Aficionados might point to the Warren Buffetts of the world to support their claims that, over the long term, few investing methodologies can eclipse the performance returns generated by seasoned practitioners of value investing. But what if a new emergent form of value investing is set to supersede conventional value investing in the decades to come?
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Old school investors may scoff at the idea of socially responsible value investing generating superior returns. After all, value investors with a tilt towards sustainability and ESG factors have fewer companies from which to choose. At an investment committee meeting, corporate governance controversies would render some companies ineligible for consideration. Negative externalities originating from sugar consumption over the long term might eliminate soda companies, such as the classic Buffett value play, Coca Cola. Fossil fuel suppliers would not even make it past a first round of debate. And violations of International Labor Organization standards would put a knife in the hearts of some companies with international bases.
Careful scrutiny of the remaining companies would eliminate a host of others based on valuation, intrinsic value trends, competitive dynamics and other screening criteria. Yet in spite of the obvious challenges, this comparatively nascent form of investing is showing signs of gathering pace and standing toe-to-toe with traditional value investing when it comes to performance returns.
Perhaps the most prominent fund to overlay sustainability criteria with value investing is Generation Investment Management. Despite co-founder Al Gore enjoying global notoriety, the co-managers of Generation’s flagship Global Equity fund, Mark Ferguson and Miguel Nogales, have historically been shy of publicity. Whatever the PR strategy, the investing strategy has translated into enormous success. Since inception in 2004, Generation has grown to manage over $15 billion in AUM as of March 31, 2017. And data from Mercer ranked Generation #2 among over 200 global equity managers with 10 year returns averaging 12.1% annually.
We can peer into the future value investing landscape by examining the performance returns at Generation and understanding the demand for socially responsible investments (SRI) from investors. Generation has delivered long term returns to support its thesis that value investing with a sustainability overlay can match traditional value investing performance returns. And the recent launch by leading robo-advisor, Betterment, of SRI portfolios may be a sign of increasing investor demand for investments that have a social-good overlay.
Betterment claimed that its decision to launch socially responsible investing portfolios was a direct response to client demand. Due to the constraints of liquidity and high expense ratios, Betterment is only able to support client SRI elections in the large cap arena. And as investors vote with their dollars to select SRI portfolios versus core portfolios, the supply of managed funds to meet investors’ needs is likely to rise in coming decades.
Interestingly, Betterment reported a 0.9979 correlation between SRI portfolio total returns and core portfolio total returns, however dividend payments tended to be lower and expense ratios slightly higher for SRI portfolios.
As a leading robo-advisor with approximately $9 billion in assets under management, Betterment has a good pulse on clients’ desires to align their dollars with their values. The launch of SRI portfolios is a shot across the bow to their competitors and the message should also ring in the ears of investment managers: liquid, low-cost socially responsible funds are increasingly demanded by investors.
Backing up that assertion is a survey from Forbes which claimed that millennials make more social impact investments than any other segment. As millennials gather wealth, they will likely place greater demands on fund managers to combine capitalism with social good.
Beyond fund managers, financial companies more generally are starting to pivot from the pure capitalist philosophy of focusing on maximizing shareholder profits to include social impact considerations too. For example, who would have bet on a financial lender incorporating the funding of financial literacy programs in under-served neighborhoods across the U.S. as part of its core business model? Yet CommonBond, a student lender pioneered a one-for-one social model where every degree fully funded on the CommonBond platform financed the education of a student in need.
The future of value investing may not be crystal clear but early signs point to the end of the black and white choice between making money and doing social good, and instead combining the two without sacrificing returns, and perhaps even enhancing them.
Article by George Windsor
Bio: George Windsor is an author at Investormint, a finance publication designed to help investors make smarter financial decisions and live a richer life.
FAQs
For the most part they believe SRI will experience significant growth over the decade to the point where it becomes virtually mainstream: mainstream asset managers will regularly incorporate non-financial considerations into stock analysis and will increasingly assess stocks from a long term perspective taking ...
