The Markets July 22, 2015

ESG Portfolios Outperform Broad Market Indices

Environmental, social and governance investing has great value, Calvert attests.
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Companies are increasingly trying to mitigate potential environmental, social and governance (ESG) risks as a way to protect their brand value and ensure stable demand for their products, Calvert Investments states in a new report, “Perspectives on ESG Integration in Equity Investing: An opportunity to enhance long-term, risk-adjusted investment performance.”

“Companies are also responding to a wide range of global sustainability challenges with new business solutions that could boost financial performance and provide long-term competitive advantages,” Calvert says. “For investors who recognize the importance of considering non-financial information when making investment decisions, there is an opportunity to generate excess returns and better manage risk in investment portfolios by using ESG factors.”

Calvert analyzed data on ESG investing in various ways between June 2000 and December 2014, starting with ESG screens, then moving to stand-alone ESG investing and finishing by looking at a combination of traditional and ESG investing. “We find empirical evidence across each of these approaches that incorporating ESG factors into investment decisions improves the investment selection process and enhances risk-adjusted returns,” Calvert says.

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From December 31, 2008, through December 31, 2014, the Calvert Social Index (CSI) outperformed the Russell 1000 Index by 142 basis points on an annualized basis, Calvert says. “Importantly, ESG screens can add value through stock selection by helping investors avoid ‘bad actors’ as well as by identifying more sustainable companies,” Calvert says.

Next, when looking at portfolios that actively selected ESG stocks between March 2004 and December 2014, Calvert found that “portfolios consisting of companies showing the greatest improvement in their ESG portfolios outperform both comparable broad market indices and portfolios made up of companies with deteriorating ESG profiles.” The top-quartile ESG portfolios delivered annualized total returns of 9.76%, compared to the Russell 1000 Index’s 8.28% return and the bottom-quartile ESG portfolios’ 7.92% return.

Finally, Calvert analyzed the performance of hybrid portfolios consisting of traditional and ESG equities between March 2004 and December 2014, again separating portfolios with improving ESG scores in the top quartile from portfolios with deteriorating ESG scores in the bottom quarter—and found a difference in those quartiles’ returns of as much as 4.88%.

Calvert says that in 2014, $21.4 trillion of professionally managed assets around the globe applied ESG criteria to their investment analysis. In the U.S., $6.57 trillion on assets use ESG criteria.

Calvert’s findings mirror a recent global survey of 97 institutional investors by LGT Capital Partners and Mercer that found that more than three-quarters incorporate ESG criteria when investing in alternative asset classes, and more than half (57%) believe ESG investing has a positive impact on risk-adjusted returns.

Calvert's report can be downloaded here.

Data & Research July 22, 2015

Advisers Using Robo-Advice for Older and Wealthier Clients

Jefferson National survey dispels the belief advisers are only offering the technology to younger investors.
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Registered investment advisers (RIAs) and fee-based financial advisers are using robo-advice for older and wealthier clients, Jefferson National found in its inaugural Advisor Authority survey.

The financial planning industry has held the belief that advisers are only using robo-advice for younger clients with lower assets under management. However, Jefferson found that among the advisers using robo-advice, 52% are using robo-advice for clients with more than $1 million in investable assets. Among the advisers using robo-advice, 49% are using it for their younger Millennial clients, and another 49% are using it for their Boomer clients.

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Nonetheless, Jefferson National found that usage of this technology among advisers as a whole is low; only 19% currently use any type of robo-advice and only 15% say they are very likely to integrate this model into their practice in the next 12 months.

Even advisers who are familiar with robo-advice are split on their feelings about it, with 48% saying it poses a threat, and 42% saying it does not pose a threat.

“Our Advisor Authority study found that the most successful advisers—those who earn more and manage more assets—are forward thinkers and early adopters when it comes to using technology, including robo-advisers,” says Mitchell Caplan, chief executive officer of Jefferson National. “While there is no replacement for the value of holistic guided advice, our research demonstrates that this new generation of digital advisory solutions can be incorporated into a successful adviser’s practice to create greater efficiencies—and more value for their clients. The most successful advisers understand that rather than a threat, robo-advisers are, in fact, an important part of a comprehensive offering.”

Harris Poll surveyed 535 RIAs and fee-based advisers online on behalf of Jefferson National. The full findings can be downloaded here.

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