Investors pouring money into broad-based environmental, social and governance (ESG) strategies may have to brace for disappointing returns as sustainability efforts push some companies to the wall, according to a new MFS investor note.
The MFS analysis says shares with a high ESG rating have accrued about a third of the record flows into equities in 2021 as investors bet on a win-win from corporate sustainability moves.
However, the note – authored by Robert Almeida Jr and Robert Wilson Jr, respective MFS global investment strategist and research analyst – says not all companies can survive under ESG conditions that are already hitting some corporate profits.
“We fear that short-term investors underappreciate how many companies have a real terminal value problem,” the MFS paper says. “Sustainability isn’t free, and in our view, efforts to become more sustainable will challenge many firms and perhaps even bankrupt some.”
Almeida and Wilson argue that optimistic bets on ESG strategies currently under-estimate the impact of “financial materiality” on specific companies as the sustainability battle plays out across the corporate world in “a disruptive force akin to the industrial revolution or the advent of the Internet”.
Sustainability “will define society and the investment landscape for decades”, the paper says, creating “some winners and some very big losers.”
“And this new paradigm is unfolding when risk premia are at all-time lows, making the responsible allocation of capital even more important,” the MFS note says.
The Boston-headquartered global investment giant has several institutional clients in NZ, including ANZ, as well as a retail offer via Clarity Funds.