But they have been unable to prove the polar opposite – that ESG-based stock picks consistently produce above-average returns. So, the jury is not hung, but it is still out.

For instance, the 2007 Mercer report Demystifying Responsible Investment Performance, which was co-authored with the UN, looked at 20 academic and brokerage studies. Ten found a positive relationship between ESG issues and performance, seven were neutral and three were negative. The report concluded, “The evidence suggests that there does not appear to be a performance penalty from taking ESG factors into account in the portfolio management process.”

A report covering six years of data by EDHEC Risk and Asset Management in France also found no significant difference between the performance of socially responsible investing funds and mainstream equity funds. Accordingly, a growing number of investment professionals believe that considering ESG issues in portfolio choices does not harm growth perspectives and may, over the long term, actually help.

Today, many research teams focus on ESG issues and are working to make them a regular part of standard investment analysis that examines factors such as earnings per share, P/E ratios or return on equity. As they do so, some houses are also tinkering with their analysis models for examining ESG issues, given the financial crisis and the underlying governance issues surrounding subprime lending.

David Blood, a managing partner at Generation Investment Management, says sustainability investing is the explicit recognition that social, economic, environmental and ethical factors directly affect business strategy. He recently wrote: “Sustainability and long-term value creation are closely linked. Business and markets cannot operate in isolation from society or the environment. ”

Consider a recent proposal by the state of New York for a so-called fat tax of 18 % on sugary beverages. As one newspaper put it, the state wants to increase its budget by decreasing the size of its citizens. News items on the subject early this year were not just important for concerned citizens, parents and drink-industry lobbyists. They were of material interest to financial investors and something many will be watching closely and carefully.

Such a regulation and the effects it may have on the profitability of beverage producers may not have been a surprise to investors. A 2005 JP Morgan report, Obesity – Reshaping the Global Food Industry, correctly predicted that obesity would be a major health concern. It warned that changing consumption patterns and potential regulatory and litigation issues may impact the fundamentals of food and beverage companies. Companies that were embracing healthy products were experiencing above-average growth, while those that were not experienced slower or declining growth, it said.

The JP Morgan report and others on environmental, social and governance (ESG) issues illustrate the impact of non-financial factors on future financial performance of listed companies. To prove that protecting against such risks improves performance, some have employed the “best-in-class” method of benchmarking companies against others in their sector, according to their relative management of environmental, social and governance risks, and realization of environmental and social opportunities. This avoids labeling an industry, such as oil and gas, as “bad” and others, such as health care, as “good.” It is the idea behind the Dow Jones Sustainability Index.

Stan Becker, of Barclays Global Investors, told listeners during a talk on “Doing Well by Doing Good” in London last year, that studies of outperformance and ESG issues are inconclusive. Later, he added, “We [Barclays Global Investors] are continuing to evaluate how we can incorporate ESG factors in our investment process. The idea is to use these factors as ‘enhancers’ of our current process rather than launching purely ‘ESG-’focused funds. The objective is to find ESG factors that help our portfolios achieve/exceed their long-term outperformance objectives.”

A recent internal assessment was made of the Allianz RCM Global Sustainability fund, which applies best-in-class ESG criteria to a bottom-up stock-picking strategy. Based on information from data provider Innovest, RCM found that during three, four and five years, on a US-dollar basis, the annualized returns of the sustainable portfolio using stocks rated “A” by Innovest were ahead of those in a comparable unsustainable portfolio. Over two years, results were similar and during a single year with periods of high volatility, the sustainable portfolio was behind the less sustainable one. Bozena Jankowska, head of RCM’s Sustainability Research team, said, “We have eliminated the argument that there’s a definite penalty to ESG-based investing, but it’s not a silver bullet. ESG analysis is a tool for understanding the bigger picture.”

Becker said ESG issues will remain important in the future. Carbon emissions, pollution and human rights will continue to be front-page news and it is too early to expect ESG issues to show up convincingly in return/risk data. Sustainable development will drive economies during the next decades and, to protect against risk, must be taken into consideration in any careful investment analysis.