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High percentage of companies work for ‘impact’ portfolios

sustainable investingAbout 19% of listed companies in a study were making a “positive impact” as defined by the UN’s sustainable development goals (SDGs).

Fund manager NN Investment Partners (NN IP) which carried out the research said this was a “surprisingly high” percentage of listed companies globally that were making a positive impact. The firm added that the analysis showed these companies delivered high growth rates.

NNIP studied 15,000 companies and nearly 3,000 were seen to have a positive impact.

Within the positive impact universe, researchers found that more than 60% of firms either provide access to health solutions (45%) or contribute to the low-carbon transition and ‘circular’ economy (18%).

Researchers said they’d identified many companies that may be ready to take the next step in adopting a more sustainable business model, as their products were gradually improving or were less damaging than those of peers.

Overall, the results indicated roughly a 20-60-20 distribution of positive, neutral and negative impact companies.

These companies outperformed the overall listed company universe, delivering higher growth rates and higher-quality returns and enjoying a lower cost of capital. Positive impact companies deliver five-year sales growth of 12% on average, versus 7% for neutral/negative impact companies.

Impact companies also enjoy average five-year costs of capital of 5% versus 6% for non-impact companies.

The research initially seemed to show that positive impact companies underperformed in the short term, with cash-flow return on investment of just 2.7% above their cost of capital, versus 2.9% for neutral or negative companies. However, when companies with a market cap below US$1 billion are excluded, positive impact companies deliver 7.3% above the cost of capital, versus 4.9% for non-impact stocks.

Willem Schramade, senior portfolio manager at NNIP, said the findings supported the belief that financial and societal returns can go hand in hand.

“Our research debunks common arguments and assumptions that support the myth that impact investing costs money or leads to worse risk-return metrics. The higher growth rates of positive impact companies make intuitive sense. They tend to be more innovative and benefit from SDG tailwinds, and they are not usually involved in sunset industries.”

Schramade also said the size factor was also worth noting.

“Before we started our analysis, we expected to find a higher prevalence of net positive impact small cap stocks than large caps. After all, smaller companies are more likely to be innovative pure plays, while larger companies are more often entrenched old-economy players with negative externalities, such as airlines, oil majors and tobacco companies. In reality, we found only a mildly negative relationship between positive impact and size.”

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