Morningstar Magazine - June/July 2017 - 39

EXHIBIT 1

Organizational Infrastructure

Green Grows Assets in sustainable investments are growing quickly.
U.S.

Europe

Canada

Australia/N.Z.

Asia

Japan

USD
22.89

Japan shows first ESG assets at 0.01
before jumping to 0.47 in 2016.
Australia/N.Z. and Asia show first
ESG assets at 0.18 and 0.07.

24
Trillion

18.54

16

13.34

8.58

8

5.36
3.78

0
2006

2008

2010

2012

2014

2016

Source: Global Sustainable Investment Review, 2016, 2014, 2012.

ESG-Focused Mutual Funds
2006 %
2016 %
tested the theory that exclusionary investing would
8.0
10.1
QQQQQ
necessarily underperform because screening
out

companies for nonfinancial reasons 23.1
would result
in
27.7
QQQQ
less efficient portfolios. Mercer and U.N. (2007)
34.8
38.7
QQQ
summarized 20 academic studies, concluding that
25.9 penalty.
18.1
there did not appear to be a performance
QQ
8.5
5.4
Q
By 2015, so much research had been published
Source: Morningstar.
that metastudies were required to make
sense of it all, but the conclusions remained the
same. Friede et al. (2015), using 2,000 published
empirical studies, found that only 11%
of studies reported negative outcomes, while
16% reported positive outcomes, and the
rest showed mixed or neutral results. That lent
more-conclusive support to the idea that
the inefficient portfolio thesis is not supported.

This is an important finding for sustainable
investing because it gives asset managers and
investors confidence that an investment
process that incorporates ESG factors can perform
on par with conventional investments and,
with the right manager at the helm, perhaps
even outperform.
Indeed, Statman and Glushkov (2016) suggested
that the use of company ESG research in stock
selection and portfolio construction was a positive
performance factor. Using a multifactor model,
they found that the ESG factor they created
was a significant positive factor and that the use

Organizations supporting sustainable investing go
back further than a decade, but they have
experienced significant growth in the past 10 years,
and important new ones have emerged.

of traditional exclusions was a negative factor.
The positive influence of the former, they found,
was more than enough to offset the negative
influence of the latter in portfolios that employ
both methods.
The second conclusion from academic research
suggests that a positive relationship exists
between corporate sustainability and financial
performance. Arabesque and Oxford (2015)
reviewed more than 200 studies on the
relationship between corporate sustainability
practices and financial performance. More
than 80% of the studies they reviewed indicated
a connection between better company
sustainability practices and lower cost of capital,
better operational performance, and better
stock-price returns.
Studies have shown that companies with superior
sustainability performance have better credit
ratings, that firms with environmental
management systems have lower credit spreads,
and that firms with significant environmental
challenges have higher credit spreads. Another
study demonstrated that companies that handle
environmental issues better than their peers
have significantly lower cost of equity. Eccles et al.
(2014) found that "high sustainability" firms
significantly outperformed "low sustainability"
firms over the long term in both accounting
and stock-price terms.

What is today called US SIF: The Forum for
Sustainable Responsible Investment has been
around for more than two decades. It is a member
organization of mainly asset managers and
advisors practicing sustainable investing. Today, a
network of global social investment forums covers
not only the United States but also Canada,
Europe, and Australia/Asia. Ceres, founded in 1989,
brings together investors and business and
public interest groups to speed the adoption
of sustainable business practices and the
transition to a healthy low-carbon economy. The
Ceres Investor Network on Climate Risk and
Sustainability, launched in late 2003, has more
than 130 institutional investors as members,
managing more than $17 trillion in assets.
The Carbon Disclosure Project, or CDP, launched in
2002 with 35 institutional investors managing
$4 trillion in assets. CDP asks companies to
disclose how they are managing risks posed by
climate change and provides guidelines on
how to do it. Today, CDP has more than 800
0
5
10
15
20
25
30
35
40
investor signatories managing more than $100
trillion in assets.
In 2006, 100 investment industry firms signed the
United Nations-sponsored Principles for
Responsible Investment, or PRI. The signatories
represented $6.5 trillion in assets. The principles
are based on the idea that ESG issues can
affect investment performance and, therefore,
should be considered alongside more
traditional financial criteria for investors to fulfill
their fiduciary duty. PRI provides signatories a
framework for incorporating ESG into their
investing, along with technical expertise and
membership in a global network of peers involved
in the field. In 2016, the principles had
more than 1,600 signatories managing $62 trillion
in assets.
In 2011, the Sustainability Accounting Standards
Board, or SASB, was formed with the mission to
establish industry-specific standards for corporate
reporting on ESG issues. SASB's work is important

global.morningstar.com/Morningstarmagazine

39


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