Performance through sustainability

Implementing a sustainable investing strategy in a portfolio requires adopting a long-term view. It is valuable to do so, to catch most of the value of a company.

In fact corporate-finance theory states that more than 50% of the value creation of a company sits in its long-term cash flow generation. When adopting a long-term view one needs to integrate sustainability issues because the context of business is changing, we face various emergencies which points out the limits of the current model.

Sustainable development goes far beyond morals or environmentalism. It will be the primary driver of industrial and economic change over the next 50 years.

Environmental, social and governance have an impact on the long-term business performance. As concluded by a research by McKinsey in 2006, a corporate strategy integrating sustainability issues increases shareholder value over the long-term.

In fact, sustainability matters have risen to the top of consumer and political agendas, thanks partly to the exponential growth of global media and communication channels.

We are living in a carbon constrained world, resources are finite, access to water is becoming an economic topic and civil society is increasingly expecting actions from the corporate world.

While construction and real estate in the Gulf offer interesting short-term investment returns, it is also among the prime resource-intensive sectors that might not be sustainable in the long run.

Economic, environmental, and social governance are an integral part of business strategy and go beyond reputation management. It can have a real impact on a company's ability to sustain profitability and deliver returns over the long run.

Therefore businesses that have strong management teams who understand and respond to sustainability factors will be the ones that have the potential to benefit most.

As an investor, efficiently allocating your capital means investing in companies that have integrated these challenges. Factoring in the risks of the economic, environmental and social challenges based on the material impact upon a certain industry sector does not mean sacrificing returns either, a recent study by Mercer concluded.

For example, there are many sectors for which climate change is considered to be a material issue. This is obvious for carbon intense companies, such as transportation or oil companies.

For service industries such as the IT sector, human capital management is one of the main challenges.

Furthermore, an increasing body of research shows that private and public companies benefit by adopting best practices in corporate governance. Transparency and integrity usually means a well-run business.

This perception can make a valuable difference by decreasing the cost of capital and by improving the risk profile of the company as having been highlighted by accounting scandals from Enron or Parmalat.

As always, the story has two sides. When risks occur, opportunities rise. Detecting these future trends enable corporations to identify interesting growth areas, be it on demand-side energy efficiency, water treatment technology or access to affordable medication. From a competitive advantage standpoint, it is critical that companies leverage these opportunities.

Sustainability investing is nothing more than investing where fundamental quality and value is found and by better managing risks and creating new investment opportunities.

Natacha Guerdat is a portfolio manager at Lombard Odier Darier Hentsch & Cie.