13. Aug 2019 Sustainability New

MSCI investigates: What are the real advantages of sustainable investing?

Everyone knows that sustainability benefits the environment. But does it also provide financial benefits? Current studies indicate yes.

  • Recent research confirms that sustainable investment is more profitable for investors.
  • History has shown that companies with a good ESG rating pay higher dividends, for example.
  • Sustainably managed companies generally have a lower risk exposure.
Reading time: 3 minutes

What do financial analysis and investigative work have in common? Actually, quite a lot. Both involve pursuing leads and gathering evidence − exactly the methods used by the index provider MSCI to determine the precise advantages, in euros and cents, of sustainable investing.

The crime’s sequence of events: In April 2010, the explosion of the oil drilling rig Deepwater Horizon resulted in the worst maritime oil disaster to date. The culprit was quickly identified: the rig operator BP. The court’s ruling made legal history: BP has so far been forced to pay an approximate 65 billion US dollars in penalties and settlement payments − around 58 billion euros.[1] The environmental catastrophe was also a disaster for investors: Between April and June 2010, the BP share price fell by around 50 % – and still hasn’t fully recovered.[2]

34 %

is the rate by which the global volume of sustainably managed assets has grown since 2016

Cases such as the Deepwater Horizon have led investors to reassess the hazards by using ESG criteria to evaluate the risks. The acronym ESG stands for Environment, Social and Governance.[3] The key focus was thereby on the risk of potential losses. The American index provider MSCI has taken this a step further and asked: What are the direct financial benefits of sustainable investment for investors?[4] The MSCI study compared the development of several market indicators over the past decade: The key conclusions:

Companies with a good ESG rating generally have a lower risk exposure.[5] One reason for this lower risk may be that these companies employ more stringent risk monitoring methods.[6] This was obviously not the case with the Deepwater Horizon. MSCI consequently omitted BP from its sustainability index in early 2010 – shortly before the catastrophe on the drilling rig.[7]

Having a good sustainability rating results in greater profitability and higher dividends. To give an example: The ESG-dominated emerging market index MSCI EM ESG Leaders grew by 179.52 percent from 2007 to 2019, whereas the traditional MSCI EM grew by 118.93 percent.[8] Why? Because, among other things, companies that follow a sustainable strategy are more future-oriented, attract a more talented workforce and maintain a stronger culture of innovation.[9]

Improving the ESG rating significantly enhances the performance, As shown by another MSCI survey.[6] The index provider compared factors such as the long-term performance of companies that had improved their ESG rating with the performance of companies whose ESG rating had deteriorated. The result: In an analysis of industrialized nations over a timespan of nine years, companies in the first group grew by 12 points more than those in the second group.[10]

The indicators send a clear message: Investors are well-advised to take ESG criteria into account, as these have a direct effect on returns. For this reason, DWS uses its proprietary ESG Engine software system to rigorously evaluate the sustainability of companies. To enhance its expertise, DWS recently raised its investment in the sustainability specialist Arabesque S-Ray, which uses artificial intelligence to analyze the sustainability performance of over 7,000 companies.[11] The investigative work necessary to ensure sustainability is thereby assured.

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1. Source: Handelsblatt, „Kosten durch Ölkatastrophe (…)“, Stand: January 2018, https://www.handelsblatt.com/unternehmen/energie/bohrinsel-deepwater-horizon-kosten-durch-oelkatastrophe-klettern-fuer-bp-auf-65-milliarden-dollar/20852434.html

2. Source: University of Oxford/Arabesque, “From the stockholder to the stockholder”, status: March 2015, https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf

3. Source: Morningstar, “Auf diese vier ESG-Risiken (…)”, status: May 2018, http://www.morningstar.at/at/news/167104/auf-diese-vier-esg-risiken-sollten-anleger-achten.aspx

4. Source: MSCI, “Weighing the Evidence (…)”, Status: April 2019, https://www.msci.com/documents/10199/9aec76d8-376f-91ef-a575-b2b0ea65061a

5. Source: MSCI, “Weighing the Evidence (…)”, April 2019,https://www.msci.com/documents/10199/9aec76d8-376f-91ef-a575-b2b0ea65061a

6. Source: MSCI, “Foundations of ESG-Investing (…)”, status: July 2019, https://www.msci.com/documents/10199/03d6faef-2394-44e9-a119-4ca130909226

7. Source: University of Oxford/Arabesque, “From the stockholder to the stockholder”, March 2015, https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf

8. Source: MSCI, “MSCI Emerging Markets ESG Leaders”, July 2019, https://www.msci.com/documents/10199/c341baf6-e515-4015-af5e-c1d864cae53e

9. Source: MSCI, “Weighing the Evidence (…)”, April 2019, https://www.msci.com/documents/10199/9aec76d8-376f-91ef-a575-b2b0ea65061a

10. Source: MSCI, “How Markets price ESG”, November 2018, https://www.msci.com/documents/10199/f3f252a7-0dbd-035b-e67c-964a87fbcd03

11. Source:  DWS, “DWS investiert in die Zukunft (…)”, status: July 2019, https://www.dws.com/de-de/unser-profil/medien/medieninformationen/dws-investiert-in-die-zukunft-weitere-staerkung-in-den-bereichen-kuenstliche-intelligenz-und-nachhaltigkeit/

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