Environmental, social and governance (ESG) investing has not compromised but actually increased returns in equity markets over the past two years, the EU’s securities regulator has found.
The European Securities and Markets Authority (Esma) said that this also applies when taking volatility into account.
Risk-adjusted returns of ESG indices have consistently outperformed the corresponding benchmark, the Euro Stoxx 50, in recent years (see charts below).
While it assessed this to be a result of increasing investments in sustainable, long-term strategies; short-termism in financial markets has accelerated as well, Esma wrote in its report.
Stocks were being held for record short periods of time, it said.
As excessive short-termism poses a risk to financial stability, the EU’s action plan on sustainable finance seeks to limit short-termism pressure from financial markets.
What are the causes?
A potential source of short-termism is misaligned investment horizons in financial markets.
Adding to this, “sell-side investment research and the remuneration of fund managers and executives are identified as potential factors determining excessive focus on short-term results”, Esma noted.
Almost half of survey respondents (45%) believe that sell-side analysts contribute to short-term investment behaviour to a large extent.
Esma also suggested that investors could take more long-term investment decisions if they engaged with companies and had better-quality ESG data.
Currently, ESG lacks a standard definition and the data is neither comparable nor reliable.
The European Commission has announced that it is actively looking to resolve this issue.
The report also pointed out that, looking ahead, a weakening economic outlook and continuing uncertainty over global trade negotiations and Brexit remain key risk drivers.