Putting money into sustainable companies between 2005 and 2011 would have yielded a return on investment 15% higher than investing in a benchmark index, according to a study by Oekom Research.

The sustainability analysis firm compared the performance of its Prime Portfolio Large Caps (PPLC) – a portfolio of 300 major companies that had satisfied its industry-specific sustainability requirements – against the 1,600 companies in the MSCI World Total Return Index, for the period from 31 December 2004 to 31 December 2011.

Over those seven years, the PPLC, when weighted by market capitalisation, achieved a cumulative return on investment of 30.9%, while the MSCI index achieved 26.8% – an improvement of 4.1 percentage points, or 15.3%. If equal weighting is given to the securities in the PPLC, their cumulative return on investment rises to 62.8%.

Furthermore, the outperformance was not achieved at higher risk, Oekom said, with the PPLC portfolio in fact slightly less risky than the MSCI.

Oekom undertook the study, in conjunction with Frankfurt-based portfolio analysis firm DPG, to dispel the belief that sustainable investors have to sacrifice returns.

“Underlying this is the belief that the use of exclusion criteria and a best-in-class approach, whereby only the most sustainable companies in an industry are invested in, will lead to a reduction in the size of the investable universe and consequently, according to current portfolio theories, to disadvantages in terms of return and risk,” the companies said.

Robert Haßler, CEO of Munich-based Oekom Research, said: “The results of the study confirm our hypothesis that sustainability performance is a good indicator of companies’ overall performance and that investors would be well advised to incorporate this indicator into their decision-making processes.”

Companies in the PPLC at the end of 2011 included telecoms group BT, pharmaceutical firm GlaxoSmithKline, metals and mining firm Norsk Hydro and consumer electronics giant Sony.

Haßler said the PPLC is not currently an investable index, but several mutual funds and the Global Challenges Index are based on the portfolio.

He added that the dates for the back-testing were chosen because “we have ratings based on a comparable structure and set of criteria for this period, and this period includes bullish and bearish markets and we wanted to analyse how the PPLC reacts in different market situations.”

By Christopher Cundy
Environmental Finance