Fifth of listed companies have positive impact

NN Investment Partners (NN IP) has published research that suggests a surprisingly high proportion of listed companies globally are making a positive impact, as defined by the UN Sustainable Development Goals (SDGs).

The Dutch asset manager surveyed 15,000 companies and found that almost 3,000 (19 per cent) met the criteria to be considered “positive impact companies”. Within this “positive impact universe”, researchers found that more than 60 per cent of firms either provide access to health solutions (45 per cent) or contribute to the low-carbon transition and circular economy (18 per cent).

Overall, the results indicated roughly a 20-60-20 distribution of positive, neutral and negative impact companies. The research also highlights the importance of fundamental analysis in sustainability-focused investing. Researchers identified many companies that may be ready to take the next step in adopting a more sustainable business model, as their products are gradually improving or less damaging than those of peers.

The analysis also shows that such companies outperform the overall listed company universe, delivering higher growth rates and higher-quality returns and enjoying a lower cost of capital. Positive impact companies deliver five-year sales growth of 12 per cent on average, versus 7 per cent for neutral/negative impact companies. Impact companies also enjoy average five-year costs of capital of 5 per cent versus 6 per cent for non-impact companies.

Initially, the research seems to show that positive impact companies underperform in the short term, with cash-flow return on investment (CFROI) just 2.7 per cent above their cost of capital, versus 2.9 per cent for neutral or negative companies. However, if companies with a market cap below $1bn are excluded, positive impact companies deliver 7.3 per cent above the cost of capital, versus 4.9 per cent for non-impact stocks.

Willem Schramade, senior portfolio manager, NN Investment Partners, commented: “Impact investing is a relatively young area. Data is limited and there is little empirical evidence. Many investors are still relatively unfamiliar with this type of strategy and many regard it as risky, expecting the positive impact to come at the expense of alpha and financial returns. However, our findings and database results suggest otherwise and prove that financial and societal returns are not mutually exclusive. As reporting on impact becomes more widespread, the available data will increase and improve. This will make it easier to track impact in a more tangible way, making the SDGs more investable and thus helping to accelerate their fulfilment.”

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