How can you build your responsible investment portfolio? With little money and a lot of strategy, says Kimberly Gladman, CFA, Ph.D. Director of Research and Risk Analycs for GovernanceMetrics International, Inc. Gladman's analysis shows that RI portfolios can sometimes outperform benchmarks, but it's the specialist's expertise that really sets RI into growth mode. In her white paper, Gladman highlights the top 10 things every investor and strategist should know about responsible investment and performance:
1. Research shows that on average and in the aggregate, RI portfolios perform comparably to conventional ones. In the case of the actual investable products, Gladman says that because portfolios are constructed according to many different methodologies, they draw upon different asset classes and pools of securities.
2. Investment-specific definitions of RI vary. RI can include social elements like employees, customers, communities, governments, the environment as well as economic elements including private equity, real estate and fixed-income investments.
3. There are many RI strategies investors can apply. Through direct dialogue and shareholder resolution filings, Gladman says responsible investors can encourage companies to improve their social, environmental and governance practices.
4. RI does not have to be bad for diversification. Gladman points out three aspects of diversification: the number of securities available to choose from; the correlations among those securities; and the volatility of those individual securities.
5. Responsible investors’ analysis of ESG factors sometimes flags unpriced risks and opportunities that are soon to be recognized by the market. According to Gladman, individual ESG data points 'may serve as indicators of future firm and stock price performance and may therefore be incorporated profitably into active investment management.'
6. In other cases, the ESG risks and advantages identified by responsible investors are either already priced by the market, or will only affect stock prices in the long term. In this case, the value of some ESG factors is already recognized by the market and therefore offers limited advantages to active managers.
7. The impact of ESG variables varies with industry, firm and other factors. Part of a responsible investment professional’s expertise, says Gladman, is the ability to assess how industries, and individual companies, are differentially affected by ESG issues.
8. Responsible investment is a specialized skill. To capture the success of RI, Gladman notes that specialist expertise is required to outperform using responsible investment strategies.
9. Responsible investment may confer benefits by correcting the externalization of costs, and encouraging positive externalties. In her report, Gladman points out that RI can financially or economically have measurable impacts based on a company's employees, communities, ecosystems, or other stakeholders.
10. 'Values' can be linked to 'value.' While often unquantifiable, Gladman reminds investors that RI is based equally on importance and issue, although not always an immediate cost-generator.