A proven link between financial performance and ESG factors is the top reason which US investors use to adopt ESG integration in investment practices, according to a recent report released by United Nation's Principles for Responsible Investment (UNPRI), a top proponent of responsible investment practices. The report focuses on the results of three empirical studies of investment practices, including:
- UNPRI study using MSCI ESG analytics:
- Bank of America-Merrill Lynch Global Research Study:
- Calvert Research and Management Study:
Unsurprisingly, UNPRI concludes the three studies "collectively demonstrate" that "ESG factors are materially linked to both equities and fixed income performance. According to the report "[t]he commercial case for analysis on ESG issues is growing rapidly" and the report provides "confidence for US investors who are still doing their due diligence on ESG integration, to fully recognize its value and capitalize on opportunities in the US". Notably, UNPRI characterizes the lack of use of ESG integration as a fiduciary risk for investors. This last point is most notable and is consistent with the UN PRI’s threat of removing signatories which do not adequately demonstrate that they have incorporated ESG measures into the analysis and are engaging their portfolio companies on ESG matters. The shift from focusing on pressuring individual companies on ESG issues to pressuring mainstream investors to incorporate the measures thereby providing downstream pressure on companies is a material factor in the expansion of investor focus on ESG issues over the last 18 months. An ongoing critique of ESG measures is the lack of a solid connection between the use of the measures and end economic performance, although there is research that certain ESG metrics may be positively correlated to financial performance. As noted, the report is a push to solidify that connection. Additionally, groups like MSCI and Calvert Research and Management, a long-time leader in “responsible investing” have an incentive to enhance that connection because by doing so it provides them with additional areas for potential business.