At the end of January, the Sustainable Investment programme held its first annual meeting, at which some of the results from its first year were presented. The programme consists of two subprogrammes, the Sustainable Investment Research Platform, based at Umeå University, and Behavioural Impediments to Sustainable Investment, at Göteborg University.The Umeå group are focusing on financial and capital markets, and are working with, among others, GES (Global Ethical Standard) Investment Services, a Stockholm-based consultancy firm whose services including screening of companies from a sustainability point of view. Through GES, the group have gained access to a database of over 1,000 of the world´s leading companies, rated on sustainability criteria over the period 2003-6.
High risk requires a high return
The Umeå researchers have studied the links between environmental risks and returns on investment portfolios. The question is whether shares in businesses with low environmental risks represent a poorer investment than shares in companies with higher levels of risk.
‘In sectors where environmental risks are greater, investors demand higher returns by way of compensation. That link is there whatever type of risk you are talking about. The interesting thing is that environmental risks make a difference - in other words, markets do take into account the environmental performance of companies,´ explains Lars Hassel, a professor of business administration at the Umeå School of Business and one of the two managers of the programme, in charge of the Umeå group.
But companies with higher environmental risks also have to generate a higher internal return on their assets, resulting in higher capital costs for the company, lower market value and more uneven profit growth. Where an attempt is made to minimize these risks, the required returns and hence the company´s capital costs are not as high.
‘For a business, then, there are economic incentives to minimize environmental risks. And investors, too, benefit from companies with a strong commitment to the environment, as such companies seem to enjoy good long-term value growth,´ Professor Hassel points out.
According to Lars-Olle Larsson, an auditor at Öhrlings PricewaterhouseCoopers who specializes in auditing and verifying sustainability reports, the Umeå group´s findings confirm a growing trend in the financial sector.
‘It is becoming increasingly common in this sector for analyses of businesses to take account of what companies are doing to promote sustainable development,´ he says. ‘With the Umeå researchers´ results, I´m now in a position to demonstrate that a business´s efforts in this area actually create value - there is a pay-off, for both the company and the environment.´
Sustainable strategies
The other research team, in Göteborg, are studying what obstacles there are to more investors taking sustainability into account. The researchers have identified different types of difficulty, at various levels within an organization. There is an individual/psychological level, which results, for example, in too little weight being attached to future concerns, and an organizational level, where for instance the reward structure may encourage a short-term outlook. There is also an institutional level, where there may for example be potential conflicts of interest between different players in the investment and valuation chain.
‘One of the basic questions we´re looking at is whether there is anything in the investment organization itself that prevents sustainability issues being addressed. We´re trying to find different types of values and approaches, and studying whether they are consistent within an organization - whether senior management, investors and asset managers all share the same outlook. One of the next steps will be to send out a questionnaire to fund managers, to probe how they operate,´ says Anders Biel, professor of psychology at Göteborg University and a project leader within the Göteborg group.
Different criteria
The Göteborg team have also investigated whether sustainability factors have any impact, either way, on financial returns.
‘Often, a wide range of criteria are used to assess a company´s sustainability performance. We´ve come to the conclusion that there are three main factors: the company´s environmental action, its relations with customers and employees, and its reporting on environmental, social and governance issues,´ says Evert Carlsson, director of the Centre for Finance at Göteborg University and the programme manager responsible for the Göteborg group.
In the light of these three factors, the researchers have analysed companies in a number of sectors and industries, but have found no evidence of sustainability factors affecting financial returns or economic efficiency. As their next step, the group will be studying whether there are particular sectors where sustainability factors are of greater significance.
