Data proves ESG strategies drive superior investment returns

Source: © 123rf 123rf Conway Williams, head of credit at Prescient Investment Management says ESG has evolved into a crucial component of modern risk management

However, the importance of ESG considerations in investment management has been a topic of growing debate, with some global asset managers questioning their effectiveness.

Detractors claim that ESG integration has been overstated and may not deliver the expected benefits.

Conway Williams, head of credit at Prescient Investment Management (PIM) disagrees. “At Prescient, we take ESG seriously because we understand that it is instrumental in creating long-term value for our clients."

When implemented correctly, ESG serves as a vital tool that strengthens risk management and drives improved long-term financial performance for investors.

Stronger financial performance

Multiple studies have highlighted ESG’s role in delivering superior investment returns.

Morningstar research revealed that over 10 years, 58.8% of sustainable funds outperformed their traditional counterparts.

Similarly, the NYU Stern Centre for Sustainable Business analysed 1,000 studies conducted between 2015 and 2020 and found that ESG and financial performance were positively linked in 58% of the corporate research papers.

Williams says the data speaks for itself.

“These findings show that ESG-integrated investment strategies do, in fact, lead to stronger financial performance.

“It’s not just about following trends – ESG helps us navigate a complex investment environment, identifying risks and opportunities that other strategies might miss."

Not the norm

While some critics accuse asset managers of either being sceptical of ESG or engaging in "greenwashing" (where companies or funds falsely claim to be more environmentally or socially conscious than they actually are), this is not the norm across the entire industry.

"Greenwashing exists, but it’s important to understand that not all asset managers are guilty of this practice. We ensure that ESG is deeply embedded into our investment process through rigorous, data-driven approaches.

“It’s not a superficial exercise for us – it’s fundamental to how we create and preserve value for our clients,” explains Williams.

ESG factors should be thoroughly integrated into every stage of the investment process.

This is not about paying lip service to sustainability, but about creating resilient, long-term strategies that genuinely address environmental, social, and governance risks.

A comprehensive risk management tool

Despite the challenges associated with standardising ESG criteria, research consistently shows that ESG frameworks lead to better risk management and improved long-term financial outcomes.

"ESG is more than just a framework for sustainability. It’s a comprehensive risk management tool that helps identify and mitigate non-financial risks.

“Whether it’s environmental concerns, social inequalities, or governance issues, ignoring these risks can lead to financial consequences.

“By integrating ESG, we’re helping our clients build resilient portfolios that can withstand these challenges," explains Williams.

Beyond promoting ethical practices

ESG’s role goes beyond simply promoting ethical practices – it provides an analytical framework that helps investors identify risks that could materially impact financial performance.

As Williams notes, PIM’s ESG strategy is not about "saving the world" but about using all available tools to manage risk and achieve sustainable growth.

ESG’s value transcends political agendas

While the ESG debate has become increasingly politicised in regions such as the US, Williams is clear that ESG’s value transcends political agendas.

"ESG is not about politics – it’s about risk,” says Williams.

“Climate change, poor corporate governance, and societal disruptions all pose significant risks to our investments. Ignoring these factors is not an option.

“By integrating ESG, we’re not just making socially responsible decisions, we’re protecting our clients’ investments."

South Africa

In South Africa, the regulatory environment supports ESG integration.

Regulation 28 of the Pension Funds Act mandates that fiduciary investors consider both financial and non-financial risks, including ESG factors, in their decision-making processes.

This ensures that asset managers are required to account for environmental, social, and governance risks when managing retirement funds, further underscoring the importance of ESG in South Africa’s investment landscape.

“We believe that integrating ESG into our investment processes enhances the quality of our risk management and leads to more resilient portfolios. This helps us deliver superior, risk-adjusted returns to our clients,” says Williams.