Good news from our polite neighbors to the north: a new academic study commissioned by OceanRock Investments Inc. reveals that responsible investing (RI) benefits not only the environment, community, and corporate governance but also offers investors better returns, reduced volatility, lower risk, and more downside protection of capital. The study, titled “Canadian RI Mutual Funds Risk/Return Characteristics,” was conducted by the Carleton University Centre for Community Innovation, under the direction of Dr. Tessa Hebb, a leading RI author and researcher.
The study reviewed Canadian-based RI funds that invest based on environmental, social and governance factors (ESG), and measured their financial returns and – for the first time in Canada – risk characteristics against peer benchmarks.
Study findings related to returns show that Canadian-based RI equity mutual funds outperformed their non-RI peers 63% of the time, and Canadian-based RI fixed income and balanced mutual funds outperformed their non-RI peers 67% of the time.
Study findings related to risk metrics show Canadian-based RI equity mutual funds:
- Outperformed non-RI peer benchmarks on various risk measures 55% of the time, demonstrating the ability for RI funds to reduce risk in investment portfolios; and
- Showed stronger Sortino ratios than their non-RI peer benchmarks 72% of the time, indicating that RI funds provide better downside protection than traditional equity funds.
“The study results reveal that responsible investing provides a number of potential advantages for investors, including strong financial returns, reduced risk, and more downside protection than traditional mutual fund investments,” said Dr. Hebb. “Findings related to the significant correlation between RI and improved downside protection are new and notable, especially at a time when so many investors approaching retirement are worried about protecting their assets and want to sleep better at night.”
Previous Canadian studies have linked ESG to better financial returns, but none have studied whether taking ESG factors into account can protect against downside risk. The study suggests that investors who want to protect their investment assets while enjoying comparable returns should consider adding RI funds to their portfolios.
“This study represents a breakthrough for the RI market and investors who prioritize capital preservation coupled with growth,” said Gary Hawton, President of OceanRock. “We have suspected that responsible investing led to reduced risk and greater downside protection for investors, but that notion had not been quantified until now.”
“Investors need to consider the growing evidence on the benefits of responsible investing to ensure they are making the most of their investment opportunities,” added Mr. Hawton. “And financial advisors need to become more familiar with RI funds to ensure they are proactively providing the best advice to clients and offering the most appropriate investments.”
Critics suggest that RI may limit portfolio diversification, leading to reduced returns and increased risk. The empirical evidence, however, shows that RI generally improves overall returns and now, with the release of the study today, we know that RI in Canada also reduces risk and protects assets.
The survey results come at a time of strong and growing demand for RI in Canada. The report notes that RI is one of the fastest growing investment trends in the last decade. RI assets under management grew from $600 billion to more than $1 trillion in the two years to the end of 2013, representing a 68% growth rate.
The study was released at the Responsible Investment Association (RIA) Conference in Banff on Monday, June 1, 2015.