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‘Factoren op het gebied van milieu, maatschappij en ondernemingsbestuur (Environmental, Social, Governance; ESG) moeten onderdeel uitmaken van de algemene financiën.’ Dat was een van de belangrijkste conclusies van het vijfde jaarlijkse ESG Europe Event in Amsterdam, georganiseerd door responsible-investor.com en gesponsord door Robeco vanaf het begin.
(Dit artikel is Engelstalig)
ESG factors improve company analysis
Martine Menko, Investment Officer at the Dutch pension fund for the transport sector, was very clear: ‘There is nothing ethical or morally uplifting about ESG integration. To investors, ESG factors are an additional set of factors to analyze the companies we invest in. Including them in the analysis is a necessity, as they provide more insight in the risks a company runs or the competitive edge they have by anticipating relevant long-term threats and opportunities. Ethical or socially responsible investing is for a limited group of investors. Morals are, by definition, individual, and cannot be implemented by a pension fund.’
Exclusion not always the way to go
Paradoxically, exclusion is not always the most sustainable option either. This was the conclusion of one of the specialist sessions at the conference. Of course, there are companies that violate international laws, such as corporations producing cluster bombs or using child labor. The illegal character of these companies’ practices is beyond debate and it is clear to everyone that they need to be eliminated. In that case, exclusion is the only – and a powerful – option. However, industries such as tobacco and alcohol are not illegal and regardless of any moral or health objections one might have, these industries are here to stay. In this case, exclusion would be too easy and actually not sustainable at all. After all, excluding unsustainable companies means that they will remain unsustainable. It is more productive to engage with them to convince them to improve their ways. An example is to convince such corporations to refrain from marketing their products to young people. Excluding them is the field of ethical investors, not sustainable investors.
Companies benefit from sustainability
In terms of ESG integration, companies are clearly ahead of investors, increasingly integrating ESG factors into their decision-making. According to Erik Breen, head of Responsible Investing at Robeco, over 70% of global firms have sustainability on the top management agenda, against 20% only ten years ago. And rightfully so: a metastudy by Deutsche Bank shows that 100% of all studies investigated indicate that corporations with higher ESG scores have a lower cost of capital. Piet Eichholtz, professor of real estate and finance at Maastricht University, has even found that green companies have a lower beta, and are therefore less exposed to the systemic risk. Speaking of risk, although companies are still mainly using ESG as a ways to avoid risk - environmental risks in the deep-water drilling industry, for example - more and more companies are embracing ESG to create opportunities as well.
Lose the jargon
To allow analysts and investors to make an optimum assessment of a particular company, it is important that the latter is transparent and provides accurate reporting on the integration of ESG factors. Integrated reporting is increasingly demanded by both corporations and investors and the European Commission is working on regulations to make it mandatory. Mandatory or not, it is crucial that the information provided is clear and unambiguous. In this respect, Erik Breen made a case for stopping the use of sustainability jargon altogether. ‘Using a language that only sustainability experts understand does not help anyone. I sometimes feel like I am in Babylon, and this has to stop if we want to integrate ESG into mainstream finance.’