- A new research shows ESG investors would not sacrifice returns for the environment
- Most investors treat ESG news just like other financial news
- Avoid tunnel vision when investing in ESG, says expert
Do ESG investors care about the environment?
A new research paper by Wharton University found that retail investors care about a stock’s ESG related activities – but only if they don’t adversely affect the value of their investments.
Titled “Retail Investors and ESG News” and co-authored by Wharton’s accounting professor Christina Zhu, the paper also found that ESG investors are not motivated by altruistic motives.
“Retail investors treat ESG information like they do financial information, and they trade on such news in the same way as financial news,” said Zhu.
Zhu also said that her findings disputed many surveys that suggest retail investors “are willing to sacrifice a little bit of wealth for the environment or other ESG causes”.
“Retail investors care about ESG factors primarily to the extent they are financially material for company performance.
“In other words, retail investors profit from trading on ESG-related information when it is relevant to firm value,” Zhu said.
Interestingly, the research found that retail investor trading activity was 5.7% higher on “ESG news days” than on “non-event days”.
Significantly, retail investor’s reactions to ESG news events are greater in magnitude than those to analyst forecasts and dividend announcements.
“But these reactions are smaller when compared to earnings announcements and management guidance,” Zhu added.
Financial return is still number one
Another important finding was that although all categories of ESG news events generated significant trade activity by retail investors, news related to “Leadership and Governance” aspects impacted their trading the most.
“The G-type or governance aspects reactions are the biggest because they have a lot of impact on firm value,” Zhu said.
“It’s still related to the other categories because it’s the governance of the E and S (environmental and social) portions.”
The paper also found that events with more extensive media coverage generate significantly more retail trade.
“The significant increase in trading activity by retail investors around high-attention ESG events allows us to reject the hypothesis that they are indifferent to ESG-related information,” the paper stated.
The paper explored these findings further by asking the core question:
“Do retail investors value ESG-related factors for pecuniary (money-related) or non-pecuniary reasons?”
Zhu concluded that while it’s possible that some investors value ESG-related factors for non-pecuniary reasons, the evidence actually points the other way.
“When an event is good for the ESG performance of a company but bad for its stock price, retail investors are selling. They don’t seem to be willing to sacrifice financial returns for ESG performance,” she said.
“If the ESG news is good for firm value, then they’re buying.
“The basic takeaway from this study is that ESG-related news matters to retail investors just like any type of financial information would matter to them,” said Zhu.
Avoid ‘tunnel vision’ when investing in ESG
Amundi’s head of equity solutions, Piergaetano Iaccarino, argued that there is actually no need for ESG investors to compromise on returns if they just avoid falling into the trap of tunnel vision.
The trick, according to Iaccarino, is simply to stop focusing solely on one particular theme like renewables or clean energy.
Similarly, he said that if such an investor only picks companies that have great ESG credentials, they are often paying a premium for the stock relative to their competitors, often dubbed the ‘ESG premium’.
In this instance, fund managers could run the risk of overpaying for their investments in favour of being committed solely to investing in firms with the best ESG practices.
“Investment is intrinsically a selfish activity,” Iaccarino said.
“Your main objective is your own returns. There is this belief that there is a trade-off between your own goals and the planet’s goals.”
“But there is no trade off. I’m deeply convinced about that.”
ESG performance leads to stock value
Meanwhile, a research note from RBC Wealth Management asserted that companies that invest in improving its ESG performance may in the process be helping their bottom lines.
RBC argues that companies that focus on advancing their ESG performance may be considered ‘less risky’.
“For example, an oil company that invests more time and resources to improve health and safety measures at its operations and in protecting the environment could reduce its chances of a costly crude spill,” noted RBC.
“On the social side, companies with strong relationships with stakeholders — including employees, suppliers, communities and investors — can benefit from a strong reputation and potentially more business.”
The bottom line, according to RBC, is that ‘an overall strong ESG track record may help to increase shareholder value’.
“ESG should be marketed as something that enhances a portfolio, not inhibits it. It reflects in the value of the company.”