Environmentally aware funds perform better finds study
Good environmental governance is the key to better financial returns, research published this week suggests.
The research, Corporate environmental governance – a study into the influence of environmental governance and financial performance, carried out by Innovest Strategic Value Advisors on behalf of the Environment Agency provides strong evidence of higher financial returns, business opportunity and competitive advantage, with differences in financial performance between environmental leaders and laggards being quite marked.
It details fifteen case studies covering funds, sectors and individual companies alongside the findings of a literature review in which 85% of published studies showed a positive correlation between environmental governance and financial performance.
Howard Pearce, Head of Environmental Finance and Pension Fund Management for the Environment Agency said: “The Environment Agency commissioned this report to shed light on the value of good environmental governance from a business and investor perspective. The findings clearly support the view that companies which reduce their environmental risks and impacts are more sustainable, profitable, valuable and competitive.”
Specific case studies include that of UK based Jupiter Ecology Fund, which has given a consistently better investment return over five years than the Standard & Poor Global Growth sector average. The US based Winslow Green Growth Fund also consistently out-performed its benchmark over a prolonged period with annual average returns above the benchmark index by 20.41%, 5.79% and 11.49% over one, three and five years respectively.
Forest and paper product companies with good environmental governance ratings financially out-performed companies with below average ratings by more than 43%; oil and gas companies saw the top environmentally rated firms out-perform the competition by 11.8% over three years; the stock price of EU electric utilities with above average environmental performance was 39% above below average performers; and in the water utilities sector, environmental leaders out-performed laggard companies by 4.5 percentage points over a three year period.
Case studies also show how environmental management in areas such as risk reduction and pollution control can reduce costs and create savings in areas such as operational impact.
Dr Matthew Kiernan, Innovest CEO said: “Many in the financial community are yet to recognise the link between environmental governance and financial performance. A widespread misconception remains that paying close attention to an environmental governance strategy is at best a waste of time for investors, and at worst actively harmful to financial returns. The scope of the education challenge in this instance should not be underestimated. Indeed, it is hoped that this report will go some distance towards redressing this situation.”