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Jun 11, 2015

ESG investing lowers risk and offers better downside protection

Funds investing responsibly outperform peers on risk measures 55 percent of time, according to OceanRock-sponsored study

Investing based on ESG principles lowers risk and offers better downside protection while helping to boost returns, according to a study commissioned by Canadian investment manager OceanRock Investments.

The study, carried out by Tessa Hebb, managing director of Carleton University’s Centre for Community Innovation in Ottawa, shows that Canada-based mutual equity funds that use ESG principles outperform their peers 55 percent of the time on various risk measures. It also shows funds that invested responsibly have a stronger Sortino ratio ‒ designed to measure the risk-adjusted return of an investment ‒ than their peers 72 percent of the time, indicating they have better downside protection.

OceanRock, which provides traditional and SRI investment options, says the research is the first in Canada to measure the performance of funds that use ESG principles against their benchmark peers in terms of risk characteristics.

‘This study represents a breakthrough for the responsible investment (RI) market and investors that prioritize capital preservation coupled with growth,’ says Gary Hawton, president of OceanRock, in a press release. ‘We have suspected that RI led to reduced risk and greater downside protection for investors, but that notion had not been quantified until now.’

Mutual equity funds that opt for RI outperform their non-RI peers 63 percent of the time, according to the study. Meanwhile, RI funds that invest in fixed income as well as RI-balanced mutual funds outperform their peers 68 percent of the time. RI assets under management in Canada increased 68 percent to more than C$1 tn dollars ($810 bn) in 2013 from C$600 bn in 2011, making it one of the fastest-growing investment trends in Canada, according to the research.

‘Critics suggest RI may limit portfolio diversification, leading to reduced returns and increased risk,’ OceanRock says in its press release. ‘The empirical evidence, however, shows that RI generally improves overall returns and now, with the release of this study, we know that RI in Canada also reduces risk and protects assets.’