Is ESG investing the future? ›
In short, yes. Alongside growing demand from investors, sustainability issues are being prioritised at the highest level. In 2015, the United Nations introduced their 17 Sustainable Development Goals (SDGs) which they describe as a "blueprint to achieve a better and more sustainable future for all".
Is socially responsible investing a good idea? ›
Many major studies reviewed by RBC GAM found a clear correlation between strong sustainability business practices and company performance. Findings include: Stock price performance often goes hand in hand with strong governance practices, strong environmental performance and high employee satisfaction.
Is ESG investing becoming more popular? ›
The COVID-19 pandemic has reinforced the importance of ESG issues and accelerated the transition to a more inclusive capitalism. Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.
Do Sris outperform or underperform non Sris? ›
SRI funds tend to outperform non-SRI funds for below-the-median outcomes, and this outperformance is especially strong during bear markets. funds when comparisons are made at the quantiles away from the median.
Is ESG investing a bubble? ›
There is another reason the ESG and DEI bubbles are bursting: The economic case for them was never strong. Investors were promised ESG funds that would produce higher returns by avoiding certain investments, but they haven't always outperformed the market.
Does ESG investing outperform the market? ›
ESG equity indices have performed in line with, or in some cases outperformed, traditional indices. Companies with higher ESG ratings tend to be more competitive and have high quality management teams, driving strong returns.
What is the dark side of ESG? ›
The Controversy
Today, criticism of ESG includes these claims: Companies that devise ESG ratings keep their methodologies proprietary, making the process impossible to understand or evaluate. Because of company self-reporting, ESG is rife with greenwashing and false claims of social responsibility.
Is ESG falling out of favor? ›
Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.
What is the problem with ESG investing? ›
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers.
It is more and more becoming the standard in the investment industry, especially in Europe, where most of the sustainable fund's assets are concentrated. The most common approach to investing sustainably is through ESG integration - by explicitly and systematically factoring ESG issues into the investment decision.
Why ESG is the next big thing? ›
Because we see in our own portfolios that integrating ESG evaluation across all investment asset classes can – and often will – boost performance. Looking at ESG returns at this moment, the Morningstar Global Sustainability Leaders Index doubled its broad market index returns in Q1 2023, reaching 21.2 percent.
Why is everyone investing in ESG? ›
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
Do you think sri funds will outperform traditional funds in the future? ›
The findings indicate that the majority of the current academic literature reports that the performance of SRI funds is on par with conventional investments. At the same time, many studies show that SRI investments outperform conventional instruments, while others have found that they underperform.
Is Undervalued better than overvalued? ›
Generally, undervalued shares are favored over overvalued ones, as the investors buy low and sell high. If the company is performing well, it can give promising returns. Buying an overvalued share doesn't have this advantage, as the price returns to its intrinsic value, which is lower.
Why do most investors underperform? ›
Investors often find their picks underperform because they are chasing past performance; they are remarkably consistent with their propensity to get into an investment after it has done well, and then get out after it has done poorly.
What is the future of ESG finance? ›
ESG Focus for the Future: Environmental Risk Management
Even if an asset managers' job is not to make the world a better place, managers will need to take into consideration the risks resulting from climate and environmental change, as well as the effects of the resulting regulatory risk for their assets' returns.
What is the outlook for ESG investments? ›
Assets in dedicated ESG funds could grow from US$8 trillion today to as much as US$30 trillion by 2030. The industry would thus play a vital role both in the allocation of capital towards a more resilient economy and in addressing sustainability challenges.
What will ESG look like in 2030? ›
Co-opetition will be in full force in 2030: a whole-of-systems approach between organisations will be required to implement and drive ESG change. ESG priorities will transform supply chains, with sustainable technologies leveraged to verify end-to-end ESG credentials.
What is the future impact of ESG? ›
Ultimately, the integration of ESG factors into business strategy and decision-making will help drive more sustainable and responsible business practices, and create long-term value for companies, investors, and society as a whole.
