For a long time, investors eager to use their money to improve the world through socially and environmentally conscious investments worried that they would be sacrificing returns in the process. No longer. Investing that takes into account environmental, social and corporate governance (ESG) factors often equals or even outperforms investments that ignore these factors. Today more than $20 trillion, or a quarter of all professionally managed assets worldwide, follow ESG strategies. With younger people ascendant and especially concerned with climate change, that number is sure to grow.
Such investing, moreover, could be especially important in achieving a sustainable recovery after the pandemic and a better reality for current and future generations.
The question is whether it is wise for governments to also orient the investments of sovereign wealth funds (SWFs) and pension funds around ESG concerns, whether they be climate change, gender equality, labor conditions, or others. We decided to find out. In a recent study, we compared the actual performance of Chile’s two SWFs and five government-regulated pension funds against their conventional market benchmarks. We also created a counterfactual in which we replaced the funds’ benchmarks with their ESG counterparts. We found that over the period of our analysis (generally from 2013 to today) the SWFs and pension funds could have restricted their investments to those with good performance in environmental, social and corporate governance without sacrificing financial returns.
By Eric Parrado – Bridget Hoffmann – Tristany Armangué.
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