14th December 2022

While the goal is to make business more sustainable and ethical, there’s also evidence that it’s good for the bottom line.

ESG is also good for the bottom line

There is a lot of talk about ESG in business today. It’s such a broad topic that we don’t take the time to really think about what we mean or what it means for our business. Essentially, ESG measures businesses’ impact on environmental, social, and governance factors. While the goal is to make business more sustainable and ethical, there’s also evidence that ESG is good for the bottom line.

The tenacity of ESG investing

“It is true that appetite for ESG investing has fallen. Net inflows are well below those of last year. But for all the talk of a backlash, sustainable-investment funds have been much more resilient than other funds during this year’s downturn. According to Morningstar, a data firm, $139bn had flowed into sustainable funds by the end of September, compared with $643bn of net outflows from the broader market. European funds have attracted the bulk of the money, receiving 89% of total inflows into sustainable funds, but even in America such funds have drawn more money than other investment vehicles.”

What is it about green funds that keeps them attractive?

“It is certainly not because of juicy returns. These funds tend to invest heavily in technology stocks, which often achieve high esg ratings owing to some combination of progressive Californian values, asset-light business operations and sophisticated human-resources departments which do things like diversity monitoring as a matter of course. Such stocks have poorly performed this year. And while esg funds are overexposed to this year’s losers, they are underexposed to the big winners: fossil-fuel firms.

Sustainable-fund managers point out that their investors are not overly bothered by short-term returns. People putting money into ESG believe the energy transition is not something that will happen over a couple of years, but a long-term trend that will mean their investments inevitably pay off. Oil majors may have been a good investment this year, they admit, but that will cease as deadlines for hitting net-zero emissions near. Sustainably minded investors tend to be young and have decades-long investment horizons. They do not fret about a few years of poor performance.

Social values give investors a non-pecuniary reason for allocating money and sticking with their choice, a rare advantage for funds in an industry where a competitive edge normally means lower fees. Indeed, Morningstar’s data show that the greener the fund, the more likely it is to have enticed investors to stick around. The EU’s Sustainable Finance Disclosure Regulation, a rule on climate-investment standards, splits funds into three categories. Those in the greener bucket, known as Article 9 funds, enjoyed the biggest net inflows in the third quarter of the year. Article 8 funds, sometimes called “light green” in the industry, have seen net outflows—but not as big as those from Article 6 funds, which have no sustainability focus at all.”

This year’s greenwashing scandals, and investors’ relaxed attitude towards them, have demonstrated an important truth: that there is money to be made from environmental investing. So long as that is true, businesses claiming to provide investors with the genuine, truly green article will not be going anywhere.”

SOURCE: This article appeared in the Finance & economics section of the print edition under the headline “The tenacity of ESG”

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