A collaborative project carried out recently by independent Munich-based sustainability ratings agency Oekom Research and Morgan Stanley, has found a strong link between out-performance and sustainability.
The best in class - the companies of what Oekom Research calls its “prime” universe - outperformed the non-prime universe by 16.74%.
“We took our best in class and checked how these fared compared with those which for social and ecological reasons we explicitly did not recommend for inclusion in sustainable investments,” says Robert Hassler, managing director of Oekom Research.
There are 207 companies in the prime universe, representing 30 industries and 21 countries. Oekom Research states possible factors that distinguish prime companies and non-prime companies include, the close relation of a company’s cultural background to sustainability topics, a high level of transparency, a commitment of executive board regarding sustainability, integrated management systems, high level of adaptability and eagerness to learn.
“We are convinced that those companies that have a stronger environmental and social policies than their competitors are the more successful companies overall,” Hassler says.
Morgan Stanley’s role in the project was to look at developments in the performance of these stocks for the period between 2001 and 2004. “We checked against the MSCI World Index to see if there was a coincidental element in the out-performance of the stocks that we chose and we are pleased to say that our companies outperformed in eight out of 10 sectors.
“The analysis criteria are chosen on a scientific basis,” explains Hassler. “We work closely with a very well respected group of experts and we analyse each sector; our approach is very much industry-specific. The scientists provide details of the relevant social and ecological factors for each sector. In the case of the energy companies we try to ascertain what the companies are doing to reduce their future emissions. We also look at how they are doing business in countries where the environmental standards are much lower like in developing countries. Reputations can suffer if they do not behave in a socially and environmentally friendly manner.”
Turning to his native Germany, Hassler highlights an interesting mix of attitudes towards sustainability among his compatriots. He points out that the environment is important to most Germans. “We tend to believe that we are the world champions in protecting the environment – we think that we are those in the world who take the most responsibility. While this may indeed be the case, it is difficult to make the case that funds should make this link with their investments – which is contradictory.”
Hassler continues: “German pension funds are very reserved about risk and new ideas. Until 10 years ago pension funds and insurance companies only invested in fixed income in the form of government bonds . Their primary concern was to invest safely. As institutional investors, church funds and foundations are much more open.”
If we are going to have our work cut out convincing German investors of the benefits of an equity strategy then the prospects of selling an equity strategy with an SRI overlay as financially worthwhile seem rather dim, for now at least, he reckons.
The prospects for change don’t look particularly good. “The huge sums lost by investors who bought shares in Deutsche Telekom through the country’s first popular floatation have made people more wary than ever.”
Corporate governance issues - particularly the falsifying of financial statements, management salaries that are far too high - are also very much points of discussion in Germany. “When Mannesmann was taken over by Vodafone the then CEO of Mannesmann received a payout of E60m when he left the company,” says Hassler. “That was - and still is - a huge issue.”
He adds: “Sustainanle investment is about choosing companies with better corporate governance structures to reduce risk; this will be easier to achieve than ethics and social responsibility.”
So how do we make pension funds less reticent? “We have to provide positive examples - reports like the one we have conducted with Morgan Stanley - to show that corporate social responsibility does add value in the long term – this cannot be ignored. There is a German social investment forum where we want to make appearances and invite target groups – they mustn’t be afraid!”
Hassler adds a philosophical note: “Rethinking one’s investment philosophy is not a short-term process and we won’t achieve our goal from one day to the next. It is a German mentality.”
In which case perseverance would seem the best strategy.