New White Paper Makes Business Case for Sustainable Investing
Article by Steffen Rufenach and Ellen Chiu
Do companies with high ratings in environmental, social and corporate governance (ESG) offer investors better stock market performance? A new white paper by Dr. Andreas G. F. Hoepner, lecturer in Banking and Finance at the University of St. Andrews, looks at ESG investing and suggests it offers opportunities for higher returns and reduced risks.
Here are Hoepner’s key findings:
- ESG investments grew nearly tenfold over the last decade and are still gaining momentum. It’s common sense that better corporate governance tends to be beneficial to shareholders. That, along with the availability of ESG datasets online, contributes to the growth of ESG investing.
- Datasets are available and accessible, but ESG investing is under-appreciated by the average analyst or investment manager because these datasets currently aren’t covered in many professional financial degrees. This presents an opportunity.
- Hoepner recommends that all institutional and private asset owners consider ESG data in their investment decision-making since portfolios of assets with high ESG ratings outperform their benchmarks. For example, investors in companies in Corporate Knights Inc.’s Global 100 ranking of the most sustainable companies would have outperformed their benchmarks between 2004 – 2008.
- Companies with high ESG scores show better credit ratings and a lower cost of debt.
Studies in the past have tried to show the correlation between ESG rankings and stock returns. Some of them found clear evidence, like this March 2012 paper by Robert G. Eccles, Ioannis Ioannou and George Serafeim for the National Bureau of Economic Research.
In this sense, the outcome of Hoepner’s new study is not surprising. What is interesting is the clear message he has for investors – start using ESG data now. For Hoepner, ESG data offer a competitive advantage because it’s currently underused when portfolios are being built.
Hoepner’s study is based on short-term analysis and may not stand against Deloitte’s review from earlier this year, which finds that long-term evidence missing for the impact of ESG. Nevertheless, Hoepner is in line with Deloitte’s argument that companies prepared for ESG shocks can better mitigate risks.
Overall, I think the white paper makes a persuasive case – there are incentives for companies to improve their ESG performance. In a time of cheap money, the effect of the lower cost of capital and better credit ratings may not be so significant, but I’m very curious to see the difference when interest rates go up again.
During her panel speech at this year’s GRI Global Conference on Sustainability and Reporting, Barbara Kux, chief sustainability officer of Siemens, cited Hoepner’s study as one of her key arguments of why a strong ESG performance pays out for companies. This, to me, is a good sign that the case for ESG investing is reaching the boardrooms.