By Barbara Krumsiek, President & CEO of Calvert Investments
Sustainable investing has always focused on the future, not the next trade or the next day or even the next quarter, but the longer-term horizon against which environmental, social and governance issues have an impact on stock prices and the larger world. Yet right now, I believe that our industry is thinking about the future more than ever, as investors take on an increasing responsibility for creating a greener, more sustainable economy.
Consider that 20 years ago, the original Rio Summit looked almost entirely to government to protect the world\’s natural resources and clean up the environment. This year, the Rio + 20 Summit asks investors to take up this task.
As co-chair of the UN Environment Programme Finance Initiative, or UNEP-FI, I have been very much involved in this effort. The finance section of UNEP\’s Green Economy report, published this year, notes that “A global transition towards a green economy will require substantial redirection of investment …the bulk of which will need to be mobilized through financial markets.” The report also estimates that total world investment in a green economy will have to rise by one to 2.5 percent of global GDP to meet emerging challenges; currently we spend less than 1 percent on these priorities.
Consider, for instance, global warming, which many scientists see as a threat to global living conditions and economic growth. Analysts estimate that it will cost some $46 trillion between now and 2050 to halve CO2 emissions while providing low carbon energy. An additional $316 trillion will be required to develop green transportation and building technologies. Keeping global warming to two degrees centigrade rise may require an investment of $500 billion per year by 2020. The financial markets – and particularly the segment of these markets committed to sustainable investing – will be critical in raising and directing these funds toward solutions.
The future of Sustainable and Responsible Investing (SRI), then, is bound up with the future of our economy and our society. As investors, as money managers and as advocates for sustainable principles, we have to take the lead in developing solutions to sustainability challenges. SRI will become not just a niche, but an integral part of our new green economy.
All this has important implications for the SRI sector as we gear up to play a larger, more important role in the world\’s capital markets. At Calvert, we believe that SRI will become broader, greener and more global in the years to come – and that, indeed, these changes are already underway.
A broader segment of the world\’s capital markets
SRI assets have already become a much larger part of the world\’s total investments, accounting for $3 trillion at the beginning of 2010 – or one out of every eight dollars under professional management in the United States today.
These assets are also growing faster than the market as a whole. From 1995 to 2010 SRI assets grew by 380 percent, as compared to an increase of 260 percent for all professionally managed assets.
At the same time, more institutional investors are demanding that their asset managers incorporate environmental, social and governance factors into their investment analysis. U.S. institutions currently have more than $2.3 trillion in SRI assets, European institutions 34 billion Euros ($45 billion U.S.) in core SRI strategies. And these numbers are increasing as institutions recognize that sustainability analysis is, in some ways, a form of risk analysis, identifying potential exposure to environmental problems, labor disputes and governance issues, among other negatives.
In one striking measure of SRI\’s increasing acceptance, as of early 2012 more than one thousand organizations had signed the U.N.\’s Principles for Responsible Investment, including 249 asset owners, 592 investment managers and 165 service firms. Many of these investment managers do not come from traditional SRI backgrounds – they include firms like BlackRock, Goldman Sachs, UBS and Deutsche Bank. As sustainable analysis becomes a standard part of due diligence, more and more companies are looking to improve their ESG profiles.
At Calvert, we noticed several years ago that a number of companies that had never met our screening standards had begun asking us for advice on meeting sustainability criteria. We began to think about how we, as SRI investors, could have an impact on companies beyond our traditional scope. We looked for ways to help companies that did not pass our sustainability screens improve. In 2008, we developed an innovative approach to sustainable investing called SAGE.
Through SAGE, in select Calvert Funds, we invest not only in companies that meet certain screens, but also in a number of companies that do not. Then we work with these companies to help them improve in the areas where they fall short. For instance, as of February 2012, our Large Cap Value fund, which follows the SAGE approach, owned stocks including Duke Energy, Dow Chemical and Wal-Mart. The holdings in this Fund meet only three of the seven criteria required by our traditional sustainable Calvert Funds. But that is the point – to work toward sustainability with companies that we have never held before and to broaden the impact of SRI at the same time.
So SRI is getting broader, reaching more investors, more asset managers and more portfolio companies – and we at Calvert believe this trend will continue.
Moving towards a green economy
We also believe that SRI will continue to become greener, that is, more focused on the environment, resource conservation and climate change issues. And we will do this not just by screening out companies with poor environmental records, or even through shareholder advocacy to encourage better performance. We as an industry will be involved in directing capital towards the green companies and technologies that can solve our most pressing ecological problems.
