Could sustainability come at the expense of return?
This could be the case when sustainability is combined with a passive investment style and only the “villain” is excluded from the index port-folio. This restricts the investment universe without being remunerated with a return premium from the market. A simple exclusion process (negative selection) can have a negative impact on return in the long term, in particular as many of the excluded companies perform better than the market. The example of sinful corporations confirms this evi-dence: Historical strings of data of US companies operating in less sustainable branches such as the production of alcohol or tobacco, show that they outperform the market systematically. The financial sector has only recently discovered the reason why this is the case.
Why do sin stocks outperform the market?The answer is good news for sustainability-conscious investors: Sinful companies do not perform better than the market because they ignore eco-logical or social standards, but because these are particularly profitable companies with a stable cash flow, high profitability and low debts. Although these characteristics apply to sin stocks, they are neither exclusive to them, nor do they automatically exclude sustainability.
A clear conscience and excess return – How does this fit?
Equivalent results can be reached with a clear conscience by combining sustainable criteria with an active investment strategy, focusing directly on these qualities. This particularly applies to minimum risk (minimum variance) investment. Companies whose share prices only fluctuate slightly are often prudently managed and do not violate ecological or social standards.
Sustainability can very eas-ily be implemented when using the minimum risk investment concept applied by OLZ. Strict sustainability criteria have been integrated into all OLZ funds since 2017, and prove that a “clean” or sustainable return is possible without return losses. The risk-return-profile of the OLZ funds has not changed despite the integration of sustainability.