History has steered, changed investment strategies for many
In September 2015, the U.S. Environmental Protection Agency accused German automaker Volkswagen of installing computer software in 482,000 American vehicles to conceal nitrogen oxide emissions 40 times above the legal limit. The company subsequently acknowledged that up to 11 million cars worldwide had been fitted with a similar “defeat device.”
It pays to look under the hood.
Beginning in 2013, the environmental, social and governance research team at MSCI, a provider of market indexes, repeatedly flagged Volkswagen for its risk exposures and management practices. By April 2015, VW had sunk to the bottom 28th percentile of companies ranked by MSCI for environmental, social and governance standards, and the following month it was removed from MSCI’s index of world businesses with favorable ESG.
Volkswagen customers — and planet Earth — weren’t the only ones to pay the price. From April to October 2015, VW stock sank by 64%, wiping out $40 billion in market value.
That episode, combined with other corporate calamities, has driven investors toward U.S. companies that meet positive standards for sustainability, social impact and sound governance, a category that has grown to $9 trillion, or one-fifth of all assets under management.
“From an investment perspective, it just makes sense,” said Greg Wait, president of the Germantown advisory firm Falcon’s Rock and founder of Prophecy Impact Investing. “Money managers want to mitigate big event risks, like the BP oil spill. They are looking for red flags.”
The concept of investing for good started decades ago when religious organizations avoided so-called sin stocks. But that exclusionary approach — then known as socially responsible investing, or SRI — led to subpar returns. The modern version of SRI stands for sustainable, responsible and impact investing, a broader and more inclusive investment genre. Many if not most SRI portfolios now are constructed using environmental, social and governance screens.
Superbugs and investors at risk
The election of Donald Trump further galvanized interest in environmental, social and governance-based investing. The number of unique users of ESG data within Morningstar’s Direct Cloud platform has quadrupled this year. Many investors view Trump’s focus on material wealth as coming at a significant moral cost — and at a potentially large financial one as well.
Future bills might come due from climate change, equal pay, board diversity, human rights, environmental degradation and the drug-resistant superbugs that threaten human health.
Citing a World Health Organization report on antibiotic resistance, 17 institutional investors with $2.5 trillion of assets under management recently joined forces to pressure fast food providers to phase out medically important antibiotics in their livestock supply chains.
“Without urgent action, we are heading for a post-antibiotic era, in which common infections and minor injuries can once again kill,” the WHO report noted. Already, about 23,000 Americans die each year from infections resistant to antibiotics or similar drugs.
Investors also are at risk.
Maria Lettini, director of the London-based Farm Animal Investment Risk & Return initiative that includes those 17 institutional investors, said in a recent phone interview that animal factory farming is exposed to 28 ESG issues that could affect the financial performance of agribusiness interests, including restaurants and food retailers.
Professors Robert Eccles (Harvard Business School), Ioannis Ioannou (London Business School) and George Serafeim (Harvard Business School) studied the impact of sustainability on corporate “processes and performance” over an 18-year period through 2009. Using a matched sample of 180 U.S. businesses, the authors concluded that “high sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.”
A study by Bank of America Merrill Lynch determined that “ESG-based investing would have offered long-term equity investors substantial benefits in mitigating price risk, earnings risk and even existential risk for US stocks (and) would have helped investors avoid 90% of bankruptcies.” An analysis of more than two thousand studies by Deutsche Bank found that “the orientation toward longterm responsible investing should be important for all kinds of rational investors in order to fulfill their fiduciary duties and may better align investors’ interests with the broader objectives of society.”
Those results suggest that investors can earn market-beating returns while still doing good, a pleasing combination that Wait happily calls “a double bottom line.”
As earlier shareholders of Volkswagen could tell you, that’s at least twice as good as the alternative.