A growing body of empirical research shows that ethical and sustainable business practices facilitate corporate risk management and exploration of financial, social and environmental risks, obligations and opportunities can make them more profitable than firms that cut corners or ignore such issues. This also makes them more attractive and secure investment for investors.
We take a look at key studies which these findings.
Relationship between ESG and CFP
Collaborative research between the University of Hamburg and Deutsche Asset Management of more than 2,000 academic studies on the relationship between ESG and corporate financial performance (CFP), showed that 62.6% per cent had positive correlation between sound sustainability practices and financial performance.
Sustainably minded companies may actually perform better than average
Morgan Stanley cites a Harvard Business School study as follows: Investing a dollar 20 years ago in a select portfolio of public companies focused just on growing their businesses, would have resulted in a return of $14.46. While this may seem profitable, compare this to the same dollar invested in a portfolio of companies that focused on the most important environmental and social issues while growing their businesses – that same dollar would’ve grown to $28.36. (Serafeim, G. (2014). Turning a Profit While Doing Good: Aligning Sustainability with Corporate Performance. Brookings Institution. Khan, M. Soon, Serafeim. (2015). Corporate Sustainability: First Evidence on Materiality. Cambridge: Harvard Business School.)
This increased return results from focusing on components which enhanced their businesses and productivity such as conserving water and energy, which necessitated their CEOs focusing on the long term and providing high-quality, diverse workplaces that lead to greater employee satisfaction, retention and productivity.
The same article explains that in one meta-analysis, 88% of studies found that companies that adhered to social or environmental standards showed better operational performance, and 80% of studies showed a positive effect on stock price performance. (Clark, G. L. (2014). From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Out-performance. Oxford University Smith School of Enterprise and the Environment).
The 2018 Annual Impact investor Survey of the GIIN (Global Impact Investing Network), illustrates the growth of the impact investing industry, citing that over 50% of the survey respondents made their first impact investment in the past decade as a way of illustrating the ongoing entry of new players to the industry. Together, 225 respondents invested USD 35.5 billion into 11,136 deals during 2017 (Table iv). These respondents plan to increase the amount of capital they invest by 8% and the number of deals by 5% during 2018. The subset of five-year repeat respondents increased the amount of capital invested that year by 27% and the number of deals made by 32%.
The 82 respondents that completed the survey five years ago and again this year demonstrated a compound annual growth rate (CAGR) of 13% for their collective AUM, growing from USD 30.8 billion in 2013 to USD 50.8 billion in 2017. This growth was spread out across the majority of regions, sectors and instruments, but was particularly pronounced in regions (East and Southeast Asia, MENA, Oceania), sectors (education and food & agriculture) and instruments (public equities) that have historically accounted for relatively smaller portions of global AUM, indicative of an expansion of the market across multiple vertices.
Impact sectors as investment opportunities
“Many of the most exciting investing opportunities are in the fast-growing sectors which are also impact sectors. That’s a realisation that is quite new,” says James Gifford, head of impact investing, global wealth management, at UBS.
Dutch asset manager Robeco looks at sustainable investments as those which focus on combining ESG components and active ownership, such as engagement and voting.
According to said Masja Zandbergen, head of ESG integration at Robeco, the Dutch asset manager is engaging in talks with Asian companies on topics such as board independence and quality, remuneration policies and capital allocation policies. Monitoring ESG factors means better regulation of company policies which in turn makes for more stable investments. “To start reporting on carbon footprint or human capital management will lead to more knowledge and ultimately better policies and procedures. We believe that good ESG policies in the long run will lead to better and more stable investment returns,” says Zandbergen.
- Clark, G. L. (2014). From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. Oxford University Smith School of Enterprise and the Environment.
- Serafeim, G. (2014). Turning a Profit While Doing Good: Aligning Sustainability with Corporate Performance. Brookings Institution. Khan, M. Soon, Serafeim. (2015). Corporate Sustainability: First Evidence on Materiality. Cambridge: Harvard Business School.