Strategies for Responsible Investing: Emerging Academic Evidence

Abstract

The authors contrast and evaluate two of the most popular responsible investing strategies employed at present: negative screening and engagement. As a backdrop, they consider the challenges faced by the University of Cambridge, which mirror those experienced by institutional investors worldwide. Specifically, they make use of issues raised at the recent “Divest or Engage?” conference at the university. The authors discuss emerging academic evidence from recent, and hitherto unpublished, papers to provide an up-to-date perspective. They describe the challenges in excluding undesirable assets from investment portfolios and present evidence on the effectiveness of engaging with investee companies. The strategies of divestment and engagement are often employed as complements to each other, and this can be advantageous. The authors caution that investors need to be aware of the disquieting evidence that ESG metrics differ considerably across rating services, and the choice of data provider can have a fundamental impact on the ESG credentials of institutional portfolios.

TOPICS: ESG investing, portfolio theory, portfolio construction, style investing, foundations and endowments

Key Findings

• • Engagement: On average, companies with whom engagement has proven successful have subsequently demonstrated enhanced financial and stock market performance.

• • Divestment: Responsible investing strategies often incorporate both exclusion policies and engagement. Support for exclusion can vary based on its motivations.

• • Ratings: Environmental, social, and governance (ESG) scores from different providers have low correlations among one another. Choosing an ESG provider involves buy-in to their choice of methodology.