3 December 2019
Sustainable investments: how profitable are they?
Socially responsible investments are in vogue. But what financial performance do these investments produce, and what is their impact on society?
Sustainable investments (also frequently called “ethical investments”) were the focus of discussion at the financial breakfast run by La Libre and the MoneyStore blog. Initially initiated by large religious groups in the 1930s, ethical funds have worked hard to refineir approach over time. Today, they are known as sustainable funds, socially responsible investments (SRI) or ESG investments (short for environmental, social and governance). "The exclusion of specific sectors such as the arms industry and tobacco, was the basis for the criteria when these types of funds were first launched. Today, a range of values is incorporated in the portfolio based on ‘Best in Class’- criteria. The best companies from each sector are chosenbased on a combination of environmental, social and governance criteria" explains Nicolas Crochet, Managing Partner with Funds for Good.
Financial and sustainable performance
Do these funds perform on a par with traditional investments? "It's true that in the beginning these types of investments implied some sacrifice in terms of performance. Today, however, the interests of all players, from companies, consumers and also the regulators, are converging towards higher requirements on sustainability,. It's also a question of risk management. Companies are complying with ever stricter regulations in order to avoid potential fines. Those which adapt are therefore more competitive over a full economic cycle," says Frédéric Degembe, Investment Expert at ING Investment Office.
According to data supplied by Morningstar, more than 60% of the SRI funds they have analysed outperformed the aggregate of all the funds analysed. As a general rule, companies which comply with sustainability criteria also display less volatility than companies which do not comply. "Not investing in certain controversial companies also allows you to avoid certain risks. This is the case, for instance, with companies operating in the tobacco sector, which are faced with court rulings that impose substantial financial penalties on them", according to Nicolas Crochet. You can therefore argue that more sustainable companies are at an advantage compared to less "ethical" companies in the same sector.
However, beyond the financial return, sustainable companies also provide an environmental or social return. "We are finding more and more data available to estimate the environmental or social impact of an investment. The most common one is the rate of reduction in CO2 emissions. A fund can publish the percentage by which CO2 emissions have been reduced thanks to the investments made. However, it's hard to measure the reliability of this data," Frédéric Degembe warns.
These measurements are developing over time. For example, the UNO has established 17 sustainability goals. More and more companies have decided to incorporate them and to put in place reports on these goals. This approach enables us to measure sustainability criteria more objectively. Nicolas Crochet adds: "As far as social criteria are concerned, companies can be analysed by the representative capacity of the trade unions, diversity in the decision-making bodies, the rate of industrial accidents, for example. In this area, European companies are ahead of the rest of the world. However, so far there are no standards that have been adopted by the financial sector as a whole".
The only label of its kind in Belgium
Finally, it should be noted that the Belgian financial sector has just introduced a sustainability label through Febelfin, its financial services federation. More than 300 investment funds have received this label. "It's the only label of its kind in Belgium. The criteria demanded by this label are pretty strict. They're both qualitative and quantitative. It's an advancement in the area of socially responsible investment," says Frédéric Degembe. The availability of sustainable investments is expanding in Belgium. In addition to financial performance, the criteria that enable analysis of sustainable performance are improving. The transparency and quality of the offering should therefore make further advances in the future.
Interested in sustainable investments?
© Isabelle de Laminne, La Libre Belgique