Can ESG make you richer?
Looking ahead towards retirement can be terrifying for many – I know it is for me. With the world rapidly changing around us, it can be very hard to keep up with new generations. Nevertheless, we want to leave a better world behind for our children. Making investment decisions based on the sustainability of a company sounds like a good way to decrease our negative footprint. But do we want to risk our financial independence when we are old in exchange for a better conscience? Is “doing good by doing well” a viable strategy when managing our hard-earned savings?
Decades of campaigning for the awareness of climate change and putting importance on sustainability has gained the attention of the financial markets. Environmental, social and corporate governance factors have been trending for a while now. But what is the hype around ESG all about and why do investors favor sustainable investments over traditional approaches?
Four factors have made ESG investments especially attractive to many:
SUSTAINABILITY: Acting sustainably has two major benefits:
- In a world where resources are scarce, using less to produce more is a long-term competitive advantage. Companies that invest into new techniques which are more efficient have an edge over their competitors. This improvement is resulting partially in more ecological sustainability.
- Regulators around the world incentivize sustainable behavior by heavily taxing the costs of externalities such as CO2 emissions or waste water pollution.
HOLISTIC PICTURE & LONG-TERM THINKING: ESG investing embraces a long-term view of companies’ value and performance, rather than focusing on short-term financial results. In other words, the impact of ESG compliance on companies’ performance might not be immediately visible but could take some time to show its effects. A holistic screening also covers nonfinancial aspects when judging a companies’ mid- and long-term performance outlook.
ESG AS A POWERFUL MARKETING TOOL: Corporate social responsibility (CSR) can also act as a brand strengthener. Companies such as Ben & Jerry’s are some of the best examples of how sustainable environmental and social practices helped them reinforce their brand and reputation among customers and stakeholders. As such, ESG can be used as an effective marketing strategy. Multiple studies have indeed found evidence of a link between positive brand image and customers’ willingness to pay higher prices. This, coupled with an increasingly conscious public, have made more and more companies and their investors welcome sustainable practices.
RISK MANAGEMENT: What do BP and Volkswagen have in common? Both companies were marked by environmental scandals that cost them billion-dollar penalties. Their stock performance plummeted as a consequence of their ESG misconduct. BP’s responsibility in the Deepwater Horizon Oil Spill caused a significant drop in the price of its shares in 2010. Similarly, in 2015, Volkswagen’s carbon emission scandal was followed by severe decline of its share price.
In light of this, CSR can act as a risk management instrument to avoid the pricey consequences of ESG mismanagement. Lars Kaiser finds in his study on “ESG Integration: Value, Growth and Momentum” that investors can “raise their sustainability performance without sacrificing financial performance”. For this reason, ESG has become an increasingly popular “must” in investors’ checklist when deciding to buy a share.
SAVING THE WORLD FOR FREE
As of today, different studies have shown different results regarding the question, if ESG investment strategies can add Alpha to a portfolio. Most studies conclude that using ESG data when making an investment decision won’t hurt the performance. A majority of outperformance that ESG portfolios show can be explained by traditional effects such as size, prominently stated in the CAPM model. Responsible investment comes at zero cost which makes it an attractive selling point. Investors don’t have to sacrifice profits when applying ESG as an additional filter. Doing good isn’t expensive!
 JOHAN ANSELMSSON, NIKLAS VESTMAN BONDESSON, ULF JOHANSSON, (2014) “Brand image and customers’ willingness to pay a price premium for food brands”, Journal of Product & Brand Management, Vol. 23 Issue: 2, pp.90-102, https://doi.org/10.1108/JPBM-10-2013-0414
 KAISER, LARS (2018): “ESG Integration: Value, Growth and Momentum”, page 1