Sound business is more expensive!

Sustainable investment works according to one theory: “bad” companies are more expensive to raise funds than “good” companies to be the first to develop in the right direction. Another theory is that investing in “good” companies rather than “bad” ones makes more money because of the sustainability of their business models.

Is this true in the estimates? This question was asked by Duncan Lamont, head of strategic research at Schroders.

His conclusions? So. Bad companies in the MSCI All Country World Index are valued 17 times more than profits in the last 12 months. But good companies are valued 25 times. “In other words, if both companies had the same profits, a good company would cost about 49% more.” The situation is similar when considering the estimated multiples of the price to profit or reserve price. Therefore, good companies have a much higher rating. This is true if we focus on the environmental aspect – bad companies are valued 17 times their profits against 20 for good companies – and on the social aspect – bad companies are valued 19 times their profits against 25 for good companies.

It was found that companies that meet a wide range of sustainability criteria have a higher “assessment premium” than companies that focus on environmental or social parameters.

The materials sector is one of the most conscientious

And if we consider the issues by sectors of practice of companies?

In all sectors except real estate, a sector that includes many REITs that tend to differ from those of conventional biased companies, companies that are more stable than their counterparts in the sector trade at higher multiples. / profit than those that are not.

The difference is relatively noticeable in the materials, energy, finance and industry sectors.

Material companies with more sustainable management are valued 23 times more than profits in the last 12 months, compared to 13 times for the least stable. The same applies to companies in the energy sector – 19 times for the best against 11 times for the worst. In both cases, it is best to assess the different environmental risks. For these two sectors, Duncan Lamont believes that this sharp difference makes sense. “These industries are portrayed as bad guys when it comes to environmental impact. They are more often than others in the spotlight. Therefore, it goes without saying that the market differentiates them even more, estimating those who are best placed to survive the next decades, and devaluing those who are likely to be on the line of fire.

Social risk is less taken into account

Now, if the estimates are high, the profit is lower. Thus, a bona fide company will be less “profitable” than a company run in an unstable way. At least for a short period.

For Duncan Lamont, profits can still be made by finding and identifying leaders and laggards, as well as taking into account the difference between the price of environmental risk and social risk.

In general, and in most sectors, there seems to be greater divergence in assessments of environmental sustainability – “an area where more investors and asset owners have clearly articulated policies and where transparency and industry-wide pressure have been strongest” – but not so much because social risks. “Investors generally say that a company’s prospects do not depend on whether it treats its employees well or sells products that cause health problems. I don’t think they are right. These social consequences are important for the company’s sustainable growth in the long run. ” According to him, “social risk pricing has not really advanced”, and in the future investors need more companies on this basis.