Investors aren't sold on 'values-based' investing, but they may be missing out

Protesters outside a Wells Fargo building in New York.
Erik McGregor | Pacific Press | LightRocket | Getty Images
Protesters outside a Wells Fargo building in New York.

Investing with your conscience may not your thing, but it's working for people who know where to look.

So-called "values-based" investing — putting money into companies with strong track records on the environment, social issues and corporate governance — has increased among major money managers. Scandals at Wells Fargo and Volkswagen show that misdeeds can crop up even at well-known firms, and can hit their stocks as well.

But still about a third of investors don't view socially conscious investing as a source of better returns than investing in the broader market, according to an RBC Global Asset Management survey released last week. Forty percent of respondents did not consider it a way to prevent losses, the report said.

Exploiting a 'perception gap'

Since investors "remain unconvinced" about socially-conscious investing's benefits for improving returns or preventing losses, that creates "a perception gap" for investors to exploit, a press release on the RBC study said. Ninety major market players completed the online survey, said RBC, which distributed the questionnaire to 1,000 institutional asset owners, wealth managers and pension plan consultants.

For example, banks have led the post-election rally, but Wells Fargo is still 4 percent lower for the year on revelations that the bank signed up consumers for products they didn't want. In contrast, JPMorgan Chase hit a 52-week high last week and is up nearly 20 percent for the year so far.

Analysts attributed the lukewarm sentiment toward environmental-, social- or governance-based investing (ESG) to a lack of data that shows significant benefits of applying a values-based strategy. The MSCI USA ESG Index, which focuses on environmental, social and governance issues, gained 4.01 percent over the 12 months ended Oct. 31. The MSCI USA Index is up 4.33 during the same period.

Where it is working best

Investment strategies focused on companies with a focus on ethical practices perform particularly well when applied to emerging market stocks.

The MSCI Emerging Markets ESG index had climbed 14.66 percent in the 12 months ended Oct. 31, while the broader MSCI Emerging Markets index was up only 9.67 percent over that time.

Emerging markets index gross returns from Nov. 2007 - Jan. 2016

Source: Glenmede

One reason for the outperformance in the emerging markets ESG strategy is that "companies that have low labor standards may have high litigation costs," said Asha Mehta, portfolio manager and director of responsible investing at Acadian Asset Management, which has $70 billion in assets under management.

However, not all companies may provide the same level of disclosure about labor standards. The majority of respondents to the RBC survey, or 43 percent, said they were either somewhat dissatisfied or completely dissatisfied with the amount and quality of ESG-related information companies reported.

Ben Yeoh, senior portfolio manager at RBC Global Asset Management, said academic research in the area is slowly growing, and it's pointing to benefits for investors. "Regardless of the politics … companies doing these things will benefit over the long term," he said.

As with any change in party leadership, the Republican sweep of the White House and Congress has renewed interest in topics such as renewable energy, a trend that's likely to translate into investor interest.

"If anything, the election outcome has increased the demand for ESG investing as investors look to fill a potential void from public policy," said Casey Clark, vice president of investment strategy at wealth management firm Glenmede. "Corporations are reacting to investor demand when it comes to" responsible investing.

I think this will become more and more mainstream as there's more data," Clark said. "I believe this is a long-term trend, only going to grow from here."