Socially responsible investment (SRI) portfolios failed to provide sufficient downside risk throughout the crisis, but Pictet Asset Management found that identifying companies' financial sustainability is vital to providing better returns.
A study of SRI revealed that to identify sustainability in companies’ financial fundamentals, investors need to integrate those factors that make companies more stable and resilient over time whilst delivering superior risk-adjusted returns.
"Factors such as moderate asset growth, low leverage and concentrated ownership can not only secure companies’ own survival but also contribute to the stabilisation of financial markets and the economy as a whole," Pictet Asset Management said in a release.
Throughout the crisis, SRI portfolios did not act as a buffer in falling markets and although the SRI community warned against bad practice, it was not enough to make these portfolios less risk in the face of financial fallout.
In its study, Pictet tested the relative performance of the financially improved sustainability portfolios against their respective conventional MSCI benchmarks over the last decade. The firm said the results confirmed its hypothesis that optimising screened portfolios from a financial sustainability point of view can actually make them more resilient to losses and tends to outperform in most environments except in the most vigorous market recoveries.
Pictet’s sustainability expert Christoph Butz said: “For too long, SRI investors have been made to believe that extra-financial research alone could shield them from market adversities - an assertion which is not borne out by facts.
"Something else is needed. To tilt ESG-screened portfolios towards more financial sustainability opens up an interesting perspective. The promise of lower risk and higher returns, both in the extra-financial and financial dimension, finally seems to be within reach."
©2011 funds europe