“You want to make profits in the future? Then you should better pay attention”, said Dirk Schoenmaker in a SAFE Policy Lecture on 18 February about the importance of sustainability for financials and corporates. In the House of Finance, he talked about the role finance can play to a more sustainable world. In his view, however, decisions about investments need to follow a more interdisciplinary approach to be sustainable.
For Schoenmaker, who is a Professor of Banking and Finance at the Rotterdam School of Management, Erasmus University Rotterdam, there are three reasons why companies need to take ESG criteria (environmental, social and corporate governance – refers to the three central factors in measuring the sustainability and ethical impact of an investment) into consideration. First, he argued that companies need to anticipate regulation or taxation in their field, such as a carbon tax.
Second, companies put their reputation at risk due to pressure from NGOs or consumers when they act unsustainably. Third, he said that companies need to make their business future-proof in an ever-changing environment, mentioning the Sustainable Development Goals for 2030 of the United Nations which include objectives for economic growth, climate, and social goals. “That is where the future of business is lying, that is where the investments should go”, he said. Schoenmaker pointed out that he is optimistic that companies will actively take more sustainable decisions. Even if returns may be a bit lower when companies integrate sustainability factors, it would secure more stable returns in the future. However, this is not true for all sorts of companies. “I would not put my money in coal mining. Some sectors will die, others will transform,” he said.
Still, it is hard to decide whether an investment is sustainable or not. Schoenmaker warned that an administrative approach by officials would stifle innovation. “Let investors and bankers find out what works”, he said. He is in favor of a market-led approach through fundamental investing and banking.
A long-term horizon of investments
Schoenmaker named three elements for sustainable investment. Firstly, fundamental analysis to calculate the integrated value of a company is decisive which includes social and environmental value. The current ESG analyses are limited as they do not focus on the companies’ actions. In his view, ecological and social experts are required to assess the concrete actions of a company because these are the key to a responsible investment decision: “What kind of action you are taking is in the end what counts”, he stated.
Further, Schoenmaker addressed the problem of portfolio diversification. For him, a concentrated portfolio with 50 to 100 companies is feasible as a fundamental analysis on a greater number would simply not be possible. “You cannot run a portfolio with 1000 shares because you cannot check 1000 companies”, he said.
The third element should be an intended long-term horizon of the investment. Investors should look more at the added integrated value of companies than to take the market as a benchmark. Pointing to the banking sector, Schoenmaker showed that some institutions like Westpac or Rabobank already integrate new approaches in their lending policies.
Schoenmaker concluded by stressing the importance of long term value creation to achieve sustainability goals and the more broadened interpretation of value. “Finance is about anticipating events and pricing them in today”, he said. In this way, finance can in Schoenmaker´s view contribute to a swifter transition of the economy.
Video of the SAFE Policy Lecture: Finance - a Tool for Sustainability
