Values can be Linked to Value

Do responsible investment considerations enhance or detract from the financial value of investments? Is there a strong financial and competitive case for corporations to include sustainable practices in the management of their business? Can a corporation positively serve all stakeholders – customers, employees, shareholders, suppliers, communities, and the environment they inhabit – while simultaneously pursuing its business mission?

These are some of the oft-posed questions in relation to investing responsibly – that is, investments that take into account sound environmental, social and governance (ESG) considerations. And the answer is a resounding “yes”, a conclusion that is based not only on anecdotal references supplied by investors and corporations, but also on an increasing number of rigorous research studies conducted by academics and industry experts.

Consider the following sample of studies that clearly demonstrate a positive link between responsible investments and financial performance:

2011 Harvard Business School Study

The study[2] compared 90 “high sustainability” firms – those that voluntarily adopted environmental and social policies – with 90 “low sustainability” firms – those that adopted almost no policies - on the issue of governance, culture and performance. The study found that a portfolio of high sustainability firms outperformed a portfolio of low sustainability firms by 4.8% in stock market performance on an annual basis. The results were statistically significant, and outperformance occurred in 11 of the 18 years of the sample period. [3]

2012 Deutsch Bank Study

In a 2012 meta-study of more than 100 academic studies from around the world by the Deutsche Bank Group, a 100% of the studies in the review found a positive correlation between CSR and financial outperformance, while 89% and 85% of the studies found a positive correlation between ESG factors and market or accounting–based outperformance, respectively. [4]

2014 Arabesque Asset Management Ltd. and the University of Oxford

A 2014 meta-study of over 190 academic studies by Arabesque Asset Management Ltd. and the University of Oxford also highlights results similar to the Deutsch Bank study. The results once again prove that corporate sustainability measures lower the cost of capital (in 90% of the studies) and the incorporation of ESG factors into investment decision making is positively correlated with market and accounting-based outperformance (in 80% and 88% of the studies, respectively). [5]

2015 study of Canadian Responsible Investment (RI) Mutual Funds The study examined the relationship between risk and return in Canadian RI mutual funds (equity, fixed income and balanced funds), showing that ESG factors, when taken into account, can lower risk in a portfolio. Based on one, three, five, and 10-year observations, the study found that the RI equity mutual funds and the RI fixed income and balanced funds examined outperformed the benchmark 63% and 67% of the time, respectively. Simultaneously, the RI funds were either less volatile than or as volatile as the benchmark. In particular, the funds were better able to generate excess return at lower risk than the benchmark – 72% of the time for RI equity funds and 61% of the time for RI fixed income and balanced funds – reducing downside risk. [6]

In the wake of such trends, an emerging generation of responsible investors is mobilizing capital for complex smart buildings, community infrastructure projects, wind and solar projects, hybrid buses and other inventive solutions. These investors are applying a holistic and integrated investment approach to the challenges facing cities, industries and our environment, and reaping the financial benefits. They are joining coalitions to pool capital to rebuild cities, make companies more humane and efficient, and address climate change. They are amalgamating resources and investment capacity across borders, as evident from the rapid spread of the UN-backed Principles for Responsible Investment (UN PRI). The result has been greater allocations of capital to investment strategies that link values with financial value. Per the US Sustainable Investment Forum (US SIF), $6.57 trillion out of $36.8 trillion under professional investment management in the US as of the end of 2013 followed one or more types of responsible investment strategies – the former up 76% from $3.7 trillion as of the end of 2011. [7]

At the forefront of this class of investors have been pension funds, representing the retirement assets and savings of everyday working families held in trust and invested in the capital markets with the aim of providing long-term financial benefits to plan participants and beneficiaries. Indeed, there is a long and rich history of intentional responsible investments by pioneer labor pension funds, who have been the fiercest proponents for the “S” (Social) in the ESG framework, fighting for union representation, worker participation, good wages, and workers’ health and safety. Labor visionaries have, for decades, worked to promote strategic investments to make the “boss" accountable and to grow the real economy. Many of the most successful investment initiatives to build affordable and workforce housing, revitalize the manufacturing sector and grow the clean economy were started by workers’ representatives.

Still, a large majority of pension funds, their advisors and money managers have been slow to incorporate a responsible investment philosophy into their investment decision-making. Trustees who oversee pension funds are often challenged by weak governance structures, increased capital market complexities, oversized influence of investment managers and external consultants, and a multitude of regulations. Too often, conventional asset management has focused on short-term returns based on quarterly results. This short-termism not only negatively impacts expected returns in the long run, but also ignores the social and environmental costs incurred to society in the process. The resulting herd mentality is more concerned with peer comparisons and relative performance metrics, rather than delivering stable and sustainable risk-adjusted returns appropriate to a plan’s goals. [8] While such shortcomings can result in poor performance even in good economic times, their impact is exacerbated in times of financial crises such as after the 2008 market crash. [9]

Anew Responsible Investor Guidebook, commissioned by the AFL-CIO and partners and authored by Heartland Capital Strategies, encourages pension trustees to re-align their governance and investment strategies with the long-term interests of plan participants and beneficiaries by incorporating responsible investment practices into the investment decision-making process for plan assets. The Guidebook discusses how responsible investors, with their longer-term focus, ESG-based holistic risk assessment, and shareholder activism, are better equipped to preserve and grow retirement capital while maintaining intergenerational equity. This concept of intergenerational equity represents the idea that “growth should occur whilst ensuring a certain level of economic, social and environmental security for future generations” [10]– emphasizing important and inherent links between the goals of workers’ capital and those of responsible investing.

The Guidebook also highlights leading capital stewards who have prudently and profitably invested in rebuilding our cities, revitalizing the industrial commons, growing the clean economy and pushing "the boss" to be fairer. The Guidebook’s purpose is to illustrate how the investment of workers' capital assets, held in pension and other institutional funds, can be targeted to generate specific ESG benefits along with competitive financial and economic returns.

For more information or if you are interested in obtaining a copy of the book, please feel free to contact Heartland’s head office at 412.342.0534 or


[1] Kimberly Gladman, Director of Research & Risk Analytics, GMI Ratings

[2] Robert Eccles, Ioannis Ioannou, and George Serafeim, “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance,” (November 2011).

[3] Commonfund Institute, “From SRI to ESG: the Changing world of Responsible Investing,” (September 2013).

Gordon Clark, “From the Stockholder to the Stakeholder: How Sustainability can Drive Financial Outperformance,” (2014).

[4] DB Climate Change Advisors, “Sustainable investing: Establishing Long-term Value and Performance,” (June 2012).

[5] Arabesque Asset Management Ltd and the University of Oxford, “From the Stockholder to the Stakeholder: How Sustainability can Drive Financial Outperformance,” (September 2014).

[6] Tessa Hebb, Carleton Centre for Community Innovation, “Canadian Responsible Investment Mutual Funds. Carleton Centre for Community Innovation,” (May 2015)

[7], 2014

[8] James Hawley, “Reclaiming Fiduciary Duty Balance,” (Fall 2011).

[9] For instance, CalPERS sent ripples through the finance community in 2014 when it decided to disinvest in hedge funds, due to, in its view, complexity and costs. Other analysts have questioned the low hedge returns since the 2008 market crash, which liquidated a large number of funds. Retrieved November 2014 from

[10] Claire Woods and Roger Urwin, “Putting Sustainable Investing into Practice: A Governance Framework for Pension Funds,” Journal of Business Ethics, vol. 92, issue 1 (August 26, 2010).


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