Sustainable investing is subject to more myths than any other style of investment. And perhaps the first and foremost is the idea that it means sacrificing performance – giving up returns in pursuit of some sort of perceived ideal.
So, where does this myth of poor performance come from? Part of the reason is that in some cases, adopting sustainability does require investment – it costs money to implement it. Energy companies retooling to focus more on renewables do indeed need to spend millions on new infrastructure. Sourcing products from suppliers that pay their employees properly means costs go up. Less tangibly, a company with poor diversity may need to pay third parties such as recruitment consultants, also raising costs and cutting short-term returns.
This should, in theory, mean that companies that take sustainability seriously underperform. In fact, the reverse is usually true: the use of environmental, social and governance (ESG) principles by companies and investors can be shown to enhance performance. This is primarily due to the ability to reduce risks, particularly as standards are raised in all three domains to combat climate change or bad corporate behavior.
At the core of improving decision-making by including ESG information in the process is taking an investment perspective and only analyzing issues that are financially material – they go to the core of a business. In other words, the focus should be on researching those ESG issues that have a direct financial outcome on company results in the longer term, and therefore feed through into investment returns. For a utility, these would be issues related to energy efficiency of its operations and its strategy towards the energy transition. For a bank, this would be governance, risk management culture and product stewardship.
Further, adopting ESG can lead to opportunities, or reduce risks. For example, the trend towards the adoption of electric cars has generated investment opportunities in both the car makers and their suppliers, including the new smart materials being produced such as lithium for batteries. Meanwhile, the role of ESG in reducing risks can be seen in how it has exposed potential supply chain problems in industries that had been reliant on cheap labor such as fashion and retailing. This in particular allows investors to pick the ‘wheat from the chaff’ when deciding which stocks or bonds to buy, in a ‘best-in-class’ approach.
Four studies looking at this ‘added value’ issue in the past three years are particularly noteworthy. The extent to which this can add and not subtract value was first demonstrated in abstract in a 2015 study, ‘From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance’ by Oxford University and Arabesque Partners. This examined more than 200 sources including academic research, industry reports, newspaper articles and books, and concluded that “80% of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance." 1
A separate survey later that year by Deutsche Bank’s asset and wealth management division in conjunction with the University of Hamburg went much further. The research examined the entire universe of 2,250 academic studies published on this subject since 1970, using data spanning over four decades until 2014. It concluded that ESG made a positive contribution to corporate financial performance in 62.6% of meta-studies and had negative results in only 10% of cases (the remainder were neutral).2
Better corporate results should in theory feed through into higher share prices. A 2016 study by Harvard Business School directly linked better performance and disclosure on material ESG issues to higher share prices for the first time. The paper entitled ‘Corporate Sustainability: First Evidence on Materiality’ made a clear case for the financial benefits feeding through into asset values.3
And sustainable investing is also about active ownership, partly achieved by engaging with companies to improve their ESG standards. This can also be shown to enhance returns. A 2017 research paper by three academics analyzed a dataset of 660 companies that had agreed to some form of engagement for a range of ESG issues, with 847 separate engagements in total.
The research found that the engaged companies saw stock returns that were 2.7% higher than non-targeted firms in the six months after the engagement ended. The results for companies which previously had had low ESG scores were even more marked, as their share prices outperformed non-targeted companies by 7.5% in one year after the end of the engagement.4
Taken together, a growing body of evidence concludes that companies which are progressively more sustainable today will reap the rewards in the future – and it may even save their businesses. Oil companies, for example, are slowly changing their business models to replace fossil fuels with renewables, while car makers are switching to electric vehicles, and retailers are sourcing only from suppliers with verified human rights records.
Should carbon limits ever be introduced, those companies that are cutting their carbon footprints now will be better placed to deal with new regulatory or governmental regimes in the future. This is already an issue for real estate companies, and for virtually all utilities. Meanwhile, the greater efficiencies enjoyed today will cut costs and raise profits.
Put simply, taking sustainability issues into account leads to better-informed investment decisions, and that leads to better returns in the long term. This is why Robeco remains convinced that it works, and has integrated ESG analysis in the investment process for fundamental and quantitative equities, and for fixed income.
1Clark, Gordon L. and Feiner, Andreas and Viehs, Michael, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (March 5, 2015). Available at SSRN: https://ssrn.com/abstract=2508281 or http://dx.doi.org/10.2139/ssrn.2508281
2Deutsche Asset and Wealth management, ‘ESG and corporate financial performance: mapping the global landscape’, December 2015 https://institutional.deutscheam.com/content/_media/K15090_Academic_Insights_UK_EMEA_RZ_Online_151201_Final_(2).pdf
3 Khan, Mozaffar and Serafeim, George and Yoon, Aaron S., Corporate Sustainability: First Evidence on Materiality (November 9, 2016). The Accounting Review, Vol. 91, No. 6, pp. 1697-1724. Available at SSRN: https://ssrn.com/abstract=2575912 or http://dx.doi.org/10.2139/ssrn.2575912
4 Tamas Barko, Martijn Cremers and Luc Renneboog, ‘Shareholder Engagement on Environmental, Social, and Governance Performance’, Working paper for the European Corporate Governance Institute, 2017 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2977219
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.