If only one side is optimised at the expense of the other, this could be seen as not producing the desired result. Active managers can offer inveors added value because they are able to factor in individual requirements and they can also use suainability as an additional risk filter as part of a dynamic approach. 'Socially responsible inveing from an academic perspective: value proposition and reality' is a udy conducted by the Research Center for Financial Services at Steinbeis University Berlin ith financial support from Union Invement to analyse the performance of socially responsible and conventional invements. The objective is to de - scribe differences in the performance of different suainable and conventional inve - ments and to outline possible influencing factors. The udy comprised a comprehensive inveigation in hich 195 other academic udies ere analysed to compare performance beteen conventional inveing and socially responsible inveing. The authors also carried out their on calculations. The authors of this udy are Dr Jens Kleine, Professor of Financial Services at Steinbeis University Berlin, ith Matthias Krautbauer and Tim Weller, research associates at the Research Center for Financial Services. 14

15

16 Contact: Union Invement Initutional GmbH Wiesenhüttenraße 10 D Frankfurt am Main Telefon: Telefax: union-invement.com Source: April 2013