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Fresh capital has not run dry for unsustainable firms

Fresh capital has not run dry for unsustainable firms

11-03-2021 | 研究
Despite rising interest in sustainable investing, unsustainable companies have faced no obstacles in raising funds in public markets. To deprive these businesses from fresh capital, sustainable investing needs to become ’business as usual’ in the investment community.
  • David Blitz
    David
    Blitz
    Chief Researcher
  • Jan Anton van Zanten
    Jan Anton
    van Zanten
    SDG Strategist
  • Laurens Swinkels
    Laurens
    Swinkels
    Researcher

Speed read

  • Sustainability has garnered increased attention in recent years
  • Yet unsustainable firms have not been starved of fresh capital
  • Sustainable investing must become the norm going forward

Sustainable investing has gathered rapid momentum in recent years. This impulse is shifting the goalposts for investments, as investors are increasingly looking for solutions that make an impact alongside financial returns. Asset managers and owners can reach these objectives through active ownership and capital allocation. With active ownership, they can pursue their sustainability goals by voting at shareholder meetings and engaging in constructive dialogue with firms to steer their behavior. They can also vote with their feet, through their capital allocation choices.

Sustainable investing is not limited to negative screening, as it also entails taking larger positions in sustainability leaders

Excluding companies, for example ‘sin stocks’, from investable universes is a popular way to make an impact through capital allocation. However, sustainable investing is not limited to negative screening, as it also entails taking larger positions in sustainability leaders. This can be done with the integration of environmental, social and governance (ESG) indicators in investment processes, targeting carbon footprint reductions in portfolios, or aligning investments with the United Nations’ Sustainable Development Goals (SDGs).

There can be many reasons to divest from unsustainable firms and shift capital towards more sustainable ones. Some investors are content with simply disassociating themselves from certain businesses, such as the tobacco industry, regardless of whether this will have any effect on the actual production and consumption of tobacco products. Others see it as a signaling tool, even though they acknowledge that this approach likely has no direct impact on the related companies. The third and most ambitious reason is to allocate capital in a way that supports sustainable companies and hurts unsustainable ones. This approach can incentivize the latter to improve their corporate behavior.

Measuring the impact on a firm’s cost of capital

Our analysis examines how sustainable investing has affected capital flows and the financing needs of companies. In principle, divestment would negatively affect the targeted firm, but this mechanism is actually not so clear-cut. Divesting results in a transfer of ownership from one investor to another, which has no direct impact on the firm. However, divestment may hurt companies indirectly by increasing their cost of capital. With this in mind, we argue that the ultimate impact of sustainable investing on listed companies is best evaluated by examining the primary market, i.e. new issues of bonds and stocks.

In our study, we considered all stocks in the MSCI All Countries World Index over the 2010-2019 period. We classified a company as an equity issuer if its number of shares outstanding increased by at least 10% over the year. Similarly, we categorized a company as a debt issuer if the book value of its debt increased by at least 10% over the year. To distinguish between sustainable and unsustainable businesses, we used a broad range of metrics, namely ESG, carbon footprint and SDG dimensions.

Our analysis showed no evidence that fresh capital flowed more towards sustainable firms than towards unsustainable ones

Our analysis showed no evidence that fresh capital flowed more towards sustainable firms than towards unsustainable ones. More specifically, it appears unsustainable companies faced no obstacles in raising funds in public markets. Indeed, the sustainability profile of equity issuers was generally similar to the broad market, while debt issuers even tended to have a below-average sustainability profile. Moreover, our results were stable over time. Capital did not flow more towards sustainable firms in recent years than before.

Therefore, our results suggest that sustainable investing has not been able to starve unsustainable companies from fresh capital over our sample period. We acknowledge that if sustainable investing continues to grow, it may become increasingly hard for unsustainable firms to obtain fresh funding in capital markets. But how much growth would be needed for that, and whether such a scale is realistically attainable, remain open questions.

To deprive unsustainable companies from fresh capital, sustainable investing needs to become ’business as usual’ in the investment community.

Important information

The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the Securities and Futures Commission in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

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