By Sergio Tauhata, from Sao Paulo

Investing in shares of sustainable companies seems logical. However, the short-term culture and, mainly, the difficulty in assessing the real gains for organizations with such strategies usually weigh against this investment thesis. In the long term, however, the gains usually pay off. And by a good margin, as shown by a study carried out by the consultancy Aon in conjunction with the American university Wharton School, which assessed the performance of 361 publicly traded companies from five continents and 25 sectors, according to the maturity of social, environmental, regulatory, economic risk management, among others.
Among the results, the research shows that the shares of companies with better risk management had a volatility index 38% lower than those with worse controls, in the period from March 2012 to March 2013. And, between 2010 and 2012, the advantage was even greater: 50% less oscillation in asset prices for the group with greater maturity in risk management.

Regarding the return on securities, between March 2012 and March 2013, the group with the highest risk management maturity had an average gain of 18%, while those with the most precarious control lost an average of 10%. According to the study, in 2012, the year in which the S&P 500 fell 4%, groups with maturity levels 1 and 2, the lowest in the risk management classification created by Aon for the research, had losses of 30% and 17%, respectively. In the same period, groups 4 and 5, with the companies with the highest scores according to the consulting firm's criteria, had stable returns, with no gains, but also no losses.
The Aon/Warthon survey also looked at specific crisis scenarios. The period between the collapse of Lehman Brothers in September 2008 and the first month after the event was one such period. According to the survey, the stock market as a whole fell, but companies with a grade of 5 outperformed those with a grade of 1.

Another scenario studied was the Greek crisis in 2010. Between April and June of that year, companies with the highest degree of risk control recorded an average performance 45% higher than organizations with the lowest level. The consultancy and the university also collected data on the performance of companies' shares immediately after the earthquake in Japan, which damaged the Fukushima nuclear plant in 2011. Between March 2011 and March 2012, group 5 achieved a performance 91% higher than level 1.

In Brazil, the performance of the BM&FBovespa Corporate Sustainability Index (ISE) since its launch in November 2005 shows that, in the long term, companies that incorporated issues of social, environmental and economic responsibility, in addition to focusing on governance, had a significant gain over the general group. While the Ibovespa accumulated a gain of 62.51%, the ISE generated more than double the return in the period from November 2005 to April 14 of this year, with 142.7% of profitability.

“It is interesting to note that, until the financial crisis at the end of 2008, the ISE and the Ibovespa were very close and, after that period, the sustainability index separated from the Ibovespa”, says the president of the ISE Deliberative Council, Sônia Favaretto.
According to Alexandre Botelho, director of risk management consulting at Aon, efficient risk management geared towards business sustainability must involve all levels of the company. According to the expert, “the company must incorporate this into its day-to-day processes.” Botelho explains that adherence by senior management, the board of directors and shareholders is essential. “If the corporation is not prepared to understand and minimize uncertainties, it will make worse decisions.”

According to Erika Karp, founder and CEO of the Cornerstone Capital group, which specializes in financial sustainability, the incorporation of the so-called dimensions related to environmental, social and corporate governance (ESG) issues is becoming increasingly important in companies’ strategies and should be seen as a differentiator in investment. “This is what I call risk-adjusted return,” she says. According to the expert, more sustainable companies not only have lower exposure to risk but will also be better positioned to take advantage of opportunities over time.

With an eye on this long-term reward and the greater longevity of companies with ESG strategies incorporated into their business, asset managers have been adopting sustainability-related issues in their analysis tools. Starting this year, Itaú Asset Management officially incorporated ESG issues into all fundamental assessments of companies in the variable income area. “We are going to extend this analysis to fixed income as well,” says the manager’s CEO, Gustavo Murgel.
A signatory to the United Nations initiative called the Principles for Responsible Investment (PRI) since 2008, Itaú Asset Management had already been integrating ESG into its analyses even before its formalization. “Today, we have 100% of ISE coverage, but by the end of the year we should reach 100% of Ibovespa coverage,” explains Luiz Felix Cavallari, equity manager at Itaú Asset Management.

Bradesco is another Brazilian institution that has joined the PRI. According to Luiz Carlos Angelotti, the bank's executive director, Bradesco Asset Management (Bram) has adopted ESG principles when analyzing companies. “We are committed to adopting and looking at companies with good socio-environmental and governance practices when it comes to investments,” he says.

In most Brazilian companies, however, sustainability is still a distant reality. A study conducted by Sitawi, a non-profit organization specializing in supporting companies in financial sustainability programs, involving 72 publicly-held companies that are part of the MSCI Brazil index, 57% reported significant incidents related to sustainability in 2013. “These problems range from serious incidents, such as slave labor, to more minor situations, such as poor customer service,” explains Gustavo Pimentel, the NGO’s managing director.

The survey mapped all negative events, considered “controversial” in relation to ESG issues, practiced by companies representing ten sectors in the country. The telecommunications sector had the most incidents, with more than 26% of all cases – most of which, however, were related to situations considered to be of low or moderate “severity”. “The main focus of the problems is related to services provided to customers, which even includes excessive dropped calls,” explains Pimentel.

The second most controversial sector was financial services. According to the study, excessive waiting in lines, lack of security and unavailability of services topped the list of problems among this group.

The sector considered most critical, however, was the cyclical or discretionary consumer sector, which includes construction and development companies. This group recorded the highest number of situations considered severe or very severe. According to the study, the majority, 67% of the incidents, involved labor rights. The most serious problems were related to work in conditions analogous to slavery.

“The idea for the study comes from a trend in the capital market to consider social, environmental and governance issues to assess the future performance of companies,” says Pimentel. “These aspects are relevant and have an impact on companies’ cash flow, and this impact is only felt when companies release their quarterly reports,” adds the researcher.

Article published in the newspaper Valor Econômico on April 16, 2014