Investors say they won’t sacrifice 1bp of return for firms to become more sustainable

Most shareholders also believe companies over-invest in social and environmental issues, finds academic survey

Even dedicated ‘sustainable’ investors are largely unprepared to sacrifice any returns to allow companies to improve their environmental and social performance.

That’s according to a survey of more than 500 portfolio managers, which found that only 27% were willing to give up just 1 basis point of annual return in pursuit of sustainability goals.

The study, conducted by high-profile academics from the UK, concluded that investors running both traditional strategies and those with dedicated ESG mandates tended to shun the idea of making trade-offs between financial and sustainability objectives.

“Both types explained that fiduciary duty prevents them from doing so,” said the researchers, who asked the respondents how much long-term risk-adjusted total shareholder return they would tolerate a company sacrificing to improve its environmental or social performance.

Only 30% of those running sustainability funds would accept any drop in returns – falling to 5% who would give up more than 50 basis points. For conventional portfolio managers, the proportion was 24% and 2%, respectively.

“Even 50 basis points is a relatively small effect on the cost of capital, which is unlikely to have a major impact on corporate decision making,” noted the report, pointing to existing research that claims a 50 basis point change in the cost of capital is equivalent to a carbon tax of just $5 per tonne.

Respondents claimed that it would be a breach of their fiduciary duty to do anything other than maximise returns, with one investor arguing it would be “unethical and illegal”.

Traditional investors argued that financial and sustainability goals “should be aligned, if done well – after all, that is management’s challenge”, and that “sensible spending would mean there was no trade-off”.

Firms over-invest in sustainability

Shareholders were also asked if they thought companies over- or under-invest in environmental and social issues.

Nearly 70% of respondents believed firms over-invest in at least one of the eight topics they were asked about – most commonly greenhouse gas emissions – while 51% said they underinvest in at least one, most commonly ecological impacts.

“The most supported reasons for overinvestment are pressure from the media, the public, employees or investors,” the study noted. “Underinvestment is attributed to investor or company short termism.”

Last week, REP reported on two new papers calling on governments, regulators and the private sector to acknowledge that there was an incompatibility between profit, growth and sustainability under the current economic model.