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Perspectives on ESG Integration in Equity Investing

There is growing acknowledgement within the investment community that environmental, social, and governance (ESG) factors have the potential to materially impact corporate financial performance and security prices. Rather than risking shocks to their business models or discord from key stakeholders, companies are increasingly trying to mitigate potential ESG risks as a way to protect their brand value and ensure stable demand for their products.

Companies are also responding to a wide range of global sustainability challenges with new business solutions that could boost financial performance and provide long-term competitive advantages. For investors who recognize the importance of considering non-financial information when making investment decisions, there is an opportunity to generate excess returns and better manage risk in investment portfolios by using ESG factors.

This paper uses comprehensive historical analysis over various time periods from June 2000 to December 2014 to evaluate different methods for introducing ESG factors into the investment process. We first assess the impact of exclusionary ESG screens on investment performance after accounting for sector and style biases implicit in the screened universe. Next, we examine if ESG factors can add value as stand-alone inputs in stock selection, and whether results are consistent across geographic regions. Our third approach considers whether combining traditional financial factors with ESG information produces better investment performance. We find empirical evidence across each of these approaches that incorporating ESG factors into investment decisions improves the investment selection process and enhances risk-adjusted returns.

Natalie A. Trunow
Chief Investment Officer
Calvert Investment Management, Inc.

Joshua Linder, CFA
Assistant Portfolio Manager
Calvert Investment Management, Inc.

Read Environmental Finance's summary of the report here.