In terms of capital cost advantage, it is quite easy to see why ESG-good companies have better access to capital than lesser ones. Let’s say M is the total sum of money available to be invested in companies. Of this available amount, S is the capital that belongs to Sustainable investments or ESG investors. Companies that pass the ESG tests have access to M, but those that do not, have access only to M-S. Based on this argument, “ESG-bad” companies will have a higher cost of capital than “ESG-good” companies. And, ESG-good companies are likely to face lower risks and probably more stable earnings that lead to higher valuations.

Active ESG investors help to transform corporate governance in our portfolio companies, contributing to significant improvements in their financial results and increase in market valuations. Active ESG investors engage with companies in various sectors and regions to improve their governance.

While it can be argued that ESG compliant portfolios if managed well can generate value added returns over the long term, they are not immune to the short-term vicissitudes of their market, political and economic environments – in other words their performances are impacted by vagaries of non-ESG factors. For example, sceptics claim that as recent as 3 years ago, green energy funds have benefitted from the financial impact on oil companies of lower oil prices and that when oil prices rise, as they did shortly after the breakout of the Russia-Ukraine war in 2022, oil companies will outperform renewable energy suppliers.

What we are suggesting is that over long periods of several market cycles, the case can be made that with capital increasingly favouring renewables and good governance and growing number of countries introducing regulations placing a cost on carbon, ESG-good companies will ultimately win the day by rewarding investors well. They can have their cake and eat it too.

Active ESG investors help to transform corporate governance in our portfolio companies, contributing to significant improvements in their f inancial results and increase in market valuations. Active ESG investors engage with companies in various sectors and regions to improve their governance. Such is the characteristic of “Impact Investing” where the burden on the fund manager extends beyond searching for superior returns to include generating desirable ESG outcomes.

Hence, true ESG investing is anything but “passive”. But according to Mobius Capital Partners, ESG investing’s dominant instrument today remains largely negative screening, which seems to us a deskbound exercise of excluding companies that fail ESG tests from portfolios. We believe we need to go further. We can turn mediocre ESG companies into tomorrow’s leading lights. The full benefit of ESG investing will not be realized until it is combined with an active investment approach such as regular corporate engagements where its impact on management and governance can do the most good.

In closing, we repeat our key assertion in the article we wrote for World Earth Day last year. That is that the pursuit of ESG in business is not in conflict with, but instead, is a condition for achieving long term sustainable profits. Highly successful visionary companies do both – they deliver consistent superior long-term profits AND contribute to the well-being of societies and the environment.

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