Impact Blog

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Gary Greenberg, Portfolio Manager, Hermes Investment Management, Calvert Sub-Adviser

      London - As investors, we face difficult questions. What are the full implications of investing in a company — on the environment, society and on all shareholders — and can they be divorced from the movement of its stock price? Although we view pursuing strong results for our clients as a fundamental responsibility, we believe the decades-old conventional wisdom to "focus on short-term, quarterly returns at the expense of all else" is a paradigm that needs to be re-examined.

      In our extensively interconnected world, it is difficult - and perhaps not prudent - to separate a company's behaviors from its investment value. That type of disconnect can make investing incompatible with promoting solutions to the very real problems and risks we face as a civilization.

      In Hermes' view, if we as investors are to profit from a company's gains, we are also responsible for ensuring that both its gains — and ours — are not ill-gotten. That means extra work in analyzing companies: understanding externalities, governance practices, environmental impacts, treatment of workers and their influence on local communities. The first step is to understand the company in light of its environmental, social and governance (ESG) practices.

      Beyond risk: ESG material to performance

      In emerging markets, some ESG risks are intensified and more expensive to address than in the developed world. Industrial pollution, autocratic governments, issues of extreme income inequality and grave human rights abuses come to mind. And the lack of transparency and disclosure that is widespread in many emerging markets makes the situation even murkier and therefore difficult to assess. ESG transgressions can result in harsh financial consequences for companies and investors, particularly over the long term, if left unchecked.

      The good news is that taking ESG considerations into account can translate into higher rewards— not only in terms of societal good but also in terms of shareholder value.

      Image for Calvert Blog 1-9

      Research by Hermes' global equities team has demonstrated that, in developed markets, avoiding companies with bottom-decile corporate governance rankings can add as much as 30 basis points (bps) per month to returns.1 Although the data to measure the impact of ESG in emerging markets is limited, we believe evidence of the efficacy of ESG integration in our universe is shown in the outperformance of the MSCI Emerging Markets ESG Index over the MSCI Emerging Markets Index, as illustrated in the chart above.

      A study by the European Centre for Corporate Engagement (ECCE) also shows a strong correlation between good ESG practices and financial performance among emerging-market companies.2 The study analyses ESG and returns data from Sustainalytics, Governance Metrics International and Factset, covering the period 2010-2015. It shows that companies with strong or improving ESG ratings often outperform lower-rated peers, and that avoiding companies with significant or severe ESG controversies can generate higher risk-adjusted ratios.

      In our view, it is part of our duty to integrate not only these risks — but also the ethics of the situation — into our investment decisions and engage companies about them — for the benefit of our clients, their investors and for the innocent bystander (future generations).

      Bottom line: In emerging markets, ESG risks are often amplified, more expensive and less transparent than in the developed world. Assessing ESG risks in these markets is critical to both societal and financial outcomes.