Professor of finance Ken L. Bechmann from Copenhagen Business School last week spoke at the annual general meeting of the the Danish Securities Dealers Association, where he took the opportunity to tell those in attendance why they should incorporate environmental, social and corporate governance standards, ESG, in their daily work to a much greater extent than they do today.

"Financiers should increasingly get used to involving ESG aspects for investment purposes. Not only because their clients demand it, but because it's necessary to ensure a highly sustainable, risk adjusted return in the long run," says Bechmann, who works with Corporate Finance, Corporate Governance and incentive based compensation at CBS in Copenhagen.

Bechmann is aware that some stockbrokers will strain at the leash, and say that it is inconvenient to have more requirements and standards forced on them, and to top it all, these requirements have no benefit for the bottom line. But that is not how it works at all, says Bechmann to FWAM:

"It's about being loyal towards their purpose, which is generating high, risk-adjusted returns for their investors. If they really are to be loyal towards pure capitalism, and if they really want to generate high, risk adjusted returns through active stock picking, then it's a requirement that they take a stand on the risk attached to their investments," says Bechmann, emphasizing that with this talking-to, he is trying to do professional investors a favor, not force more roles and responsibility on them.

Screening can be too unelaborated

If one manages to incorporate ESG in the daily assessment of investment cases, it will create much more value than carelessly chasing after purchased screening results and investing like everybody else, Bechmann emphasizes.

"When it comes to potential for returns and risk, ESG covers all the right and relevant aspects. I believe that the right approach would be to carefully examine ESG standards as a central element in the normal investment approach, also looking at the competitive environment, the market potential, technologically competing products, etc. In other words, one should take a much more straight-forward and company-specific approach to ESG than just a potential unelaborated screening, where investors could be left with undesirably restricted investment options."

Bechmann urges to not cut corners by buying a screening solution and excluding some companies. It is too easy and creates no added value in the long term, he says.

"With an unelaborated screening, you end up with limited investment options based on what an external party at a given point in time deemed important to focus on in relation to ESG. Furthermore, you risk  that an increased screening reinforces the herd instinct, both in investors and in companies, which can reduce the efficiency of the financial market, which is not in anybody's best interest – not the environment's, either," Bechmann concludes.

English Edit: Marie Honoré