May 06, 2013

ESG Investments – a breath of fresh air for the portfolio

Responsible investments, which include the areas of Environment, Social and Corporate Governance in investment decision-making, provide a breath of fresh air for the portfolios of institutional and private investors alike, as Andreas Hoepner describes in the latest White Paper for Global Financial Institute.

This relates to so-called ESG Investments. E stands for Environmental, S for Social and G for Corporate Governance. “Responsible investment offers opportunities to generate higher returns with lower levels of investment risk”, according to the Lecturer at the University of St. Andrews in Scotland, where he is also Deputy Director of the Institute for Responsible Banking and Finance.

ESG criteria refer to issues such as climate change, environmental pollution, biological diversity or water scarcity just as much as employer relationships, social commitment, human rights, protection of minorities or avoidance of harmful products such as tobacco. In terms of Corporate Governance, this addresses the areas of investor protection or limiting the powers of company directors.

Hoepner highlights the fact that the total volume of responsible investments has increased almost ten-fold over the past ten years. In his view, the key driver of this has been the demand from investors to focus more closely on ESG criteria. At the same time, he established that these subjects are still afforded too little consideration by many analysts and investment managers. Consequently, sustainably oriented investment managers enjoy a tangible information advantage over their competitors.

In his study Hoepner provided empirical evidence that responsibly oriented investments in many industries offer higher return potential than investments which disregard ESG concerns. He also noted that responsible investments tend to carry lower investment risk. Researchers at the Universities of Maastricht and Reading have demonstrated that companies which enjoy a higher ESG rating, have higher credit ratings and lower cost of capital on average. Indeed, Hoepner detects a lower downside risk in responsibly oriented portfolios, even if they are less diversified.

Nicolas Huber, who coordinates ESG interests for Deutsche Asset & Wealth Management and who was involved in the study summarizes: “Hoepner’s research shows the ESG concept to be both successful and effective. It demonstrates the suitability of responsible investment as a long-term investment strategy, which should be observed in equal measure by both institutional and private investors.”

More on this topic:
Environmental, social, and governance (ESG) data: Can it enhance returns and reduce risks?

Deutsche Asset & Wealth Management

With €944 billion of assets under management (as at December 31, 2012), Deutsche Asset & Wealth Management is one of the world's leading asset managers. Deutsche Asset & Wealth Management offers individuals and institutions traditional and alternative investments across all asset classes. Deutsche Asset & Wealth Management also stands for tailored wealth management solutions and private banking services to high-net-worth individuals and Family Offices.

Deutsche Asset & Wealth Management is the brand name for the Asset Management & Wealth Management division of Deutsche Bank AG and its subsidiaries. The responsible legal entities offering clients products or services of Deutsche Asset & Wealth Management are listed in the respective contracts, sales materials and other product information documents.

About Global Financial Institute

The Global Financial Institute (GFI) started up its work in November 2011. GFI plans to be a new-concept think-tank that will bring together the perspectives of two arenas – wealth and asset management and academia – in terms of the economic, political, financial, and social issues facing the world so that it is both an efficient and beneficial for people in the field of Wealth and Asset Management. GFI's publications combine the views of Deutsche Asset & Wealth Management’s financial experts with that of internationally renowned institutions in Europe, the United States, and Asia. The publications include Studies, Interviews and Discussion Papers and span a wide variety of research fields from Macroeconomics and Finance to even Sociology.

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