2021 was the third year in a row where sustainable investors outperformed non-sustainable investors. For a long time, there has been a debate as to whether sustainable investment comes at the expense of returns or actually generates additional returns. Many studies and meta-studies later, the cautious conclusion is that it probably does not cost a return and may even be good for the return.
With green investing becoming mainstream because of the UN’s sustainable development goals and the social-responsibility acceleration caused by the coronavirus crisis, the question is now even being asked whether there is a structurally higher return with sustainable investment. The first publications on the ESG factor and the associated premiums have already appeared.
Despite the good results, the absolute percentage of sustainable investors worldwide is still modest. Nowadays, there are many gradations in the field of sustainability and European guidelines such as the SFDR and the Taxonomy are trying to bring more order and guidance to the field. The problem is that sustainability is a subjective and dynamic concept. Much is an evolving insight and because it concerns ideals, culture, ethics and even faith, it is strange that the government is now going to determine what people may think. Some analogy with Orwell seems appropriate in this regard.
It is also ironic that SFDR is being used to greenwash, while the aim was precisely to prevent this. The light green Article 8 covers many companies with so-called sustainable controversies. In the case of a controversy, a company not only breaks the sustainable rules of the game, but is repeatedly called to account for this and nevertheless decides to persist in its undesirable behaviour. With the best will in the world, you can no longer call this (light) green, but it does happen. The real return is made with the dark green companies, which are companies that also want to have a positive impact on society and the environment.
The most acute crisis
In the coming years, the flow of money to sustainable companies, combined with the increase in legislation and regulations, will ensure that sustainable companies continue to do better than non-sustainable companies. More return is usually an easy way to convince doubters, but in spite of this, most of the time disbelief and criticism persist. Perhaps it would be better to point out to the critics the costs of the non-sustainable solutions. Not the financial returns, but the costs to society and the environment. Those costs are high.
The most acute crisis is the climate crisis. Rising sea levels alone will cause as much as 40% of the world economy to be literally under water. The current logistical problems pale into insignificance the moment something like this occurs. For a long time, this could be dismissed as something that would take place in the distant future, but the year 2021 has taught us that climate risks are also present in the here and now. The increases in forest fires, heat waves, droughts and floods have created a greater sense of urgency. That seems to set people in motion. The harsh reality of rapidly diminishing diversity, the plastic soup in the oceans or, quite simply, the lack of clean air and clean water also makes people choose a sustainable future more readily.
Social criteria
Because of the emphasis on the various environmental criteria, it seems as if the social criteria are fading into the background. Economically, there is a lot to be gained. The world economy can grow much faster if we also make full use of the labour potential of women. Now we can work on the symptoms, such as a compulsory percentage of women on the board of a company or demanding equal pay for men and women. The underlying cause is a failing HR policy that does not sufficiently strive for diversity. In this case, it is not about a few percent of economic growth that we are missing, but about dozens of percent. The same applies to unrestricted access to education and health care. As long as this is not properly regulated, the economy will run sub-optimally. We may have missed out on many Einsteins because not every child has the opportunity to enjoy higher education.
Fortunately, environmental and social criteria are partly interrelated. Whoever manages to solve the climate crisis, the environmental crisis, the energy crisis, the water crisis and the food crisis, has also largely solved the inequality in the world. There is no need to flee from Africa if there is sufficient food and clean water, unlimited energy and the harvest is not regularly destroyed by natural disasters. You do not need to come to Europe for the weather. For the record, it is not about unequal incomes, but about unequal opportunities. Pay for work is an essential principle for achieving sustainable goals. In the Netherlands, people don’t seem to understand that a good CEO is worth his or her weight in gold. Only when the CEO is overpaid and the employees are underpaid does this often manifest itself in above-average staff turnover, to the detriment of a company’s performance.
Before anyone argues that all these measures are aimed at even more economic growth and that that is precisely where the problem lies, the following is true. Economic growth increases the size of the cake and, when it is fairly distributed, this is what contributes most to achieving a sustainable balance. After all, when the level of prosperity rises, people have fewer children. In rich countries, the population is no longer growing and it is the strong population growth that is making our planet unsustainable in the current unsustainable way. The nice thing is that investors can contribute to all these solutions without having to sacrifice return.
Han Dieperink is an independent investor, consultant and knowledge expert for Fondsnieuws. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co. He is currently active as chief commercial officer at Auréus Asset Management. Dieperink provides his analysis and commentary on the economy and markets. His contributions appear in Dutch on Fondsnieuws.nl on Tuesdays and Thursdays and in English on investmentofficer.lu from time to time.