A sign for BlackRock Inc hangs above their building in New York U.S., July 16, 2018. REUTERS/ LUCAS JACKSON
A sign for BlackRock Inc hangs above their building in New York U.S., July 16, 2018. REUTERS/ LUCAS JACKSON

It pays for investors to put their money in companies that place high value on their environmental, social and governance (ESG) performance, says the world’s largest asset manager, BlackRock.

Data collected by the company shows that annualised total returns from sustainable investing matched or exceeded traditional equity index funds over the past six years.

ESG funds in emerging markets recorded a total annualised return of 5.7% from 2012 to 2018, compared to the 4.3% traditional equity index funds delivered over the same period. 

The price-to-earnings ratio was also higher for ESG stocks in the US and emerging markets. The ratio is the share price divided by earnings per share and indicates how much investors are willing to invest for each rand of a company’s earnings. A high price-to-earnings ratio means investors are anticipating higher growth from ESG stocks in future and are therefore willing to pay a bit more to acquire them. 

The asset manager said that for many years sustainable investing was seen as a trade-off for high returns. It now finds that clients are increasingly asking for more sustainable options and want asset managers to report more on the impact of their investments. 

The company conducted a separate survey late in 2018 and found that institutional investors in Africa, the Middle East and Europe in particular were increasingly looking at ESG stocks to rebalance their equity portfolios in 2019.

“We are seeing greater interest from our clients in sustainable investing. Millennials, in particular, look set to propel the future of sustainable investing. This group of future financial decision makers is asking more of companies,” said BlackRock in its insights report.

BlackRock’s data shows that dedicated sustainable investment mutual and exchange-traded funds in US and Europe grew to about $760bn by the end of 2018 from $453bn in 2013. The asset manager calculated that global assets managed by sustainable mutual funds and exchange-traded funds are expected to grow to about $1.4-trillion by 2028.

In SA, the MSCI South Africa ESG Leaders Index, which focuses on companies with higher sustainability performance than their peers in their sector, was launched in 2007. It shows that ESG leaders recorded 14.45% annualised gross returns over a 10-year period compared to 9.75% for MSCI South Africa, which is an index tracking the performance of SA equities.

Old Mutual, which launched SA’s first ESG index unit trusts in November 2018, said sustainable investment has become increasingly important to SA investors, particularly millennials. 

“Work still needs to be done on the side of advisers who are being held accountable for generating returns for their clients. There is still a perception that ESG funds underperform and I say it’s a perception because our experience is different,” said Elize Botha, MD of Old Mutual unit trusts.

In the three months that Old Mutual’s ESG index unit trusts have been operational, the Old Mutual MSCI World ESG Index Feeder Fund has received R251m in inflows while the Emerging Market fund received R13m.

“It is still early days. Advisers usually wait for a longer track record before putting their clients’ money in any fund. But it’s a good start given that the funds have been around only for three months. End clients like them from a cost perspective and for the fact that they can influence responsible investing,” said Botha.

Both of Old Mutual’s ESG unit trust funds exclude alcohol, gambling, tobacco, nuclear power and weapons.