Responsible and sustainable investing – which considers both financial and social good when making investment decisions – is much more than a noble trend. It is increasing in popularity and – according to the statistics – with good reason. There is evidence that responsible investing is a key driver of long-term value creation and actually increases shareholder returns. Can this trend really offer the best of both worlds to investors?
There doesn’t have to be a trade-off between financial performance and responsible investing
Despite the perception that to invest responsibly, investors have to sacrifice competitive financial returns; studies conducted by Sustainable Asset Management (SAM) reveal that companies with high sustainability scores outperformed their counterparts with low sustainability scores.
The results also reveal a positive relationship between sustainability and financial performance, as measured by stock returns, during both the financial crisis and post-crisis periods. This suggests that optimal sustainability portfolios may have inherently better risk characteristics.
Cromwell Mashengete, Portfolio Manager at Prudential supports this: “Overall, the findings of this research confirm that companies that adopt sustainability best practices are not contradicting or neglecting their primary objective, which is to maximise their shareholders’ profits. Investing in sustainable companies contributes to superior long-term investment results with improved risk profiles.”
Portfolio volatility can be reduced by investing in sustainable companies
In addition, a recent study by Eccles, Ionna, and Serafein, The Impact of a Corporate Culture of Sustainability on Corporate Behaviour and Performance, indicates that sustainable companies outperform a matched group of firms in the long run. The study found that US$1 invested in a value-weighted portfolio of sustainable firms at the beginning of 1993 would have grown to US$22.6 by end of 2010.
Responsible investing is gaining popularity as a key determinant of evaluating investment opportunities
Asset owners and asset managers with US$ 30 trillion in assets under management, about 20% of the world’s capital, are signatories to the UN Principles for Responsible Investment (UN PRI) – a network of international investors who commit to incorporate environmental, social and governance (ESG) issues in their decision making and ownership practices. “The belief is that investors should examine the corporate social responsibility practices and performance of companies because they have a material impact on financial performance,” says Mashengete.
Including environmental, social and governance ensures a complete evaluation
ESG indicators cover corporate governance, human capital, society and environment factors.
- Some of the key ESG indicators for corporate governance include business ethics, board leadership and independence, remuneration and share-based compensation, audit independence and protection of minority shareholder rights.
- Human capital indicators include employee training programmes, health and safety management and employee remuneration. Societal indicators look at human rights, community investment, reporting and leadership on sustainability and gender diversity and BEE.
- Carbon dioxide emissions, fresh water consumption, waste production and energy consumption are just a few of the environmental indicators highlighted.
Responsible investing yields financial and social returns
“Responsible investing encourages custodians of investors’ funds to generate long-term financial returns in a responsible manner that recognises the external costs, the cost that a producer or a consumer imposes on society, that are incurred by the companies that we invest in,” says Mashengete. “This strategy means that we should encourage companies that we invest in to include these external costs in the price of their products or services they render,” he adds.
To truly reap the results of responsible investing, companies need to remain committed to this Mashengete emphasises that to maximise the benefits of responsible and sustainable investing, companies however need to truly embrace these values and not treat them as a compliance checklist. Companies can maximise long-term value creation by integrating ESG factors into the company strategy, the measurement of outputs, and the assessment of risks and opportunities.
Research accompanied by anecdotal evidence and a groundswell of industry opinions makes a strong case that the investment industry will see a steady increase in the incorporation of ESG factors in global and local investment decisions.
*Cromwell Mashengete, portfolio manager at Prudential