FUTURE THEMES PORTFOLIO ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG)
Investing in sustainability
Environment, social issues and good corporate governance
Three topics are subsumed under sustainability: Environment, social issues and good corporate governance. In line with the English translation, it is also referred to Environmental, social and governance (ESG).
In traditional investment, the focus is on factors such as a high return and low fluctuations. In the ESG portfolio, sustainability criteria are also taken into account, which can have an impact on the success of an investment.
Environment-related criteria include, for example, the consumption of raw materials in production, the energy consumption of individual products and biodiversity. Social criteria include, for example, employee working conditions, data protection and dealings with suppliers. Responsible corporate governance involves, for example, combating corruption, transparency of management decisions and protection of stockholder rights.
The ESG portfolio therefore includes stocks in companies whose business purposes and implementation are in line with sustainable economic development. Examples include the areas of water supply, renewable energies and recycling.
Two catalysts are driving the E-commerce boom on the stock market:
- The shift from physical to digital presence.
- The shift from many small and medium-sized providers to a few large providers.
„The winner takes it all“
Booming sustainable investments
The market for sustainable investments is growing very strongly worldwide. The market volume has increased continuously in recent years. According to calculations by the Global Sustainable Investment Alliance (GSIA), around 30.7 trillion US dollars were invested worldwide at the beginning of 2019, taking into account sustainable criteria. This represents an increase of 34% compared to 2017. Europe is the region with the largest share of the global investment volume, with around 14 trillion US dollars.
How do sustainability criteria affect performance?
The question of whether one has to forego returns and/or accept a higher risk if one takes ecological, social, or responsible corporate governance criteria into account when investing has been the subject of intense debate for years.
The prejudice persists that investors have to accept poorer performance of they add a fourth dimension- the quality of the issuer’s sustainability management- to the magic triangle of investment- risk, return and liquidity-persists. Numerous studies reprove this prejudice.
This is because sustainability criteria strengthen the holistic assessment of individual companies. Companies that handle energy efficiently and have an answer to climate change, continuously qualify their employees or orient their product design to the increasing environmental and social requirements of their customers will, in their estimation, also be more successful economically in the long term.
Sustainability criteria can also be used effectively in risk management. In this way, risks that have a negative impact on portfolio performance can be identified. The reduction of risks refers not only to financial risks on the capital market but also, for example, to potential reputational risks to an investor from investing in securities that contradict the investor’s own principle.
Analyses support ESG approach
This ESG investment approach is supported by many empirical analyses. A 2015 analysis by the University of Hamburg entitled “ESG and financial performance:aggregated evidence from more than 2000 empirical studies” found that sustainability criteria can have a fundamentally positive impact on performance and returns. The finding is based on an analysis of some 2.250 studies from 1970 to 2015, which examined the impact of sustainability criteria on performance.
Significantly less than 10% of the studies evaluated show a negative influence of sustainability criteria on the financial success of the capital investment. However, well over 50% of the studies confirmed a positive correlation between the use of sustainability criteria and the risk-return profile of the capital investment. The remaining studies evaluated found a neutral relationship.
These analyses show the performance-potential of the ESG approach.