As more and more assets are invested in portfolios that consider environmental,
social and governance (ESG) factors, researchers are attempting to better measure
the effectiveness of so-called “impact investing,” both in terms of financial performance
and as it pertains to meeting the moralistic goals of ESG.
According to a new analysis published by the Center for
Retirement Research at Boston College, “New Developments in Social Investing by Public Pensions,”
public pension funds continue to engage in social investing, most recently
divesting from Iran and fossil fuels, for example. Other institutional investors,
from corporate-sponsored 401(k) plans to university endowments, are making
investments that utilize “ESG screens,” and still more are instituting a combination
of traditional and ESG investing.
CRR observes there is an
increasing amount of empirical evidence across each of these approaches
that shows incorporating ESG factors into investment decisions can at least marginally
improve the investment selection process and enhance risk-adjusted returns.
After all—it’s no real surprise that publically traded companies that utilize their
resources more efficiently and which process waste and address social/environmental
challenges more skillfully than their competitors would also perform better financially,
especially over long-term investment horizons.
However, as in the wider market, there are many ESG or
impact investment programs available, some of which will outperform and many more
that will not. Put simply, CRR says social investing by large-scale
institutions is no sure-fire financial bet, and in fact such investing is more
likely to be detrimental to performance when it is so rigid as to declare whole
market segments, such as oil and gas development, off limits. Further,
especially in the public pension context, ESG investing can “conflict with the
views of beneficiaries and taxpayers, and interfere with federal policy.”
CRR adds that social and environmental investing is often
not very effective from a moralistic standpoint, either—because there is still
a preponderance of market participants who have no interest in ESG or impact
investing. In practice, as one large university endowment drops its shares in an
over-polluting petrochemical company, for example, other investors happily step
in to buy the divested stocks, potentially at a discount due to the large
volume being traded. Until this paradigm shifts, it will be very difficult for
ESG investments to deliver on their stated ethical and moralistic goals.
CRR concludes that, at least for public pensions in which
public taxpayer dollars are being invested and for which the state carries the
ultimate benefit liability, it is not an appropriate time to engage in social
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