The false dichotomy between sustainable investment and profitable investment

 In Impact Investment

Article 2 of “ESG factors and Impact Investing” series

The financial market has seen in recent years the rapid growth of the use of ESG factors in the investment analysis. The acronym stands for Environmental, Social and Governance, and the techniques involve considering relevant factors of each item – such as global warming, employee safety and corruption – in the diligence and traditional analysis of investments.

The growth of these factors, however, demanded the overcome of barriers and several criticisms. According to Michael Porter and Mark Kramer, in a 2011[i] paper from the Harvard Business School, one of the critics of Corporate Social Responsibility was Milton Friedman, in a 1970 text where the advocates of the concept are called communists, arguing that the only responsibility of business is to increase its profits.

According to the paper, after many years of criticism and loss of reputation for several episodes of slave labor, corruption and disregard for its clients, companies began to develop areas of Social Responsibility as a palliative, treated as a necessary expense, exchanging financial returns for those expenses.

More recently, the business and academic worlds began to discuss whether this apparent dichotomy between sustainability and profits indeed existed.

The University of Oxford and the asset manager Arabesque Partners conducted in 2015 a meta-study with more than 200 academic studies on corporate ESG policies[ii], seeking to understand their relation with the operational performance of companies, their cost of capital and the performance of their shares. In 90% of the studies on capital cost, a negative relationship between this variable and good ESG policies was observed, indicating, therefore, that good practices generate lower capital cost. In the cases of operational and equity performance, respectively 88% and 80% of the studies showed a positive relationship between these variables and good ESG practices.

Such studies highlight many reasons for the positive performance of applying ESG factors in business and investments. Basically, these reasons can be grouped into three categories:

  1. The improvement of the company’s results – which can occur due to revenue expansion, discovery of new markets and innovation; or by a more efficient use of resources, such as generating less waste or by making workers more motivated and productive;
  2. Risk reduction – with companies paying more attention to environmental aspects and their stakeholders. A greater care can reduce potential problems and improve the company’s response in emergencies – like the rupture of a dam, for example – and enhance investors and stakeholders’ safety regarding the company’s attention to these factor;
  3. Improvement of the company’s reputation – which can enhance its relationship with investors and stakeholders in general. A better reputation can create more productive and engaged suppliers and workers, loyal customers willing to pay more and regulators with better insights on the company.

One of the 200 studies that underpinned Oxford and Arabesque Partners was conducted in 2011 by Alex Edmans at the Warthon School. Its focus was the social aspect of ESG factors, studying the companies’ treatment towards its employees. He collected data from the 100 best companies to work, for 26 years, in the US. The strategy was to invest in the ranking´s best companies, considering that the ranking was a good proxy for incentive and good practices in relation to their human capital. The result was a portfolio that generated a return of 2 percentage points a year above the benchmark of comparable companies.

Another representative study was conducted by Harvard University in 2014[iii], comparing the share performance of two groups of 90 very similar companies, except for the adoption of ESG policies. One dollar invested in 1992 in the portfolio of the 90 companies with the best ESG practices would generate, in 2010, around US$ 23,00, while the same amount invested in 1992 in the portfolio of the 90 worst companies in ESG factors would generate, in 2010, about US$ 15,00 – a 53% difference in return.

Graph 1: Portfolio share performance

Source: Eccles, Robert; Iannou, Ioannis; Serafeim, George. The impact of corporate sustainability on Organization Processes and Performance.

Regardless of the investment strategy that uses ESG factors and of the asset class invested – real estate, stock equity, private equity, fixed income assets – such analysis have a non-static world view and a long-term profile. This perspective matches the long-term profile of investor families and can be used as a complement to the traditional analysis in order to align the invested asset term and the invested capital.

Besides not existing any apparent trade-off between sustainable investments and economic results, as shown previously, sustainable practices can still be very beneficial to the environment and society – community, employees, suppliers, clients – which may be one of the goals of a Family Office’s investment policy.




Graduated in Economics at PUC-Rio and certified as Chartered Financial Analyst (CFA). After years of working in the financial market, he is now manager of the Financial Planning team at Stone Pagamentos.


Partner at INEO and co-author of The Investor Family and the Family Office.


[i] Porter, Michael E., and Mark R. Kramer. “Creating Shared Value.” Harvard Business Review 89, nos. 1-2 (January–February 2011): 62–77.

[ii] Arabesque Partners, University of Oxford (2015). From the Stockholder to the Stakeholder. Disponível em

[iii] Eccles, Robert G. et al. “The Impact of Corporate Sustainability on Organizational Processes and Performance.” Harvard Business School. Management Science 60 (2014): 2835-2857.

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