Impact
Busting the performance myth: the logic of ESG investing
6 min read 8 Nov 21
Summary: One of the long-standing myths about ESG (Environmental, Social and Governance) investing is that ‘doing good’ comes at a cost. You can invest for the feel-good factor or competitive returns, but not both. At M&G we disagree. We believe that businesses with robust ESG practices have greater potential for success over the long term than ones that don’t. And here’s why.
Environmental
A business using water efficiently for example could be paying lower water bills, and spending less on water disposal, than a business that isn’t. Or a manufacturing firm actively working to reduce its waste could benefit from spending less on raw materials (by only buying what it needs) and paying lower waste disposal costs overall.
Some companies may also choose to sell or exchange their unwanted industrial scrap or manufacturing by-products to other businesses to use as a raw material. This alternative ‘circular’ approach to waste management could create additional income streams for a company and in turn has the potential to boost the balance sheet.
Take Trex for example. Trex produces low-maintenance decks, made from 95% reclaimed wood and plastic waste. Since Trex became the first company to produce composite decking back in 1996, demand for timber alternatives has outgrown the wider decking market in the US and Canada.
Social
We believe a business that treats its employees well and pays a decent wage has the potential to attract and retain a superior, more loyal workforce than one that doesn’t. A logistics firm, for example, with a reputation for retaining skilled, happy workers, could be more productive and resilient in times of political or economic uncertainty than a firm offering poorer pay and inferior working conditions.
Even businesses publicly supporting their local communities could benefit from greater customer and brand loyalty than those that don’t.
Governance
It stands to reason that the governance of a business has the potential to have a positive impact on its success too. Transparency in a company’s internal workings, strong process controls and good treatment of suppliers and vendors have the potential to boost a company’s reputation and perhaps its value.
Clear roles and responsibilities within a firm can also help speed up decision making meaning things happen quicker, ahead of competitors. General good governance and regulation may also help to reduce mispractice within an organisation, potentially avoiding brand and reputational damage and the penalties, financial and otherwise, that can come with it.
The ESG lens
We believe it makes sense that businesses improving their ESG credentials are more likely to benefit from the structural shift towards a more sustainable economy that the world is working towards as we speak.
Looking beyond just the ‘financials’ of the businesses could help investors learn more about them, discovering opportunities and threats that may not be obvious from looking purely at its balance sheet. We believe that this extra layer of insight has the potential to offer even more investment opportunities for investors over the long term.
Please remember that the value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
The views expressed here should not be taken as a recommendation, advice or forecast.
The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.