Which Sustainability Factors Pay?

The European Union is asking companies to disclose the negative impacts that their investments may have on the environment. This has piqued the interest in the relationship between the financial performance of assets and certain sustainability factors. These factors include carbon emissions, water conservation, biodiversity, energy efficiency, and waste management. To address these questions, we have created a white paper to answer the question: Which sustainability factors pay?
Under the European Union Sustainable Finance Disclosure Regulation (SFDR), companies are mandated to report the effect their investment decisions or advice may have on specific Principal Adverse Impacts (PAIs). These PAIs include sustainability factors, including carbon emissions, water conservation, biodiversity, energy efficiency, and waste management. This new regulation has raised the question among investors: Can we take these factors into account without sacrificing too much in terms of financial performance? The most recent research points clearly in one direction – not only is there no trade-off between sustainability and financial performance, but investing sustainably can actually increase financial sustainability.
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Carbon emissions: A clearly profitable sustainability factor

The relationship between carbon emissions and financial performance has been thoroughly researched over the past years. A meta-analysis by the New York University looked at 39 papers and found that 59% of the studies show a positive relationship, while only 10% show a negative one. Some of these papers came to the conclusion that aggressive decarbonization strategies correlate to better risk-adjusted returns and that the conscious investment in carbon-efficient firms and exclusion of carbon-inefficient firms can result in a direct increase in returns.
Some researchers try to explain this trend through the hypothesis that a proactive climate change strategy that is also financially viable makes a company look better to stakeholders and asset managers, paving the way for economic success.

Other sustainability factors can also pay

Research on the other sustainability factors covered by the white paper, while less extensive, all point toward a positive relationship between a better sustainability score and higher returns. Investing in companies that work proactively with water conservation, biodiversity, energy efficiency, and/or waste management is a way to not only contribute to a more sustainable future but also to future-proof investments for higher long-term returns.
Investments with a high sustainability score usually contribute to better risk management and more innovation while being more resilient in times of crisis, as was shown during the pandemic. As it becomes mandatory to disclose the potential sustainability implications of investments, asset managers need to remember that there is no trade-off between a sustainable investment and a financially viable one – in fact, the opposite tends to be true.
Read the full white paper to learn more, and also see our findings on social sustainability factors such as diversity and human rights:

  • Sarah Chabane

    42 w

    Super interesting! More investors need to choose the planet

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