Sustainable investing for a changing world

The trade-off between risk and return is well understood by investors. Sustainability is the third dimension, a forward looking holistic approach to investment.

SustainEx quantifies the positive contributions and negative impacts companies have on society. Viewing those costs and benefits through a hard economic lens provides an objective measure of companies’ credit or deficit with society, which will become more important as they crystallise into financial costs or benefits. SustainEx analysis helps our analysts, fund managers and clients measure and manage those social and environmental impacts and risks more effectively.

Companies historically enjoyed unencumbered growth…

Companies do not operate in a vacuum. They are part of the societies from which they draw their employees, to which they sell their products and under whose laws they compete. For most of the last few decades, large companies have grown and thrived even as social and environmental challenges have intensified. Corporate tax contributions fell, real wages stagnated and environmental damage went unpenalised. Companies were largely able to focus on maximising current profits without too much concern for the costs their actions created elsewhere in societies or economies.

…the social and environmental impact of which is starting to be realised

In recent years, that strategy has started to unravel and will become more untenable going forward. Costs are growing and governments are less able to absorb them. As a result, social pressure and government intervention are forcing companies to take responsibility for the costs their actions create. Among other measures, minimum wage legislation, sugar taxes, gambling restrictions or carbon prices are all spreading, creating financial expenses in place of previously unaccounted social problems.

As a result, costs that were previously externalised to society will become internalised on companies’ financial statements. As that transfer plays out, companies whose profitability have relied on avoiding the costs their products or operations impose on society will find their business models come under growing pressure. The size and distribution of profit pools in many industries is at risk as winners and losers are reordered.

SustainEx quantifies a company’s cost or benefit to society…

New approaches to investment analysis are needed to identify, measure and manage the risks those externalities impose on companies’ profitability. SustainEx measures the costs companies would face if all of their negative externalities were priced, or the boost if benefits were recognised financially.

SustainEx is designed to help our analysts, fund managers and clients identify those risks, to help ensure they are reflected in investment decisions and valuations. It attributes previously unaccounted social and environmental costs and benefits to individual companies, using economic logic to systematically combine robust academic analysis with company data. Our research has identified and examined 47 externalities to date, drawing on over 400 academic studies and applied to around 9,000 global companies.

…and how that cost or benefit might impact profitability

Our analysis highlights the growing costs listed companies create, and the rising importance of considering the risks those externalities pose to future earnings. The US$4.1 trillion earnings listed companies generate for shareholders would fall by 55% to US$1.9 trillion if all of the social and environmental impacts our research identifies crystallised as financial costs. One third of companies would become loss-making. The risk to profit pools and competitive positions is clear.

By quantifying social and environmental impact in economic terms, SustainEx provides our analysts, fund managers and clients with a measurement approach that is comparable across companies, funds and indices. Impacts can be assessed through ESG, SDG1 or other lenses for investors with specific priorities. It helps focus analysts’ attention on companies facing the greatest risks and the sources of those risks. Finally, it yields a measure of corporate sustainability which we have integrated into systematic investment strategies. It focuses on the risks companies face, not how they manage those risks; we view the analysis as part of our firm’s sustainable investment tool kit, not a universal “answer”.

 

Read the full report

 

Important Information
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Our business is structured around a number of strategic capabilities, which combine to meet a variety of client requirements. Please visit the Strategic Capabilities - Sustainability page to discover how we sustainably deliver long-term value in a fast-changing world.

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