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Misconceptions around sustainable investing

Published on April 1, 2020 by Aman Chopra and Priyanka Gupta

Many private-sector firms have neglected considering environmental, social and governance (ESG) investing, believing it is just a passing trend and that screening out companies from the investment universe will sacrifice their earning potential and yield lower returns.

Understanding ESG investing and the integration process has been poor, with many executives finding it difficult to evaluate the performance of companies in their portfolios due to misconceptions around ESG integration. The following table highlights some of these:

Avoiding “sin stocks”

Sustainable investing is focused only on screening out “sin stocks” from the investment process

Just a passing trend

Sustainability is just a feel-good factor, used to enhance public relations and greenwash or as a marketing ploy

Myth

Fact

Exclusionary or “screen-based” strategies play a major role in avoiding stocks of companies involved in activities considered to be unethical or immoral such as alcohol, tobacco, firearms, and casinos. However, managers today prefer to take an inclusive approach to sustainability, integrating ESG factors throughout the investment process

Lower investment benefits

ESG investments perform poorly and yield lower returns

ESG investment strategies and practices have proven over time to produce a positive impact without sacrificing investment returns. In fact, companies focused on ESG factors attract more investments, enhancing their financial returns

A recent study showed that fund strategies that invest in companies with improved ESG scores posted returns enhanced by up to 2.2% a year(1)

No value addition

ESG assessment does not add value to the investment process

Analysis of ESG factors provides a better understanding of the risks and opportunities a company faces

Leads to long-term investment results and value creation in the eyes of stakeholders

Limited options

When it comes to building a portfolio, investors do not have enough options for sustainable investing

A customised ESG portfolio based on individual views, investment goals, risk tolerance and liquidity needs helps to reach an appropriate balance between risks and returns. A wide variety of options are coming to market owing to a surge in available data

Over 500 ESG-focused funds are available to investors globally, as per a 2019 study, of which 279 sustainable funds are available to US investors and 247 funds have added ESG criteria to their prospectuses(2)

Suitable for developed economies

ESG data is disclosed mainly by companies operating in developed markets, so ESG frameworks are not suited for less developed markets

ESG issues are equally critical for companies operating in emerging markets. Assessing how a company manages stakeholders, and environmental and social changes does not depend on the market in which it operates. With emerging markets, finding the right data requires deeper research

Developing countries such as India, South Africa, Brazil, Turkey and Colombia are home to a large number of sustainable companies. Companies such as Infosys, Wipro, M&M and L&T score well in terms of ESG. Naspers, a South Africa-based company, also has good ESG practices

Sustainability is the future of business. It is an important management process that needs to be implemented by each organisation. Sustainable investing has been around for decades and is continuing to grow. ESG investing may be just emerging in some areas of the world, but a number of examples in the US, Europe and Asia show its importance

Working to overcome misconceptions

Knowledge sharing, training, case studies, and investment practice guidance improve awareness and understanding of ESG investing among private-sector firms, and once portfolio managers become aware of ESG integration, associated ESG issues and opportunities and not just risks, they commit fully to the ESG framework.

Acuity Knowledge Partners has more than a decade’s experience in serving firms across a wide range of themes and support their requirements in sustainable investing. Our experts assist firms at all stages (pre-investment and post-investment) of ESG integration and with investment decision making.

Sources

1. Schroders Insights article

2. Morningstar article

3. Pensions & Investments article


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About the Authors

Delivery Manager, Private Equity

Aman Chopra has more than 9 years of experience working on a variety of research and analysis assignments serving multiple divisions of private equity clients including investment research, due diligence, marketing and client relations.

Delivery Lead, Private Equity

Priyanka Gupta has 7 years of experience in ESG and market research roles. She has worked extensively in conducting ESG Research in one of the top market research firms in Gurgaon. She is a Certified Research Expert and holds a Master’s degree in Business Administration (Human Resource) and a Bachelor’s degree in Technology (Computer Science)

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