Why to Bother about CSR?
The trend towards socially responsible investments has been around for a relatively long time, however global growth in SRI assets has not weakened. Currently the amount of SRI assets accounts for more than a quarter of the world’s total managed assets, with Europe leading the field (more than 50% SRI in proportion of total assets).
Figure 1: Growth of SRI Assets by Region 2012-2016, billion USD
Source: HQAM, Global Sustainable Investment Alliance (GSIA) Global Sustainable Investment Review 2014; 2016
While the trend towards sustainable investments can be attributed to a number of reasons, the primary one is that CSR evaluation is often perceived as an additional risk management tool, something that was admitted by the portfolio managers in CFA Institute ESG Issues survey1.
Past cases also confirm that timely avoidance of companies with questionable sustainability ‘climates’ can decrease left-tail risk.
One of the extreme cases is Transocean, which has a long history of poorest sustainability ranking among the deep-water drillers. After the Deepwater Horizon catastrophe in 2010 Transocean’s share price halved in two months. Every subsequent accident involving the company was accompanied by severe share price decline. This lead to extremely high beta of 1.67.
Another company with poor CSR ranking, Valeant Pharmaceuticals, experienced its share price tumble by 80% between August 2015 and April 2016 after a drug price inflation scandal.
CSR Filter Contributes to Performance
A look into historic data demonstrates that the consideration of sustainability and social responsibility issues when building a portfolio might eliminate extreme risks. Moreover, there exists a significant amount of statistical evidence confirming the ability of a CSR factor to generate alpha. Though the very first research pieces were speaking against the sustainability topic, recent studies prove the added value of sustainability analysis. The stereotype of underperforming “green” portfolios emerged from the negative screenings, which were applied to the portfolios in the beginning of the SRI trend: whole industries have been excluded making the portfolios totally undiversified, often biased towards small technology companies2. Indeed, there are studies that show negative or neutral relationship between SRI factors and stock performance, but many more studies argue in favour of sustainability investing.
For instance, Morgan Stanley’s3 examination of 10,228 open-end mutual funds and 2,874 Separately Managed Accounts concluded that there is a positive relationship between corporate investment in sustainability and operational performance – returns of sustainable investments often exceeded performance of the comparable traditional ones. Eccles, Ioannou, and Serafeim4 found that when relating sustainability scores to the stock market performance, a ‘highsustainability’ portfolio outperforms a ‘low sustainability’ portfolio by 4.8% on an annual basis.
Good CSR Companies are also Good Companies Financially
Obviously the market values corporate investments in sustainability, which is also supported by the improved corporate financial performance. Friede, Busch and Bassen5 provide aggregated evidence from over 2000 studies on CSR-corporate performance relationship, saying that there is a strong business case for CSR investing as good quality of CSR goes hand in hand with above-average corporate financial performance. It often results in reduced cost of capital and increased capital profitability and Tobin’s Q.
Average sustainability scores by industry groups of the Quality companies in majority of cases exceed sustainability score of the average benchmark company as shown in the chart below. Results of the analysis confirm that corporate financial health and CSR play on one side of the field, which is well-seen in case with building products, Chemicals, IT services, Pharmaceuticals.
Source: HQAM, MSCI, Sustainalytics
Figure 2: CEAMS Quality Global Equity vs MSCI World Index Industries ESG Score Difference (excluding industries in portfolio with only one company represented)
Therefore, the conclusion is rather straight-forward: corporates concerned with good CSR practices not only enjoy increased trust from the investor’s side, but also better-positioning in the long-run for lowering their operational costs, facilitating capital attraction, earning higher profits and higher valuations in the end.
HQAM Approach to Sustainable Investing
The validation of the statement that financially healthy companies also have high ratings happens at HQAM on a constant basis. For instance, Geberit, Swiss sanitary products and systems producer, can boast exceptionally good financial conditions, while at the same time it enjoys the highest possible sustainability rating from Sustainalytics.
Figure 3: Financial conditions of Geberit AG
Economic sustainability is the very core of HQAM Quality investment process. The process includes a specific SRI plausibility check to assess whether, from a risk perspective, ethical norms are being followed.
1. ESG Issues in Investing: Investors Debunk the Myths. (2015). CFA Institute,
2. Kelly, R. (2016). Sustainable Investing as Performance Investin. Thornburg Investment Management.
3. Sustainable Signlas: New data from the Individual Investor.(2017). Morgan Stanley Institute for Sustainable Investing.
4. Eccles, R. G., Ioannou, I., & Serafeim, G. (2013). The Impact of Corporate Sustainability on Organizatioonal Processes and Performance. Harvard Business School Working Paper Series. Harvard Business School.
5. Friede, G., Busch T. & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233.