Margarita M. Phillips 
Robert Armstrong (Unhedged, FT.com, June 25) argues that environmental, social and governance investments only make the world a better place by providing lower expected returns. This, he says, is a necessary corollary of a lower cost of capital – what “good†companies do by attracting more investment.
The argument is flawed in several respects. I worked in listed companies for 25 years and never once heard management beg us to lower the cost of capital. The message was always about increasing the share price for shareholders, and in particular for shareholders who held large amounts of shares and made decisions for the company.
Armstrong’s argument against trying to excel in ESG would also apply to the attempt to excel in quality management. He suggests that executives would be well advised not to have a reputation for managing the business well, as this would lower the cost of capital and therefore the expected return.
In reality, the argument for making money investing in companies with good ESG credentials is the same as the argument for making money on well-run companies.
Armstrong seems to define “underperforming” as underperforming. He should know that “underperforming” means offering a lower return per unit of risk. Does he think triple A bonds “underperform†triple B bonds because they underperform? Well-run companies, including companies that are well-managed because of their ESG practices, may well earn less, but the only relevant question is whether their risk / reward profile is lower, and he doesn’t talk about it.
Interestingly, Armstrong continues this line of reasoning, where he notes that emerging market stocks have “outperformed†the S&P 500. The reason he didn’t “have much fun†owning them is that the risk / reward profile of its assets have been mediocre relative to the S&P 500 index. I thought we had gone beyond the return-only view of investments and the risk / reward view a generation ago, but maybe not.
Few sophisticated practitioners these days suggest that ESG investing is about ‘making the world a better place’. It’s about generating a positive impact alongside competitive financial performance in the market, as the Impact Investing Institute’s growing evidence base demonstrates across all asset classes, sectors and geographies. Sustainable businesses are, in the long run, probably the only ones that generate truly sustainable profit streams. Why? Because regulation and consumers will increasingly punish companies that do not pursue positive ESG policies, whether it’s cutting carbon emissions or meeting decent work standards.
Jamie Broderick
Member of the Board of Directors, Impact Investment Institute
London SE1, United Kingdom
