How to navigate the fog of sustainable investment
Interest in so-called sustainable investing is on the rise. One token is money given to mutual funds, writes the Wall Street Journal
Is it possible to quantify the environmental, social and governance risks? With the notable exception of carbon emissions, probably not, but that doesn't mean the exercise isn't beneficial to investors – writes the WSJ.
Interest in so-called sustainable investments is on the rise. One sign is the money given to mutual funds: in the first half of 2020, according to Morningstar, net flows into sustainable funds amounted to $ 20.9 billion in the US, compared to $ 21.4 billion. of 2019, which in turn was four times the previous record for a calendar year.
Fund managers who don't specialize in ESG strategies are scrambling to incorporate them into their investment frameworks. There is an established industry of risk ratings, but they come with a well-documented problem: the correlation between the ratings of different companies of the same stock is low because they measure performance differently. One example is Tesla. MSCI rates the electric car manufacturer very well for its green products, while FTSE Russell gives it a poor score for other reasons. This type of confusion gives ESG assessments a reputation for inaccuracy.
Quantifying the earnings risk of a given concern is a cutting edge alternative. London-based fund manager Schroders SDR has developed a tool, SustainEx, to value a company's “externalities” – the unpaid costs of its business incurred by the company. The logic is that pressure is being exerted on companies to take on a larger share of these costs, which last year estimated at $ 2.2 trillion, or 55% of corporate profits globally.
For example, SustainEx sees the tobacco sector as the most at risk given the health problems caused by smoking. The market agrees: After many years of stellar stock market performance, tobacco stocks have fallen out of favor since 2017, when the U.S. Food and Drug Administration strengthened its position. Other conclusions, such as the social risk to earnings of top-tier alcoholic beverage manufacturers like Diageo, are more surprising.
Such an approach has the advantage of bridging the gap between ESG analysis and conventional inventory analysis, which revolves around earnings estimates. Some companies have made similar efforts: Sportswear brand Puma has published a survey on how much its products cost the environment for nearly a decade. Yogurt maker Danone this year began reporting earnings per share adjusted for its carbon footprint.
Ultimately, however, putting a number on ESG risks is not that different from issuing a qualitative rating. Schroders used academic studies to estimate costs as objectively as possible, but another investor might package the same or other studies differently and come up with different numbers.
"It would be nice to have comparability, but things are often not comparable," says Alex Edmans, professor of finance at London Business School and author of "Grow the Pie": How Great Companies Deliver Both Purpose and Profit. " He usually prefers a framework based on general principles to a quantitative approach.
The real benefit of SustainEx for Schroders, which previously used MSCI ratings, is that having an internal system allows for better integration of ESG factors into existing processes. “We're trying to help our investors think differently about the ingredients that go into an investment decision,” says Andy Howard, Schroders' global head of sustainable investments.
One area where ESG risks can be easily compared is that of carbon emissions held responsible for climate change, an issue that has rapidly increased the political agenda in recent years. Tighter carbon cap-and-trade programs, in particular, could crystallize the risks to earnings identified in models like SustainEx. Amid the confusion about how to address ESG factors, comparing companies' carbon footprints is a good place to start.
(Extract from the foreign press review by Epr Comunicazione )
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/investimento-sostenibile-crescita-interesse/ on Sat, 12 Sep 2020 13:57:01 +0000.