Investors around the world are more demanding. It is not enough to choose companies that offer above-average returns or companies that have an attractive valuation. We are in a new era of the financial market, with ESG investments – in English, Environmental, Social, and Governance – translated as Environment, Society, and Governance.
But those who care about these issues also need to see their income grow, and that’s why it’s important to know: are ESG investments profitable? Several studies show that companies that follow good environmental, social, and governance practices bring greater returns than others.
Do you have doubts? Then join us in this “ ESG Week: Investing in the Future, “held with the support of CBA and Rio Bravo. Between August 8th and 12th, Suno Notícias will bring a series of special content on ESG investments so you can stay on top of the topic and understand how it impacts your pocket.
You also cannot miss Suno Notícias’ face-to-face ESG event, with limited spaces, which will take place on August 17th in São Paulo.
Investing in ESG is good for the world and your pocket
Although in 2022, with the global crisis, ESG investments are also suffering, there is a lot of evidence that in the long term, this type of investment is favorable because it reduces risks and contributes to a more perennial and stable generation of resources.
So much so that large managers in several developed countries have dedicated investment funds focused on companies that take ESG seriously, with more than US$ 1 trillion invested in the last two years. One of the classic examples is Blackrock, with an extensive portfolio dedicated to ESG investments, in addition to France’s Mirova and Aviva Investors from London.
According to the publication of the Harvard Business Review, Just Capital created an index with 100 companies with sustainable practices in the United States. Do you know what the result of the “experiment» was? The study showed that in 2020 these companies “beat» the market, surpassing the best indices in the American market.
Harvard identified an additional return of 9%
Speaking of Harvard, Harvard Business School professors analyzed the 20-year returns of 2,307 companies that stood out for their ESG practices. The conclusion was that, in the period, these companies presented an additional return of 9% per year for the shareholder, which is interesting news for those who want to invest in ESG companies.
That is, companies that prioritize the practices of the ESG agenda are profitable, says Fábio Alperowitch, manager of Fama Investimentos, one of the big names in ESG in Brazil, who will be present at Suno’s face-to-face event.
The ESG expert explains that companies don’t have to choose between being profitable or sustainable. It’s the opposite. “The most responsible companies are also the most profitable. Take Renner (LREN3), for example; the business is always thinking about how it is going to grow more, how to increase margins, new products, etc.”, emphasizes the manager.
He points out that Renner has never stopped thinking about earnings growth. It just does not admit that this result comes from bad practices. “If you want to buy from a supplier who sells clothes through slave labor analogous to slavery, they refuse,” points out Alperowitch.
The companies best known as responsible and sustainable, such as Klabin (KLBN3), Natura (NTCO3), and Fleury (FLRY3), are companies that are thinking all day about how to make more money, opines the Fama Investimentos manager.
Are sustainable companies also profitable?
At the end of the day, companies that are well positioned on the ESG agenda are quality names, adds Marcela Ungaretti, Head of ESG Research at XP. The expert mentions that they are benchmark companies in governance, performing good risk management even better than other companies. That is, companies have prospects for better results.
In the short term, the index created by B3 to indicate the most sustainable companies, the Sustainability Index (ISE), is at a “loss,” losing to the IBOV. Until the month of July, the main index of the Brazilian stock exchange accumulated losses of 4.3% in 2022, while the fall of the ISE reached 13.5%. But in the long run, the situation is different.
At XP, studies were carried out that measured the performance of companies that are within the ESG agenda in comparison with their benchmarks. In the Brazilian case, the ISE has performed better than the Ibovespa index (IBOV) by 20% since its creation in 2005.
In other indices around the world, Ungaretti notes that ESG companies also performed better than other companies.
See 5 strengths in companies with ESG practices:
At this point, an important study conducted by McKinsey, a global consulting firm, shows how strongly ESG practices act in generating value for companies through:
- Facilitating revenue growth;
- Cost reduction;
- Less regulatory and legal intervention;
- Increased employee productivity;
- Investment optimization.
Therefore, research shows that companies that have sustainable practices invest significantly to achieve long-term returns.