For instance, at Calvert our two newer funds are Calvert Global Alternative Energy Fund and Calvert Global Water Fund. Through these Funds, we are seeking out the companies with the best ideas about two of our world\’s biggest challenges – finding alternatives to carbon-producing fossil fuels and providing clean water to growing populations. If we are successful, we create a win-win situation. Cutting edge companies get the capital to solve environmental challenges – and bring the best strategies to market. At the same time, Calvert shareholders have the opportunity to participate in the profits that come from innovation, while also building a greener world.
Green bonds provide the same kinds of opportunities to fixed income investors. Right now the market for green bonds, or bonds which raise money for environmental purposes, makes up a relatively small proportion of the global fixed income market. The European Investment Bank, for instance, issued roughly $1 billion in green bonds, and the World Bank about $15 billion from 2007 to 2010. In the U.S., local governments have been experimenting with tax-free municipal bonds, known as Qualified Green Building and Sustainable Design Project bonds. These bonds have real promise in directing capital towards large-scale projects – such as upgrading utilities and infrastructure.
A more global SRI
We\’ve seen how SRI is becoming broader and more focused on green issues. The final development is globalization. We are moving towards a world in which any investor – individual or institutional – in any country may seek an SRI strategy or strategies, which cover all the markets in which it is appropriate to invest. At Calvert, we are very proud of our role in bringing the first socially-screened international fund, the Calvert World Values Fund, to market in 1992. Yet we also recognize that this is just the beginning. Investors are now looking for regional funds, sector funds, country funds, indexed and actively managed funds – in short, all the tools for diversified asset allocation – managed in a sustainable way.
Raising the bar
The ways in which we define sustainability will change over time, as they have throughout the history of our industry. Consider that not too many years ago SRI was a niche strategy that appealed mostly to people with a strong sense of values. Today it has become a broadly acceptable, institutional approach to integrating environmental, social and governance risk analysis into an overall framework. Likewise, only a few years ago, socially responsible investors focused mainly on eliminating “sin stocks.” Now we try to advocate for positive change through shareholder advocacy, an expanded scope of investment and the allocation of capital to innovative green companies. And while sustainable investment started as a local phenomenon, it has now become more and more global, with investors, asset managers, and portfolio companies worldwide.
Yet through all these changes, one thing has remained constant. We have continually raised the bar, redefining what it means to be a socially responsible company. I believe that that will continue as our industry becomes more mainstream, and as increasing numbers of companies compete for sustainable investors.
As more and more investors insist on ESG compliance, what constitutes a “good” company will change. It\’s hard to imagine what sustainability will look like in 10 or 20 years, but I am pretty certain that the standard will be higher and the performance of companies better than it is today.
Article by Barbara J. Krumsiek, Chair, President and CEO of Calvert Investments, Inc. Calvert manages over $12 billion in assets for individual investors, retirement plans, pension funds, endowments & foundations, and high net worth investors. She currently serves as Co-Chair of the United Nations Environment Programme – Finance Initiative, a partnership between the United Nations Environment Programme and 200 financial institutions around the globe mandated to develop and promote the links between sustainability and financial performance.
Calvert Information:
As of March 31, 2012, Calvert Large Cap Value holdings included Duke Energy (1.24% of the portfolio), Dow Chemical (2.25%), Wal-Mart (2.24%). Calvert may or may not still invest in, and is not recommending any action on, any companies listed. For the most recently available information on holdings in each Calvert fund, visit http://www.calvert.com . Current and future portfolio holdings are subject to market risk.
The Calvert Global Alternative Energy Fund is subject to the risk that stocks that comprise the energy sector may fall in value, and the risk that prices of energy (including traditional sources such as oil, gas or electricity) or alternative energy may fall. A downturn in the alternative energy industry would impact the Fund more than a fund that does not concentrate in this industry, and the Fund therefore may be more volatile than a typical mutual fund. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. The Fund is non-diversified and may invest more of its assets in a smaller number of issuers than a diversified fund; therefore, gains or losses on a single investment may have greater impact on the Fund.
The Calvert Global Water Fund is subject to the risk that stocks that comprise the water-related resource sector may fall in value. A downturn in the water-related resource sector would impact the Fund more than a fund that does not concentrate in this industry, and the Fund therefore may be more volatile than a typical mutual fund. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. The Fund is non-diversified and may invest more of its assets in a smaller number of issuers than a diversified fund; therefore, gains or losses on a single investment may have greater impact on the Fund.
For more information on any Calvert fund, please contact Calvert at 800.368.2748 for a free summary prospectus and/or prospectus. An investor should consider the investment objectives, risks, charges, and expenses of an investment carefully before investing. The summary prospectus and prospectus contain this and other information. Read them carefully before you invest or send money.
Calvert mutual funds are underwritten and distributed by Calvert Investment Distributors, Inc., member FINRA and subsidiary of Calvert Investments, Inc. (4-12, 12115)
