Bob Homan: Sustainability is the best policy
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
Sustainable investing currently comes at the expense of returns. But that gap could suddenly be closed.
This year, sustainable stocks (MSCI World SRI index) are lagging behind the regular global stock index by 3.5%. Last year, this figure was 2.5%. So sustainable investing costs returns! But don't despair, because in the longer term we see something different: since its inception (in 2014), the sustainable index has actually outperformed non-sustainable stocks by more than 1% per year on average.
If you ask me, the lag is due to the fact that there is currently less money flowing into sustainable stocks, and not necessarily to the financial underperformance of sustainable companies. Since US government policy has turned against sustainability, investors are seeking performance elsewhere. It's as simple as that.
Companies are increasingly abandoning sustainability goals
Another trend is that a number of companies are abandoning their sustainability targets under pressure from Trump's policies. The big question is what effect this will have on the share prices of these companies. If the market reaction is positive, it would mean that the lag in sustainable investments is not only due to the drying up of cash flow, but also that sustainable business practices are seen as a negative factor by investors.
Finance master's student Mattieu Kauffman investigated this effect within our portfolios. His research focuses on the short-term reaction of share prices following a company announcement about scaling back its ESG policy. And what did he find? In general, such an announcement leads to a decline in the share price. Personally, I am pleased with this finding. Apparently, investors do appreciate it when a company advocates sustainable policies.
ESG withdrawals sometimes good for share prices, but not usually
However, there are significant differences between sectors. Companies in the financial, consumer staples, and basic materials sectors in particular sometimes show positive returns after rolling back ESG measures. In certain cases, investors see this as a reduction in operating costs or internal regulations, which triggers a positive share price reaction.
Mattieu's findings show that abandoning ESG targets is generally negative for a company's share price. In that respect, we should not be deterred from sustainable investing. We just need to wait until the flow of money becomes more sustainable again. Mattieu's thesis was awarded a high grade of 8.
