Sustainable Investing
JOURNAL: ISSUE 3 - 2015
By CARY KROSINSKY, Executive Director, Sustainable Financial Markets and NANCY DEGNAN, Executive Director, Sustainability Essentials Training Program, Earth Institute, Columbia University
EDITOR'S NOTE: In the last decade, the global focus on income and wealth inequality and climate change has exploded – even Pope Francis has made these concerns central to his leadership. Within the financial community, many pension fund managers, professionals and trustees are weighing the social, environmental and governance (ESG) impact of their investment decisions. Some are seeking to avoid investing in businesses that cause harm, while others invest in companies that have better environmental and social practices. Using investor capital to influence business practices is known as Sustainable Investing, which has grown to $21 trillion dollars globally. BAC, the AFL-CIO and many international and local unions have a keen interest in pension fund investment strategies that yield healthy and competitive returns for fund participants while promoting a healthy environment, a more equitable economy, and in the case of BAC, contribute to work opportunities for members. BAC President James Boland invited guest authors Cary Krosinsky and Nancy Degnan to contribute the following introductory article.
Many financial professionals, especially fund managers, have long believed that considering environmental, social and governance issues (ESG) conflicts with financial investment. Many in this group also believe that ESG investing – often called sustainable investing – means simply taking out companies that the investor finds offensive, like tobacco growers, military weapons producers or manufacturers that employ child labor. Called “negative strategies” for removing negative assets, these analysts and fund managers remove “bad actors” and then otherwise invest as usual. This approach, also called divestment, still represents, according to the Global Strategies Investment Alliance, the largest strategy by managed assets: more than $14.4 trillion dollars, totaling two thirds of the dollars invested sustainably.
Negative strategies have been problematic, however, resulting in winners and losers. An example is US-based coal producing companies that have lost over 90% of their value over the last 3 years alone . This loss represents a tradeoff between socio-economic and environmental benefits, with the social aspect often a lower priority. Divestment from coal companies, for instance, impacts the people who work in the industry, resulting in the loss of nearly 50,000 jobs, particularly in Kentucky and West Virginia, states with already high poverty rates . This is not to say that the coal industry doesn’t have a host of challenges from health and safety to climate to pollution to destruction of ecosystems. But this example illustrates that negative sustainable investing approaches have real, protracted effects on people whose quality of life is already compromised.
The question becomes is there a better way?
We believe the answer is “yes,” and it is through a more positive approach to sustainable investment.
What does positive sustainable investment mean? Some of the more common approaches to investing in a positive sustainable manner involve allocating capital to a thematic sector, such as sustainable forestry or sustainable energy. Another way is to invest in businesses selected for sound environmental, social, governance practices. For these companies, sustainability is not a drag on value for shareholder investment. Rather, such companies experience better revenue growth, greater cost savings and improved risk mitigation through positive sustainability strategies resulting in positive financial results for investors.
Two of the largest innovating public companies that have been applying positive sustainability strategies for years are Apple and Google. Google has initiated sustainability solutions via Google X, focusing on energy efficiency, climate change mitigation, and human health . Apple has been driving environmental efficiency through innovation and the deployment of renewable energy. Responding to justified criticism of both companies’ overseas labor practices, each has advanced better social performance through audits of their Asian suppliers over time . A third company, Tesla, is another technology innovator with environmental priorities.
While these companies can and ought to be scrutinized critically, the fundamental principle is that they seek business opportunities with benefits that can accrue to human and environmental wellbeing. Based on our findings and analysis of existing research we have found that ESG opportunity-driven, positive sustainable investing has performed better than purely negative approaches over time.
Another challenge remains however, and it is this: How do you know if a company is using ESG in an opportunity-driven way? Where do you go to get good information?
One place is the United Nations Global Compact . The Compact works with companies worldwide whose CEOs have voluntarily committed to advance sustainability practices. The Global Compact undertook a study of 30 companies for the Value Driver Model project.
The Value Driver Model Project measures how corporate sustainability activities can contribute to positive overall performance in three important areas of business growth, productivity, and better risk management. Companies most effectively taking such positive approaches, between 2009 and 2014, outperformed the benchmark MSCI World by 13.8%. Included among these 30 global companies are the likes of Boeing, GE, Kimberly-Clark, Office Depot, and Proctor & Gamble.
Diversification and Impact Investing are two other strategies that companies use to promote shareholder value and societal benefits at the same time. Such approaches are likely to perform better going forward as environmental problems manifest themselves around forests, food, oceans, biodiversity, water, climate and energy. Impact investing strategies seek financial return while also providing a community benefit with a lower environmental footprint. Interest in these sorts of positive impact strategies are at record levels in 2015 and are expected to grow further. Many large institutions such as JP Morgan, Bank of America, Merrill Lynch, Morgan Stanley, and Goldman Sachs are adopting this practice.
There is also hopeful, positive news for union members from a jobs perspective. Infrastructure, for example, is expected to be the largest growing segment of investment overall, with some forecasters predicting an average of an additional $1 trillion per year on an annual basis . The recently proposed Rebuild America Act of 2015 would support 13 million good jobs with an opportunity to invest those funds sustainably in green infrastructure in addition to rebuilding and repairing existing infrastructure. Again, the good news is that there is a financial performance benefit being increasingly experienced by sustainable investment strategies within the related real estate sector , making the investment in sustainable infrastructure a real and positive possibility that can benefit local economies and create good middle class work.
Education is also critical to promoting Sustainable Investing. Many financial professionals remain unaware of these trends, and continue to think that sustainability is a negative approach likely to restrict choices rather than a potential driver of better financial returns that also has good social and environmental outcomes.
Investing does not occur in a vacuum. The actions of companies that union pension funds invest in affect the people, economies, ecosystems, and the planet as a whole, and positive sustainable investing strategies require a greater level of knowledge about the world as a complex system. To show financial professionals the complexity of this system, we believe that multi-disciplinary teaching is the best approach to changing attitudes, bringing professionals into a positive learning setting, and enabling them to figure what next steps make best sense for their own situation.
Investing does not occur in a vacuum. The actions of companies that union pension funds invest in affect the people, economies, ecosystems, and the planet as a whole, and positive sustainable investing strategies require a greater level of knowledge about the world as a complex system. To show financial professionals the complexity of this system, we believe that multi-disciplinary teaching is the best approach to changing attitudes, bringing professionals into a positive learning setting, and enabling them to figure what next steps make best sense for their own situation.
Sustainable investing is an evolving field. We cannot suggest that positive sustainable investing is easily achieved; nor is it the ultimate panacea. We also do not suggest that we or the businesses and organizations described in our article, have figured it out. For instance, one of the most important areas to tackle through the lens of sustainable investing is income inequality and jobs creation. How to find the right balance between environmental stewardship and socio-economic development is another. And, as with all investment, due diligence and fiduciary responsibility remains key.
But we do offer that positive sustainable investment with its focus on our environment and natural resources, with its attention to the quality of life of people, and with its insistence on innovation and economic growth, is really the only way to invest for the future wellbeing of our planet and everything on it. Finally, as this article suggests, sustainable investment can do so while also being better for financial returns.
As we learn, invest and apply consistent review of investment portfolios, we are likely to achieve social, economic and environmental impacts that are constructive and favorable. Union members and pensions are key to this work, driving positive sustainable investing forward.
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vii. https://www.unglobalcompact.org/
viii. https://www.unglobalcompact.org/take-action/action/value-driver-model