Portfolio manager pushes back against idea that sustainability focus makes companies more vulnerable to rising rates and inflation
In the current environment of high inflation and rising interest rates, there’s no shortage of challenges to navigate for the average company. For companies who are focused on extra-financial ESG factors, some may argue the challenges will be much more acute; after all, doesn’t that focus on operating ethically translate into greater costs of business?
Jeremy Richardson, Senior Portfolio Manager at RBC Global Asset Management, argues the calculation isn’t that straightforward. “It very much depends on the particular company you’re looking at, the timing of their ESG investments, and the benefits they gain from those investments,” he said in an interview with Wealth Professional.
For companies who just starting to make ESG investments, Richardson says rising interest rates could pose a challenge as they might take away from the present value of investments in ESG. As for those who are further along in their sustainable investing journey, he maintains that the value of their ESG investments might be unaffected to the extent that such companies are able to reap their benefits today.
Others may argue that because the costs of material inputs, resources, and human capital themselves are rising at record levels, businesses with an ESG focus will see a bigger hit as they take it upon themselves to protect not just the interests of shareholders, but also the welfare of their employees. But to Richardson, the argument isn’t as ironclad as common sense might dictate.
“Having a good corporate culture doesn’t have to be a financial drag,” he says. “If you do it well, trusting employees and being nice to them won’t cost you an arm and a leg. In fact, it could actually save you money.”
Companies with a happier and more satisfied workforce, Richardson says, may arguably end up with lower staff turnover, which would mean lower costs of human capital investment, and higher productivity, which opens the door to higher financial returns.
Making workers happy doesn’t have to cost companies an arm and a leg either, he adds. For many businesses in the services sector, the embrace of hybrid work throughout the course of the pandemic has required little to no additional investments. By giving up just a little control over employees and trusting them to manage their day-to-day, he says many firms have seen higher levels of productivity compared to before the pandemic.
What about regulatory costs linked to environmental emissions, like taxes or carbon pricing? Wouldn’t that be a material financial burden for companies? And if companies pass on those costs to consumers, doesn’t that mean an ESG focus may aggravate the current inflation situation as well?
“That depends on the extent to which emissions are a consequence of economic activity,” Richardson argues. “What we find is that when companies are more efficient in their companies, they produce fewer emissions. So finding ways to cut down on emissions often leads to cost savings that come with having more efficient processes.”
The argument doesn’t just apply to carbon emissions. Manufacturing companies that find ways to reduce their use of water, light, and transportation could potentially save money as they look for ways to reduce waste.
Looking at a broader view, Richardson says critics of the green transition argue that forcing companies to invest in non-fossil fuel power represents a significant cost that will result in so-called “greenflation.” But he points out that the price tag of the energy transition is an upfront cost, and the benefits of that initial investment will bear out over time.
“If you think about it a bit, having a greater focus on renewables and ESG could end up saving the system money over the long run,” he says. “So while we may be looking at a pickup in spending in some instances to manage some of these transitions, we’re also looking forward to lower marginal costs in the future.”
