Mythbuster from Nykredit: ESG has no negative effect on bottom line

Can it really be true that applying strict ESG criteria does not cost extra in returns or on the bottom line, as a company and as an investor? Yes, it can. It increases returns, in fact. So says Nykredit Asset Management.
Photo: /ritzau/AP/Martin Meissner/
Photo: /ritzau/AP/Martin Meissner/

We were all taught that good behavior is worth the effort. Strangely enough, though, people often get into their heads that this is an impediment, and that returns as well as the bottom line will be negatively affected when good behavior takes the form of ESG, CSR, or SRI criteria and ratings. As it turns out, this is a myth. At least according to Nykredit Asset Management.

"During the past five years, the companies with the highest ESG ratings have on average had twice the returns of those with the lowest ratings," says Head of SRI at Nykredit, Søren Larsen, to FWAM.

In fact, new figures from Nykredit's SRI department prove that applying ESG criteria creates better returns and more stable companies, especially when achieving a good rating.

"The interesting thing about the numbers we are presenting is that they prove that at best, the use of ESG criteria has positive financial outcome, and at worst it has no effect whatsoever. It has no negative financial effect. This is what I would like to emphasize to the skeptics," says Søren Larsen.

ESG is not a matter of niceness

Søren Larsen has worked for many years with the "sustainability principles" in investment, and he emphasizes that ESG is not a matter of which is the nicest company.

"ESG ratings are not a matter of which is the nicest company. They are key figures of financial relevance, designed to indicate which companies manage to consistently act with forethought in regard to their bottom line, naturally in active cooperation with classic key figures," Larsen explains.

Larsen has analyzed data from 2007 to 2016 with the aim of uncovering the correlation between ratings and returns. High ratings give higher returns, low ratings give lower returns, the thesis said.

Accordingly, table 1 on this page shows that the highest rated companies also have the highest returns. AAA-rated companies have a return of 12.79% p.a. and a standard deviation of 10.42%, while CCC-rated companies have substantially lower returns with 6.63% p.a. and a standard deviation of 14.26% between 2012 and 2016.

Table 1

Looking at a longer period from 2007 to 2016, the difference in returns is not as big, but there is still much difference in stability in the companies.

Figures affirm the choices of the ESG-minded

"To a responsible investor like Nykredit, it's very interesting with these results. They prove that the investment policy we chose is profitable for our clients. When we integrate sustainability into our investments, it pays off, and even the most stubborn skeptic can't disregard that," Larsen says to FWAM.

It is actually comparable with the development in certified organic food. You buy a product that is more sustainable in respect to the environment, and it is healthier for the receiver, too. The price was higher at first than the price of equivalent conventional products, but today, the price of organic food is almost lower than that of conventional products. So the reasoning is, why not buy organic?

"Earlier on, we only had numbers from the biggest companies. Now we've dug so deep down through the layers that we no longer see the bias that we used to between small cap and large cap. Today we have data from more than 5,000 companies, and data is improving all the time," says Larsen.

It is one thing to have access to data, but another thing is how this data is used. The method for calculating ratings is continuously being improved and refined.

"It's a matter of finding the data that is relevant for each sector and this varies a great deal in-between sectors. The IT sector might place emphasis on HR, while in the manufacturing business you could look at e.g. water consumption. But things continue to undergo developments in the different sectors," Larsen explains.

Skeptics and other people interested in ESG are welcome to attend Søren Larsen's talk at the "Responsible Investment 2017" conference in Copenhagen, Thursday March 2, 2017.

English Edit: Marie Honoré

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