Another XP study cites the volatility and resilience of these ESG indices in the context of market difficulties. For example, they fell less than other “conventional indices» in times of crisis, such as at the time of the stock market crash in 2020 and at the beginning of the pandemic.
Finally, this shows that these companies that value an agenda of sustainable practices are well-managed and have quality as a whole, making them good investments.
ESG is increasingly on the radar of individual investors
Companies and investment funds that have good sustainability practices are increasingly on the radar of common investors, who appreciate the commitment of these companies to the environment, society, and transparent governance. Such is the interest that the equity of funds with this theme increased from BRL 1.03 billion in 2008 to BRL 2.01 billion in March 2022, according to data from Anbima.
In this regard, the term ESG emerged to separate companies that have sustainable practices from those that are not concerned with issues related to their responsibility to the world.
The acronym emerged in 2004, within a working group linked to the UN, with the aim of making investors aware of the importance of sustainability in the business environment.
Since then, the topic has gained relevance in the developed world, with European countries concerned about the impacts of economic activity worldwide, demanding a more effective commitment from companies in the fight against inequalities. Obviously, the ESG agenda has found space in different economic contexts, including Brazil.
Deepening the definition of ESG companies
At first, many identified ESG companies with the theme focused exclusively on the environmental aspect. In other words, a company in the clean energy sector was synonymous with sustainability. However, the concept goes much further.
A company can have “green products”, but not be transparent in its communication with society, or even practice a wage policy incompatible with its workers’ needs, disregarding its social commitment.
In this regard, companies with the “ ESG seal, “in practice, bring with them the effort to reduce the impacts of their economic activity in the most different spheres of society. And the environmental agenda is obviously very important, but it doesn’t stop there.
Investors need to pay attention to the social and governance aspects of the companies they wish to invest in. “In the social sphere, it is possible to think of two universes, as highlighted by Marcela Ungaretti.
She states that the social sphere of companies that have good sustainability practices has two main aspects, which start from “the door to the inside of the company and also the door to “outside the company,” that is, in relation to society more broadly.
Internal company policies also count
Social in the internal aspect refers to the company’s policy toward its employees. The external agenda, on the other hand, refers to the companies’ efforts towards society, thinking about the impacts on the company’s surroundings. “It is the company’s responsibility to value the well-being of these communities, including through corporate philanthropy,” highlights the head of XP.
In terms of governance, Ungaretti understands that it allows environmental and social policies to evolve within the company. That is, a company that is well-managed has elements that facilitate good sustainability practices.
This includes how the company is structured in terms of committees, auditing, and independent members or how the company manages to structure itself in order to reduce internal conflicts of interest between the bodies.
And without a doubt, a diversity and inclusion agenda in corporate leadership is essential. Ungaretti believes that the greater the diversity in the management of companies, the greater the plurality of opinions, which consequently allows for decisions that are more innovative and positive.
Can ESG investing be considered a wise investment choice?
ESG investments are now a major part of the global sustainable finance movement. They are expected to surpass $30 trillion by 2030. This is a tenfold increase over its 2004 peak.
Numerous studies have demonstrated that companies with higher ESG ratings have lower business risk, better returns on investments, and are more sustainable over the long term. These metrics show the importance of ESG to ensure successful business operations.
Recent research also shows a correlation between ESG investments and ESG returns. For example, Morningstar’s 2019 study found that 41 of 56 ESG indexes outperformed non-ESG counterparts.
Retail investors who want to support companies with superior environmental performance have found ESG-themed ETFs increasingly popular.
In light of research that shows a correlation between financial performance and organizational diversity, Nasdaq recommended that the SEC establish a diversity requirement for its board. Companies listed on Nasdaq have to include at least two members of a diverse group on their boards. One must be female, and the other must be an underrepresented minority.
ESG investing is one part of a wider shift towards active investment styles. There are many options. ESG investors have the option to screen investments on the basis of values or pursue stronger ESG actions via shareholder voting strategies.
Investors still have many challenges despite the increasing popularity of ESG investing. For example, finding high-quality ESG data and standard formats to improve their assessments is not an easy task. Investors may also encounter companies that do not disclose crucial areas like carbon emissions.
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