In this article, we show returns of portfolios comprised of high-ESG scoring companies. More Importantly, we use attribution analysis to show contributions from sector, industry and stock selection within these portfolios. As Sustianalytics only has ESG ratings back to February 2014, this study covers and relatively short time period, but nevertheless we believe that it reveals some important aspects of the relationship among sectors, industries and ESG investing performance.

Investing responsibly has had varying definitions, uses, and performance throughout time. It has been defined in multiple ways; for example “green”, religious considerations, anti-tobacco, anti-guns, impact investing, and more. We believe that for the most part socially responsible investing (SRI) began with investors avoiding stocks of companies with products, services or behaviors found undesirable for some personal reason. Today, there are still multiple ways to parse socially responsible investing, but the investing community is coming closer to defining the entire area to make corporate responsibility more comparable. One such way to classify companies is known as ESG scoring, wherein good behaviors are rewarded by rating companies on Environmental, Social, and Governance (ESG) issues. Sustainalytics1, a global leader in ESG and corporate governance, rates companies in those three areas and determines a company’s one composite ESG score. Rather than simply avoiding companies with undesirable behaviors, ESG rewards companies for good behaviors.

It is one thing for an individual investor to favor high-scoring ESG companies and to avoid low-scoring companies, but it is something else for a pension plan, as a fiduciary, under ERISA and the prudent man rule. The manager of a pension plan cannot impose his or her social or political views at the expense of performance. Proponents of ESG investing have argued that there is no sacrifice of returns; not because high-ESG companies can grow earnings faster or have some foundation for higher returns, but because of risk reduction. It is argued that high-scoring ESG companies are less likely to face negative events or scandals that hurt stock returns, such as sexual discrimination or harassment lawsuits, EPA investigations, or shareholder revolts.

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