Successful risk indicators
Time and again in the past, our ratings have held our clients back from investing in companies or countries which have run into financial difficulties. For example, Greece was already receiving poor ratings in our sustainability rating at a time when conventional rating agencies were still giving it scores in the A range. The same is true of Italy, Portugal and Spain. And in the corporate sphere, we gave BP and Tepco poor scores for inadequate plant safety well before the events in the Gulf of Mexico (Deepwater Horizon) and Fukushima. In the cases of Enron, Lehman Brothers, Parmalat and many others, our analysts saved investors from economic losses.
Positive impact on risk and return
The debate about whether taking social or environmental criteria into account in investments means foregoing returns, or whether sustainability and returns are linked in the sense of a ‘double dividend’, is almost as old as sustainable investment itself. This issue features in many of the discussions we have with institutional investors about the pros and cons of sustainable investment. In these, the view - or should one say the prejudice - that sustainable investors fare less well in terms of returns and risk is frequently expressed.
We have spent a long time striving to counter such reservations with solidly-based facts. In the 20 years or so that we have been operating in the sustainable investment market, we have regularly carried out analyses in this area. The results of these have been consistently positive:
Double Dividend with Sustainability Ratings from oekom research – study in cooperation with DPG, the Deutsche Performancemessungs-Gesellschaft für Wertpapierportfolios mbH (2012)
The findings: During the period 31 December 2004 to 31 December 2011, hence over a time period of seven years, the oekom Prime Portfolio Large Caps achieved a return on investment that was 15.30 per cent higher compared to its conventional benchmark, the MSCI World Total Return Index®. In absolute numbers, the cumulative return on investment of the oekom Prime Portfolio Large Caps (weighted by market capitalisation) amounted to 30.90 per cent. Over the same period the MSCI World Total Return Index® achieved a cumulative return on investment of 26.80 per cent. If equal weighting is applied to the securities in the oekom Prime Portfolio Large Caps, their cumulative return on investment even rises to 62.84 per cent. The annual risk of the oekom Prime Portfolio Large Caps (weighted by market capitalisation) was found to be 18.92 per cent, slightly lower than that of the MSCI World Total Return Index® (19,08 per cent).
What returns can be expected from a sustainable portfolio over the long term? – study by HypoVereinsbank and oekom research on the performance of best-in-class portfolios (2007)
The findings: The study showed that if equal weighting is given to the securities in oekom research’s Prime universe, then between 2001 and 2006 they returned an overall gain of 35.8 per cent, while the MSCI World Total Return Index®, a representative benchmark for the market as a whole, recorded a negative yield of -24.0 per cent over the same period. In other words, oekom research's prime universe outperformed the MSCI World by almost 60 percentage points. This analysis did not include companies from oekom’s “Potentials” sub-universe.
Sustainability and Business Success – an analysis carried out by oekom research and the Department of Psychology at the Technical University of Munich (2004)
The findings: This study focussed on the correlation between oekom research's sustainability ratings and the returns of the companies rated, as measured by the Return on Investment (ROI) and Earnings Per Share (EPS) indicators, for the period 2001 to 2003. It revealed that there was no negative correlation between the sustainability rating and the financial indicators ROI and EPS. On the contrary, the results of the study confirm statistically significant positive correlations between the overall score in the rating and the ROI and EPS values averaged over the period 2001 to 2003.
Does sustainability produce outperformance? oekom research’s “best-in-class” recommendations put to the test – a study by oekom research and Morgan Stanley (2004)
The findings: This analysis compared the performance of companies awarded Prime status by oekom research with that of companies classified as Not Prime. It showed that the Prime portfolio outperformed the Not Prime companies by 16.72 per cent between 2001 and 2004. In eight of the ten sectors looked at, the Prime securities performed better than the comparison group.