ESG: A Just reward

With research claiming that better behaved companies make superior investments, is ESG on the verge of a mainstream breakthrough? Mark Dunne reports.

“The key message that we have seen is that ESG is a tool to achieve better risk-adjusted returns.”

Guido Giese, MSCI

It sounds too good to be true. Companies who avoid the “do anything to make money” mantra in favour of adopting better corporate behaviour could make more money and ultimately boost shareholder value. This is the conclusion of Foundations of ESG Investing, a paper published by index and analytics specialist MSCI that looks at how a healthy environmental, social and governance (ESG) policy affects valuation, risk and performance. It has widely been accepted that companies scoring high on ESG benchmarks carry lower risks, but now it seems there is evidence that they could be more profitable and trade on higher multiples. Those adopting practices, such as providing greater transparency to shareholders, employing a more diverse management team and reduce climate change risks from their operations, could report greater profits, trade on higher valuations and could even yield larger dividends. “Companies with good ESG ratings are significantly more profitable and pay higher dividends,” says Guido Giese, executive director, applied equity research at MSCI. “Knowing that companies with good ESG characteristics in the long run are good dividend payers is definitely a motivation for pension funds to look into ESG,” Giese adds. Newton Investment Management investment director Jon Bell agrees with MSCI’s findings. “We have long believed that a good ESG policy is part of being a successful company,” he says. To back this up the firm is launching a range of sustainable funds. It has already launched sustainable equity funds targeting the US and global markets. Sustainable absolute return and a sterling corporate bond fund are expected in the coming months. Other institutions share Newton’s and MSCI’s bullishness. “ESG momentum, or improving ESG performance, aligns to Invesco’s focus as valuation-led investors,” says Cathrine De Coninck-Lopez, head of ESG at Invesco Perpetual. “Stocks that have improving ESG performance, also often have improving valuations,” she adds. “Furthermore, the opportunity related to sustainability of future earnings, is potentially better for companies that produce in an innovative, less resource intensive manner; or provide solutions for the world’s problems.” If proof were needed of investor bullishness, the negative impact on share prices of poor ESG standards have been laid bare by scandals involving BP, Volkswagen and now one of the darlings of the social media world, Facebook.