160 out of 200 papers show: environmental, social and corporate governance factors generate higher profitability. They are not a fad, emphasizes Daniela DoorManager of Alternatives and Analysis at Prima AFP.
Sustainability is a trend that is here to stay. It is on the agenda of corporations, investors and regulators. In a survey of 297 global companies by U.S. business consultancy Bain & Company, 81% said sustainability is higher on their corporate agenda than it was five years ago, and 85% said it will be even higher in the next five years.
Managing environmental, social and corporate governance (ESG) factors to generate competitive advantage, as part of an integrated sustainability strategy, becomes more relevant in a world of disruptive structural change. According to Goldman Sachs, between 2010 and 2018 the number of companies in the S&P 500 index that presented sustainability issues in their quarterly earnings calls grew by 75%. And, in 2018, 85% of the companies in the index published sustainability reports.
Financial asset management follows this trend - for it is the other side of the coin - and more and more institutional investors are considering sustainability in their investment processes. As of April last year, the number of Responsible Investment Program (RIP) members globally was close to 2,000, with just over US$$80 trillion in assets under management. The latest report published by The Global Sustainable Investment Alliance (GSIA), meanwhile, shows that 'sustainable' assets under management increased by 34% in the last two years, so that they now represent a quarter of assets under management in the United States and half of assets under management in Europe.
What are the reasons for this interest? According to a recent BNP Paribas survey of 347 asset managers worldwide, the main drivers are: improving long-term return (52%), brand and reputation management (47%) and lowering risk (37%).
On profitability, studies are conclusive on the impact of ESG factors on business performance. A paper published by Oxford University and Arabesque Partners revealed that, among more than 200 papers, the 88% showed that companies with robust sustainability practices obtain better operating results, which translates into better cash flows. The 80% also showed that sustainability practices have a positive impact on financial performance.
As for risk reduction, in the latest World Economic Forum's Global Risks Report 2019, of the top ten risks with the highest probability of occurrence and that imply a significant negative impact for economies and industries in the next ten years, five are related to environmental issues, two to technological risks, two to social risks and only one to economic risks. Hence, these factors have been incorporated into investment decision-making and risk rating agencies are already including them in their ratings: between July 2015 and August 2017, S&P recorded 107 cases in which environmental risks drove changes in ratings.
I close with a sentence that Larry Fink, founder of Blackrock-the world's largest asset manager-wrote in his 2019 annual letter to CEOs:
The purpose does not pursue profits alone, but it is the driving force to achieve them. Profit is by no means incompatible with purpose: in fact, profit and purpose go hand in hand in an indissoluble manner.
Larry Fink
