Edited by Cary Krosinsky, Nick Robins and Stephen Viederman
Most people would agree that we are entering a world of peak oil and rising energy prices. There are pending fresh water and food shortages in many parts of the world coupled with theoretically unsustainable yet inevitable increases in population.
We further see soaring unsustainable debt as well as the ravages of climate change anticipated by science compounded by the pending effects of warming seas and a loss of vital coral reefs. There is a similarly critical loss of biodiversity, a shortage of arable land, increasing inequity between the rich few and the many without. This is expected to lead to unrest from the many who don’t have enough for themselves and their families, or any prospects of success, happiness, enrichment, and well-being, and may well continue to struggle from a lack of the classic definition of work, in a world of increasing automation.
Yet the majority of investors do not take such things into consideration in their traditional mainstream fund management strategies.
There can be danger as well within the so-called socially responsible investment (SRI) world, whose participants can get stuck focusing on narrow issues, at times equally if not less mindful of the trends now unfolding, regardless of a general intention to invest to a set of values. These sets of values sets vary widely. As the SIF Trends report of 2010 showed,1 while trillions of dollars are invested in a “socially responsible” manner, upward of 90% of that sum has been deployed over time using unsophisticated screens that arguably miss many of these risks and perhaps are especially not well positioned to harness the radical, transformational changes in technology and society that are developing to solve these problems of sustainability.
With sustainability risks and opportunities having become a global imperative and megatrend for business (see Chapter 1), it is now critically important that asset owners, their advisors, and fund managers build a connection to this reality within their investment strategies. In the United States alone, a majority of Americans have some portion of their retirement assets tied up in mainstream strategies that do not factor in the new realities before us.
Here and throughout text, unless otherwise specified, $ are stated in U.S. dollars.
INTRODUCTION
It is critical to point out that we are talking about a positive investment strategy that we see as the way forward—one that seeks the right opportunities while being equally mindful of macro trends and emerging risks from rapidly changing planetary conditions and the soaring wave of innovation and technology unfolding in university laboratories and elsewhere that will leave traditional business models behind.
A flat investment in the S&P 500 simply won’t protect the average investor from the shifting seas. Taking a positive angle to investment and sustainability is critical—and equally critical is that this approach be adapted by the mainstream investment community to the point where this simply becomes an additional lens on top of existing practices, while the unsuccessful, negative approaches of the past are left behind.
The very good news is that large-capitalization companies aim to herald the way forward in a number of ways; such companies have clear risks now to their supply chains, and so they are already driving critical change — protecting their resources and business flows while innovating to ensure profitability. These companies are increasingly among the most efficient as well, and the correlation between the best-run companies and those being strategically mindful of their sustainability risks and opportunities is now becoming clear.
Perhaps most important, these companies are often flush with cash, well positioned with branding, and in a position to acquire innovation and bring it most efficiently and quickly to scale. These companies include those in the social media and technology spaces. A revolution is also under way to ensure that food, water, energy and other basic needs are met in a world of shrinking resources and increasing mouths to feed. Every sector is affected by these trends. The clearest risk of all is to do nothing and be left behind.
The best news of all perhaps is that markets need winners and losers in this regard as well.
The last two generations of fund managers have succeeded using strategies that have brought them great personal wealth. These strategies don’t need to change at all. What is required is an additional lens of sustainability risks and opportunities to catch the predictable surprises of the future. In fact, the trends before us are now so clear that at some point in the not too distant future, advisors and fund managers could well be considered in breach of their fiduciary duty for not considering sustainability realities, as most today do not. Thus a sea change in practice is pending, which alone would guarantee further positive change.
The last decade saw a myriad of risks that were not black swans but rather inevitabilities that could have been prevented. From Enron to WorldCom, Adelphia to Tyco International, the tech bubble to the credit crunch and its abusers, rogue traders to Bernie Madoff and Allen Stanford:
All of these variations of creative accounting, overvaluation and looking the other way could have been foretold or easily avoided. The new predictable surprises before us are clearly emerging from environmental trends that may well be unstoppable, with related affects to the human condition.
Investors can readily observe and consider the quality of management and operations, including the growing correlation between employee motivation and share price success. Innovation is harder to measure but critical to consider.
In this book we walk through the investment practices of those who believe that this sustainability megatrend has emerged already. We review practices regarding global fund managers who have factored sustainability risks and opportunities successfully into their considerations, or are in the process of converting fully in this direction.
