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The value(s) of sustainable investing

Jon Hale  |  27 Jul 2016Text size  Decrease  Increase  |  

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New data show professional investors overwhelmingly believe there is a link between corporate sustainability and long-term financial performance.

 

What percentage of investors do you think would say that a company's sustainability performance is materially important to their investment decision-making?

Even considering the growing interest in sustainable investing around the world, I might have guessed somewhere around one third, assuming that even among those who embrace sustainable investing, some are values-oriented or impact-oriented and just hope to achieve competitive financial benefits from investing that way.

Furthermore, I might have guessed that a decent-size group remains altogether skeptical of any connection whatsoever between sustainability and materiality.

Instead, the results were a stunning 90 per cent positive to 10 per cent negative in a recently-released survey conducted by the MIT Sloan Management Review and Boston Consulting Group.

Nine in 10 respondents, all professional investors, agreed--at least "to some extent"--with the following statement: "A company's good sustainability performance is materially important for investors when making investment decisions."

Taking out those who said "to some extent" still left nearly three fourths (73 per cent) who agreed at least to a "moderate extent." Those who agreed to a "great extent" totalled 43 per cent.

 


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What is interesting about these findings isn't just that 43 per cent, however--it's that an additional 47 per cent also recognises some connection between company sustainability and materiality, and, at the other end of the spectrum, it's that only 3 per cent disagreed completely with the statement.

Even taking into account response bias--the possibility that respondents felt it would be socially incorrect to indicate complete disagreement--these results suggest widespread acceptance of the idea that corporate sustainability performance is connected to financial performance.

When probed for the reasons why investors are making that connection, respondents cited an array of expected outcomes resulting from good corporate sustainability performance.

Many of these have some support in the research literature, such as lower costs of capital, better operational performance, lower risk, and effective management.

But the most oft-cited outcome, by 82 per cent of respondents, was a company's increased potential for long-term value creation.

This connection between sustainability and a focus on the long term is a hallmark of sustainable investing.

Good sustainability performance, generally defined as the effective management of environmental, social, and governance, or ESG, risks and opportunities faced by a business, can be an indicator that a company simply is thinking seriously about the long term, even setting aside the sustainability issues themselves.

We're finding some evidence of a connection between longer-term investing and sustainability performance in our Morningstar Sustainability Ratings for funds.

US-based fund managers with longer-term horizons, defined here as those with a portfolio turnover rate of 20 per cent or less, are twice as likely to have the highest Sustainability Ratings than the lowest (although most land somewhere in the middle).

A Sustainability Rating of High indicates that the companies held in a fund's portfolio are better managing their ESG risks and opportunities than those held in at least 90 per cent of funds in the same category.

Those managers with shorter-term horizons--portfolio turnover of 100 per cent or more--are more likely to have Low Sustainability Ratings than High.

 

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Jon Hale, Ph.D., CFA, is Morningstar's US-based head of sustainability research. This article initially appeared on Morningstar's Canadian website.

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