Masja Zandbergen, head of sustainability integration at Robeco
- Companies that adhere to ESG principles outperform those who do not
- Link with better risk-adjusted investment returns is backed by wealth of research
- This is not an exact science, though, and data scarcity and interpretation matter
Robeco has long believed in the benefits of sustainable investing. We are convinced that using financially-material environmental, social and governance (ESG) information in our investment processes leads to better-informed investment decisions and better risk-adjusted returns in the long run.
This belief is supported by a growing body of evidence. A good example is the meta-study on the relationship between ESG and performance, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance”.1 This paper 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”.
Another research project looked at the universe of 2,250 academic studies published on the subject since 1970, using data spanning four decades until 2014. It concluded that ESG made a positive contribution to corporate financial performance in 62.6% of meta-studies and produced negative results in only 10% of cases (the remainder were neutral).2
More narrowly defined studies also confirm this positive link. One study, for instance, shows that companies with stronger shareholder rights enjoyed higher valuations, profits and sales growth, had lower capital expenditures, and made fewer acquisitions.3 Another noted that companies with a high ecoefficiency outperform their counterparts.4
An interesting stream of research focuses on the financial pay-off of engagements by investors. A study of more than 600 publicly-listed US companies showed that, after successful engagement, firms’ investment returns were on average higher than would have been expected without the engagement. It also found that after successful engagement, companies experienced improvements in their operating performance, profitability and governance.5
Why are some still skeptical?
Despite the plethora of positive evidence, there nevertheless is some lingering skepticism about whether sustainability adds value. One of the main reasons for this is that the concept of sustainable investing is a broad one. For instance, some investors simply wish to avoid certain companies because of a mismatch in values. Much of the early academic work focused on these values-based exclusion policies.6
Another investor perspective could be to create a positive impact by allocating capital to specific companies or sectors that offer solutions to global issues, which may even supersede financial motive.
A trend which is increasingly evident is that investors aim to exploit the growing volume of data and knowledge on sustainable business models in order to improve their financial returns.
Different objectives, different outcomes
Objectives are important. If investors do not have any financial motives for taking certain steps – such as excluding particular companies – it is not uncommon to find that investing has a neutral or even negative impact on returns.
For fundamentally-managed equity strategies, the impact of excluding stocks may not be too material, as these portfolios typically already are concentrated. For quantitatively-managed strategies, however, restrictions usually tend to limit the power of the model, and therefore its expected performance. Nevertheless, empirical tests using historical data show that if the number of excluded stocks is modest, the universe is still large enough to retain most or all of its factor exposure.
We know from our nearly decade-long experience that integrating sustainability into the investment process is financially material. But we also know that doing so is not an exact science, given the difficulties relating to data availability and interpretation. We therefore continue our research into ESG factors to ensure that this information is implemented in our portfolios in the best possible way, and in line with our firm belief that its use in investment processes adds value to our strategies.
1) Clark, G.L., Feiner, A., and Viehs, M., 2014, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance”, SSEE Research Report.
2) Deutsche Asset and Wealth Management, 2015, “ESG and Corporate Financial Performance: Mapping the global landscape”.
3) Gompers, P.A., Ishii, J.L. and Metrick, A., 2003, “Corporate Governance and Equity Prices”, Quarterly Journal of Economics, Vol. 118(1), pp. 107-155.
4) Derwall, J., Guenster, N., Bauer, R., and Koedijk, K., 2005, “The Eco-Efficiency Premium Puzzle”, Financial Analyst Journal Vol 61(2), pp. 51-63.
5) Zhang, L., 2017, “The financial return of responsible investing”, Sustainable Pension Investment Lab.
6) Harrison, H. and Kacperczyk, M., 2009, “The price of sin: The effects of social norms on markets”, Journal of Financial Economics, Vol. 93(1), pp. 15-36