Perhaps the most important thing we can stress is that politics needs to be fully removed from this equation. Too often, the mainstream investment community is biased toward the right, while the left is biased towards the SRI realm. There are few exceptions to this either way, with both camps potentially ignoring practical matters regarding unstoppable trends of sustainability.
Investing to one’s values is fine, if that’s what one wants to do with one’s money. Through our definition of sustainable investing, we separate the value we see in sustainability from the primarily negative screening values-based approach that tends to dominate SRI, especially in the United States.
Sustainable investing, then, sits neatly between the mainstream on the right, providing value opportunities that are sensible for any investor to pursue, and for investors on the left, who want to participate in an evolved, practical, positive perspective, that if taken to scale, can lead to the sustainable world they seek to aspire to.
Sustainable investing represents the practical center—where most investors and investment belongs. It is no different from how most political elections unwind, favoring the center, where the majority wants decisions to be taken. The same must be true for the aggregate goals of investment in general, aspiring to and protecting values of fairness, equity, and well-being while providing full incentives and opportunity, avoiding societal crash and burn in a rush to an unsustainable top.
Take a blinkered mainstream approach, without a sustainability lens, and you risk missing out on the crises that continue to affect markets globally, the clear trends toward innovation, and the companies that figure to deliver solutions going forward. Take a purely values-based approach, and you risk missing the very same practical opportunities in eco-efficiency and innovation, where the sustainability we require will come from.
The world and all of its various stakeholders need a sustainable investing dynamic to take hold, unless we are self-destructive as a species. I strongly suspect that we are not—and that the majority of the global population desires a world that is not unsustainable. As investors, then, the question arises: are we best positioned for this inevitability, much as large global corporates, governments, cities, and countries also see themselves in an active, ongoing race to be the most sustainable, productive, educated, healthy and prosperous possible?
And so let us now embark on a journey through the investors who fully integrate sustainability into their DNA, or intend to, and the metrics, data and regional considerations that are most relevant to get this right. This book in effect charts the history of SRI, while also observing the concurrent trends towards increased use of sustainability factors within investment decision making. It is exciting to witness the more positive, sustainability-minded, value-based investment philosophies, using values, coming out of the purely values-based approaches that have long predominated.
We observe the approaches of those who have been taking a more positive, opportunities-based approach successfully, and the longest, including the Jupiter Ecology Fund (Chapter 2), through others who attempt to embed these opportunities fully, including the Highwater Global Fund (Chapter 4) and Sustainable Asset Management (Chapter 6). We also observe how some of the longest U.S.-based SRI fund managers are now moving more in this direction, including Calvert (Chapter 8), and take an in-depth look at how Domini avoided BP (Chapter 7). Other long-standing fund managers who embed sustainability in North America in different ways are also discussed, including Winslow (Chapter 9), Portfolio 21 (Chapter 10), NEI Investments in Canada (Chapter 11), and Green Century (Chapter 12). European perspectives are also observed closely with looks at Pictet (Chapter 13), Aviva (Chapter 22), and Generation (Chapter 23), as well as Rory Sullivan’s attempts to fully integrate sustainability at Insight (Chapter 24). Further regional perspectives are provided with three chapters on Asia (Chapters 25–27) as well as glimpses at Canada, Australia, Africa, and India (Chapters 28–31). Macro issues are also addressed, with analysis and use of environmental metrics (Chapters 15, 16, and 37), the lack of use of sustainability criteria and why (Chapters 17 –20), and Bloomberg’s efforts in this area that attempt to bridge this gap (Chapter 21). Other macro issues include the potential for indexes (Chapter 32), private equity (Chapters 35–36), and performance (Chapter 34). Terminology is addressed at the end (Chapter 38) by Lloyd Kurtz, one of the longest-standing SRI researchers in the field.
You will also hear from many thought leaders in this book. They include those in the just-mentioned chapters as well as Roger Urwin on asset allocation considerations (Chapter 33) and noted author and entrepreneur Paul Hawken (Chapter 3). Let’s start then with Dan Esty, author of the seminal work Green to Gold, and his partner David Lubin. The consistent message is that all organizations must seek sustainability as a strategic imperative to have the best chance of future success. The same is very much now true for global investors as well.
