Photographer:Fotograaf: Loraine Bodewes
‘Principles cost money’, professor of Finance Rob Bauer thought in 2001 when he started his research on the performance of sustainable investment portfolios. Taking account of the environment and working conditions for employees is bad for profits and thus undesirable. “In the past, companies got away with that type of thinking”, Bauer says. “Thirty years ago nobody was talking about sustainability.”
Nowadays, ignoring sustainability is not on. “Society is expecting more and more of the business world. Indeed, if they want to stay competitive, companies now have to be sustainable and ethical. Many consumers no longer accept that companies have to cause pollution or be animal-unfriendly, or have children make their products under appalling conditions.”
Bauer brings up the case of Volkswagen, which meddled with test results in 2015 to make its cars appear more environmentally friendly than they are. Consumers felt cheated and punished the company: VW lost billions worldwide through settlements, fines and lawsuits. For the first time in years, it sold fewer cars than the year before. Sales figures eventually recovered, but not before the multinational ate a lot of humble pie. “Companies can’t afford to make too many of these mistakes.”
Sustainability is increasingly being prioritised. Yet many people, professional investors included, still believe that sustainable companies are less profitable. “Surveys show that many participants in pension funds think these companies perform worse on the stock market. This idea is common even among many ‘short-term cowboys’ at the big commercial banks on Wall Street or in London City.” But it is a misconception, Bauer says. “Research shows a positive correlation between material sustainability characteristics and the financial performance of a company.” Paying attention to sustainability is good for a company’s reputation, and thus also for its revenues and share price. What is more, it is easier for sustainable companies to attract capital because investors expect fewer risks.
And so the business sector is taking sustainability ever seriously. “Philips, for example, has already incorporated it into its company vision.” Companies that fail to get on board will suffer damage to their reputation, but also lag behind in terms of innovation. “Say DSM develops a new CO2 filter for a certain production process; this is good for DSM’s sustainability score and therefore its reputation. It can also sell this new technology to other organisations.”
For Bauer, the developments towards a sustainable economy and society can’t move fast enough. And everyone needs to chip in. “That means buying organic meat, for example; ordinary meat is so cheap because it doesn’t cover the cost of environmental effects. The same goes for T-shirts for €7.50 made in Bangladesh; there’s no way they can be produced fairly. This is not yet clear to consumers, which makes it hard to bring them around. Consumers and investors also need to keep putting pressure on companies, and asking questions like ‘Why is my pension fund investing in oil or tobacco?’ or ‘Are these T-shirts made by children?’”
Myth busters is a series in which academics shoot down popular myths on complex topics