This interview originally appeared in the Scope Analysis September Newsletter.
There are many sides to sustainability. Some people think there are too many. But sustainability won’t be disappearing from the investment industry anytime soon. In this interview, Andreas Feiner of Arabesque Asset Management explains why.
Sustainability was a niche market until very recently. Now it is one of the biggest themes in investing. What are the reasons behind this change?
Andreas Feiner: Sustainability’s status has changed because more and more investors are convinced that investing in sustainable businesses is good for people’s conscience as well as for performance. In other words, sustainable companies have higher earnings potential and better risk-yield profiles then companies with a lower sustainability profile. Numerous studies have demonstrated this correlation.
Does that mean the driving force behind this development is performance rather than ethics?
Andreas Feiner: Naturally, moral and ecological aspects continue to play important role. Having said that, sustainability is no longer just about investing in environmental protection projects or avoiding the tobacco and weapons industry. It’s much more about the core aspects of investing – risk and yields. Or to rephrase Bill Clinton’s famous campaign slogan, “It’s the performance, stupid!”
What role have the numerous corporate scandals of recent memory played?
Andreas Feiner: The scandals and the massive price drops that followed as a result for Volkswagen, Toshiba and Wells Fargo gave sustainability an extra boost. They were a painful illustration that investors should not base investment decisions solely on conventional financial performance indicators and that it’s risky to ignore sustainability factors. What value are good quarterly results when scandals of this magnitude destroy years’ worth of performance?
Many investors think sustainability is still too vague a concept. There are simply too many soft factors that are difficult to integrate in investment processes. What has changed in this respect?
Andreas Feiner: A lot. For one, companies are publishing more and more qualitative information beyond the conventional financial performance indicators. At the same time, the digital revolution we are all experiencing is transforming our ability to quantify and measure sustainability.
Have you got an example?
Andreas Feiner: Leadership culture is a good example in this context. Until recently, you could describe it but you could hardly quantify it. Big data and intelligent algorithms have changed that. Those technologies enable us to calculate a score for the sustainability of a corporate culture based on massive quantities of data and all of the information available on that company – and they enable ongoing, automated updates to that score.
Can you apply that process to every sustainability factor?
Andreas Feiner: In principle, yes. For example, at Arabesque we have developed a tool that condenses all relevant ESG information – environmental protection, social concerns and corporate culture – about a company in a single score. The benefit for investors is that they no longer have to deal with the various aspects of ESG separately; they get all available information aggregated in a single indicator.
Does that mean investors should stay away from companies that have good financial performance but a low ESG score?
Andreas Feiner: I wouldn’t make such a blanket statement. But investors should be sure to have a closer look in such cases. A low ESG score always entails risk. Investors should analyse that risk in detail.
To conclude, would you give us your forecast for how sustainability will develop in future?
Andreas Feiner: Investors will use sustainability criteria as a standard performance indicator for investment decisions, like a price-earnings ratio or dividend yield. Sustainability will become an essential component in any risk analysis. The quantifiability of sustainability aspects will increase as well, because data quality is improving rapidly.
Will this evolution lead to a more sustainable economy too?
Andreas Feiner: Investors bear a great deal of responsibility. They decide how capital is allocated in our economic system. The more investors integrate ESG criteria in their decision-making processes, the more capital will be allocated to companies that meet high sustainability standards. That would obviously be an encouraging development.