Shifting to sustainable practices could drive some companies to the wall, according to recent investor note from storied US-based manager MFS.
Contrary to Pollyanna-ish predictions that the current trend to “corporate sustainability is the ultimate win-win” for companies, investors and the planet, the MFS note says “the reality couldn’t be further from the truth”.
“Sustainability isn’t free, and in our view, efforts to become more sustainable will challenge many companies and perhaps even bankrupt some of them,” the MFS communiqué says.
Authored by MFS global investment strategist, Robert Almeida, and research analyst, Robert Wilson, the note says the surge of interest in environmental, social and governance (ESG) practices has coincided with several other pandemic-related trends such as work-from-home as well as “loneliness, [and] wealth inequality”.
“While we can point to numerous data points to illustrate mounting investor interest in ESG through fund flows, to us, what’s more most noteworthy is the growing recognition by management teams of the need for more sustainable business practices,” the note says.
For instance, the paper says the number of US corporate quarterly earnings announcements citing ESG sky-rocketed last year while the amount of companies referring to the UN Sustainable Development Goals more than doubled to about 130 over the same period.
“Now that investors are focusing on sustainable business practices, management teams have begun to pay attention,” the MFS note says. “And that matters. A lot.”
According to Almeida and Wilson, some companies may struggle to survive if the US minimum hourly wage rises to US$15, for instance, while oil firms counting on growing middle classes in emerging markets could be disappointed.
“Sustainability will drive new business opportunities for some while exacerbating risks for others, leading to substantial divergences in the long-term enterprise value of many companies,” the paper says. “But what is largely lost in the current ESG narrative is financial materiality. Which of course affects financial asset prices.”
The MFS pair suggest the investment sustainability push is a “disruptive force” on a par with “the industrial revolution or the advent of the Internet”.
“It will define society and the investment landscape for decades,” the note says. “But it won’t be free. There will be winners and some very big losers. This new paradigm is unfolding during a period in which risk premia are at all-time lows, underlining the importance of allocating capital responsibly.”
Known primarily as an institutional investor, MFS has a number of mandates in NZ, including an almost $4 billion exposure on the ANZ Investments multi-manager panel. Clarity Funds, part of the Investment Services Group, also hosts a portfolio investment entity (PIE) version – currently sitting at about $100 million – of the flagship MFS global shares fund.