One of my favorite disruptors in the ESG/sustainability space is London Business School prof Alex Edmans. He tackles a lot of sustainability sacred goats and re-evaluates previous studies. He, Tom Gosling and Dirk Jenter revised their paper “Sustainable Investing in Practice: Objectives, Constraints, and Limits to Impact.” Alex wrote in a LinkedIn post “The data hasn’t changed, but we’ve sharpened the analysis (and the title) to make the takeaways clearer.”
My favorites:
“Objectives
- The primary motivation for incorporating Environmental and Social (ES) factors is financial returns – even in sustainable funds.
- Very few investors are willing to sacrifice returns for ES performance, mainly due to fiduciary duty.
- Only 5% of sustainable and 2% of traditional investors are willing to give up >50 bps/year.
- A 50 bp cost of capital shift = ~$5/tonne carbon tax equivalent.
Limits to Impact
- Given (a) financial objectives, (b) the belief that companies aren’t systematically underinvesting in ES, asset managers are unlikely to lead the charge in transforming companies’ ES. Not due to greenwashing, but because they’re not set up to prioritise externalities over long-term value.
- That’s the role of governments (or impact investors), not mutual funds.”
These are things rarely said out loud and certainly there isn’t universal agreement, even though the findings aren’t new information. For instance, my own research a few years ago found that 81% of investors were unwilling to trade off more than 1% (100 basis points) in reduced returns in exchange for ESG performance back then. I found data and support in 2018 and 2022 for essentially every one of Alex’s conclusions. The numbers are different but the concept is the same … or is it?
Let’s consider fund holdings – operating companies themselves. The refrain “integrating sustainability with the business” is more common than ever, and examples of success abound (we are working on a compendium of specifics examples from SEC 10-Ks to be available soon). As more companies find these opportunities, they move away from sustainability language and toward business language – harvesting hard-dollars while de-emphasizing (or perhaps saying less about) sustainability. It becomes business performance/value supporting overall shareholder returns. Alex hit on this:
“73% of sustainable investors expect good ES performers to deliver positive alpha, and a notable 45% of traditional investors agree. Unexpectedly, by far the most popular reason is that ES performance is correlated with other factors that improve shareholder returns, rather than mattering directly.” [Emphasis added].
Maybe we have it backwards: maybe non-ESG companies present more ESG business value than is acknowledged.
In their 1971 song “Won’t Get Fooled Again”, The Who wrote “Meet the new boss, same as the old boss.” I’m sure they had no idea that more than a half-century later those lyrics could apply to fiduciary duty. Go figure.
The full paper is here.
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