A recent Barron’s article debunks the argument that sustainable, or ESG, investing leads to lower returns for investors.
“When critics beat up on ESG, they are often right—but the problem is simply bad implementation,” the article explains, adding that ESG investing requires understanding about how companies are “adapting to transformational change.” It cites examples, including that of European electric utility companies that missed the boat on renewables and “lost half a trillion in market capitalization as a result.”
“These aren’t just one-off stories,” the article explains. “We have systematic evidence that firms with better SG performance have better future financial performance.” The article cites research showing that companies with “organizational processes to measure, manage, drive and communicate performance on ESG issues in the early 1990s outperformed, over the next 18 years, a carefully matched control group of firms with very similar profitability, size, capital structure, and market valuation multiples.”
But in order to succeed in moving the market toward ESG integration, the article argues, asset managers must stop “goodwashing,” or using ESG “only as a marketing tool to attract capital. There are no shortcuts.” These managers, it says, must understand the issues behind ESG and how those issues are reshaping business strategies.
“We have clear evidence,” the article concludes, “that ESG factors can identify companies that will outperform, and that there is investor demand. For those asset managers who do it right, that combination spells opportunity.”