Ethics and Alpha

Can investing responsibly enhance returns? Aviva Investors takes an in-depth look at the relationship between responsible investing and performance.


In search of clarity, we set out to provide a wayfinding tool for investors by trawling through the academic literature, interviewing the experts and contrasting the theory with reality. And while our focus is on equity markets, we also touch on some of the key factors to consider in fixed income and real assets.


Friedman’s objection

Nobel Prize-winning economist Milton Friedman said: “There is one, and only one, social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”1

Friedman, perhaps the 20th century’s most celebrated free-market economist, described the idea that businesses had a responsibility to wider society as a “fundamentally subversive doctrine”.

His seminal article for The New York Times Magazine, published in September 1970, sparked a furious debate as to whether firms can increase their value by incorporating environmental, social and governance (ESG) considerations into their business operations. While that argument continues to rage nearly half a century later, and has expanded out to include bonds and real assets, there is a growing body of evidence to suggest they can.

Bell Pottinger, KPMG and Miramax are recent examples of what can happen to established companies when they fail to heed ESG factors. And with governments and other agencies expected to continue tightening regulations in the coming years – whether by forcing companies to cut their carbon footprint, increase the diversity of their workforce, or improve their management structure – common sense suggests forward-looking firms that are quickest to react to the changing landscape will have a competitive advantage.

From an investor’s perspective, if firms can indeed increase their worth by being ‘responsible’, various questions follow: Is there money to be made by investing in funds that exclude companies if they fail to abide by certain ESG criteria? If not, does integrating ESG considerations into the investment process, to complement traditional valuation yardsticks, improve investment performance? Is it worth engaging with companies to improve their ESG credentials? And can investors do anything to combat market failures?


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