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7 reasons why investors should care about ESG

The US Strategy and Quant team at Wall Street investment bank Bank of America Merrill Lynch recently published a research note to clients “Top 10 Reasons you should care about ESG”.  The note contained some interesting findings and here are our 7 favourites:

  1. You can do good and do well – buying stocks that rank well on ESG metrics outperformed the market by up to 3% per year over the last five years.
  2. A tsunami of assets is poised to invest in “good” stocks. The authors estimate over $20 trillion of asset growth in ESG funds over the next two decades – equivalent to the size of the S&P 500 today.
  3. Happy employees = better returns. The authors found companies with high employee satisfaction ratings on website Glassdoor.com have outperformed those with low ratings by nearly 5% per year over the last 6 years.
  4. ESG could have helped avoid 90% of bankruptcies. The authors found 15 out of 17 bankruptcies in the S&P 500 between 2015 and 2015 were of companies with poor Environmental and Social scores five years prior.
  5. “Good” companies enjoy a lower cost of capital. The cost of “good” versus “bad” companies based on ESG scores can be nearly 2% lower.
  6. ESG “controversies” have cost investors a lot. The authors found major ESG controversies during the past 6 years were accompanied by peak-to-trough market capitalisation losses of $534 billion for large US companies.
  7. Finally, and most tellingly, was the point “Actually, you already do care about ESG!”. The authors point out that key aspects of ESG are not new with questions around whether management compensation is aligned with shareholders, whether key talent can be retained and whether lax environmental behaviour creates elevated legal risk all being relevant for decades.

At Perennial Sustainable Future Strategies, we also believe that investing in companies based on ESG performance leads to superior returns. As at 30 September 2019, our Perennial Smaller Companies Sustainable Futures Trust and eInvest Future Impact Small Caps Fund (ASX Code: IMPQ) have both outperformed the benchmark since inception.

Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial. This article does not take into account your investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance. Gross performance does not include any applicable management fees or expenses. Net performance is based on redemption price for the period and assumes that all distributions are reinvested. Fees indicated reflect the maximum applicable. Contractual arrangements, including any applicable management fee, may be negotiated with certain large investors. Investments in the Trusts must be accompanied by an application form. The current relevant product disclosure statements, additional information booklets and application forms can be found on the Trust page.

 

Damian Cottier
dpc@perennial.net.au