Mar 13, 2019 Equities

Sustainable investments in the black

Some investors are still concerned that sustainability slows companies down, but their fears may be unfounded: many sustainable companies are extremely successful precisely because of their responsible approach to business.

  • Sustainability can be a path to success
  • Protecting the environment saves resources and money
  • Sustainable stocks are increasingly attractive
4 min. to read

"The social responsibility of business is to increase its profits," said U.S. economist Milton Friedman in 1970. Many investors are afraid that if a company starts to account for so-called ‘soft’ factors such as the environment, it risks losing money. This entrenched corporate bias against sustainable strategy is hard to shift. Protecting the environment and involving employees in decision-making? Although policies like these look good, for some investors they smack of poor performance: a sustainable corporate policy is expensive, it slows down decisions etcetera. Added to which sustainable companies come under scrutiny to comply with ESG criteria: do they care about the environment, look after their employees and demonstrate good corporate governance, for example?

Many private investors therefore do not believe that sustainable companies can be competitive. Less than ten percent of the financial inflows into sustainable securities come from private investors (it comes mainly from institutional investors), according to figures published by the Sustainable Investment Forum[1] 

12.4% Source: Total Societal Impact: A New Lense for Strategy, Boston Consulting Group, 2017

The profit margin of companies with a top ESG rating were up to 12.4 percentage points higher than those of the median performers.

What advantages do ethical investments offer?

However, studies show that an ethical and sustainable strategy often makes companies more successful than their competitors. In a meta-study conducted by DWS and the University of Hamburg in 2015[2], more than 2,000 studies were evaluated that looked at the relationship between ESG criteria and company performance. The result: almost 50 percent of the studies found a positive correlation.

The reasons given are highly plausible: companies which operate ethically and sustainably are thinking longer-term than their competitors, have to pay fewer fines because they adhere to environmental and social standards, and tend to be more innovative because of good management. They are often more stable than other companies, have fewer unplanned expenditures and enjoy a better public image.

Why being frugal pays off

Furthermore, those who use their resources sparingly have lower costs. The German drugstore giant DM, for example, has been using green electricity since 2012 to save energy (some of which it generates with its own photovoltaic and small wind turbines). Meanwhile, IT service provider Auticon focuses on inclusion by employing mainly autistic people. Not only has it made good on its social commitment in the eyes of its customers, but it benefits from the unique skills of its employees. Following this unusual approach, Auticon has grown steadily since it was founded in 2011 and now employs 200 people in six countries.[[DISLCAIMER:Source: Company Details, (15.02.2019)]] 

How does sustainability affect share price?

ESG can pay off for investors. Companies that adhere to sustainability standards usually have lower capital costs and perform better economically than other companies. That's why a sustainable strategy has a positive impact on a company's share price, according to a meta-study conducted by Oxford University in 2015.[3] The latest figures from Oekom Research[4] also back this up: their analysts compared the performance of shares in their Prime Portfolio (391 listed companies with high market capitalization and a sustainable strategy rated ‘best-in-class’) with the MSCI World share index with very positive results (see graphic). The Oekom Prime Portfolio consists of 391 listed companies with high market capitalisation, which Oekom previously selected from around 5,800 global company issuers because they performed best according to ecological and social criteria (best-in-class approach within an industry). They have the so-called "Prime" status and thus make up Oekom's Prime Portfolio.

How successful were green investments?

So, should investors be singing, "green, green, green is the colour of my shares"? As with all equity investments, the value of sustainable equities fluctuates, of course. But a glance back at the historical performance of ESG companies should provide ample cause for optimism. It turns out that a green corporate strategy more often results in solid black figures, not red ones.

All statements of opinion reflect the current assessment of DWS International GmbH and are subject to change without notice. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions and hypothetical performance analysis, therefore actual results may vary, perhaps materially, from the results contained here. Past performance, actual or simulated, is not a reliable indication of future performance.

DWS International GmbH as of March 13, 2019

CRC 065203 (02/2019)

1. Source: Forum Nachhaltige Geldanlagen, report on sustainable investment market 2018 – Germany, Austria and Switzerland

2. Source: ESG and financial performance: Aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, Issue 4, Dezember 2015

3. Source: From the stockholder to the stakeholder: How sustainabilty can drive financial outperformance, University of Oxford/Arabesque Partners, Social Science Research Network, 2015

4. Source: Oekom Research, Prime Pool Anlalysis, 2019

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