Sustainable investments in the black

"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] 

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, https://auticon.de/unternehmen (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.