Since 42% of investors in a study by Schroders said performance was a primary concern in sustainable investing, S&P decided to investigate whether carbon-sensitive companies perform as well as those that are not sensitive to greenhouse gas emissions.
S&P considered three levels of carbon sensitivity and found companies at all three levels performed as well as those not sensitive to carbon pollution. In fact, as S&P notes in its ‘Trucost’ of Climate Investing Report, “several academic studies document that companies with lower carbon emissions have higher profitability than companies with higher emission activity. Highly profitable firms are usually well managed and have the resources to adopt proactive environmental strategies as a way to decrease regulatory liabilities. In addition, optimizing energy use reduces operating expenses and improves profitability either through the use of new energy-efficient equipment or adopting energy conservation policies.”
S&P took its study a step further to see whether other activities that generate pollution, such as air pollution, excessive water use and volume of waste generated, have an impact on stock returns. S&P found that they did not directly impact returns.
S&P concludes that “incorporating carbon intensity in a stock selection process does not detract from portfolio performance. All three carbon sensitive portfolios produce comparable returns to the baseline portfolio.”Sustainable investments in retirement plans attract participants—especially Millennials and women, according to at least one study. According to Karen Kaufman-White, investment research associate at Strategic Benefit Services, ESG issues can have a material impact on a company’s performance via reputational, operational, and financial risks or via commercial opportunities (such as clean technology innovations to accelerate the transition to a low-carbon economy). And, she points to “a growing body of research” that suggests companies with a holistic consideration of ESG measures have better long-term financial outcomes and may provide more opportunities for profitable investing endeavors.
The US SIF Foundation offers a resource for plan sponsors, “Adding Sustainable and Responsible Investing Options to Defined Contribution Plans.”
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