Sustainable investing has gained traction over the past few years. According to Morningstar Research Inc., more than $1.5 billion was invested in Canadian sustainable funds in the fourth quarter of 2020 alone.
Due to its rising popularity among advisors and retail investors, Inovestor has partnered with Sustainalytics in order to cater to our client’s needs. Through this venture, we now offer ESG risk ratings for over 12,000 companies worldwide reinforced by assessment of their controversies. This new trend seems to suit both retail and institutional investor due to its risk minimization and enhanced returns characteristics. With the scoring system established, we help investors reduce the time spent on narrowing down the research.
Portfolio managers realize the significance of ESG issues as a way to mitigate risks. The scoring system used by ESG factors help identify potential risks that could negatively impact a company, such as litigations and lawsuits, strikes and bad reputations.
A good illustration of how ESG data can help identify risks is the Facebook-Cambridge Analytica scandal. Prior to the scandal, Facebook received several criticisms relating to data privacy management of users. The tipping point occurred when a whistleblower revealed that Cambridge Analytica harvested personal data from over 50 million Facebook users without their consent to interfere with the 2016 U.S. presidential election. Facebook saw 26% of users delete the app from their phones, according to a September 2018 survey by Pew Research Center. The company’s stock plunged by over 20% and had to pay $5 billion in fines to the Federal Trade Commission for privacy violations.
Taking ESG criteria into consideration has been associated with higher returns over time. According to MorningStar Direct, more than 60% of funds that incorporate high sustainability ratings in their model, beat their respective benchmarks as of December 31, 2020. The percentage of funds that outperformed their benchmark decreases incrementally with ESG risk category, except for funds with a low ESG rating.