What Mainstream Means
What a year it has been for Sustainable Investing. The year before was noteworthy as well. In fact, a year ago in the GreenMoney Journal, Amy Domini called 2018 “The Year Wall Street Got Sustainable Investing.” BlackRock came onboard, along with a host of major investment banks, and CFA Societies across the country hosted seminars and curriculum on the topic. Evidence for the growth of ESG and SRI assets is supported by the oft-quoted Trends Report produced by The Forum for Sustainable and Responsible Investment (USSIF). In the 2018 edition, the report noted that “1 in 4 dollars of U.S.-domiciled assets” used SRI strategies at the start of that year. ESG and Sustainable Investing broke out with even more supporters in 2019, accompanied by a host of new products. A recent Morningstar article noted that “Sustainable funds are on track to triple” inflows in 2019 compared with 2018. As this decade comes to a close, let’s take a moment to assess the progress and the way forward for ESG Investing.
First, there has been significant progress in identifying and tackling ESG issues. U.S. renewable energy growth has been tremendously strong over the past several years, and supply forecasts for the early 2020s in the U.S. remain robust. Tax credits have helped, and are rolling off, but the economics continue to improve driven by falling prices in solar, wind, and storage. These gains are largely at the expense of coal. Investors have availed themselves of low-carbon portfolios that benefit from improved corporate, science-based carbon emissions targets and focus on exposure in supply chains. Data providers, such as Trucost, have helped in this area, as have efforts by TCFD (Task Force on Climate-related Financial Disclosures) and more. With this growth also come questions of balancing renewables with baseload or intermittency and reliability.
In water-related issues, corporate disclosure, metrics, and target setting have improved significantly. Investors are increasingly aware of the industries and companies with the greatest exposure to water scarcity, quality, and resilience issues, and have a far better awareness of the localized nature of water risks.
Proponents of a circular economy, most notably the Ellen MacArthur Foundation, have made great strides, particularly in the area of packaged goods. These are no small accomplishments in a global economy built on fossil fuels and a “take-make-dispose” system. There is clearly more to do, but the groundwork has been laid, and investors have taken note.
If “mainstreaming” is the end game, what exactly does that mean for 2020 and the next decade?
Responsible Investing has grown from a cottage industry, born from values-based investing, to one that truly is becoming mainstreamed based on material ESG factors that impact value, risk, and return. Increasingly, investors, including Dana Investment Advisors, are embracing Sustainability Accounting Standards Board (SASB) and its analytical framework for identifying and reporting materiality of ESG impacts. This is a unifying effort and one that we applaud. At Dana, quantitative models have always played a role in our investment management process, and the information flow over the past several years has brought greater granularity. Along with this existing data, Dana has increased efforts on fundamental analysis and engagement to uncover long-term trends, competitive positioning, and emerging disruptors. We believe that ESG and financial integration of material factors will continue to grow, providing more opportunities to add alpha and reduce risk for clients.
While ESG Investing has grown in popularity due to a variety of motivations, the main impetus should be the financial opportunities and risks. Corporations need more streamlined reporting functions, and analysts need data that is useful in modeling companies and making forecasts. This is happening, and the faster the advances, the better. The recent Business Roundtable’s press release also called upon investment managers to support corporations that invest in their employees and communities. We have long believed that short-term profit maximization is a poor business strategy.
During the early part of November, several important announcements have been made, each with far reaching impacts. Saudi Aramco formally announced its intention to float shares on its exchange in Riyadh. There have been false starts, but if this time the IPO occurs, it is potentially the largest IPO in history, involving several major U.S. and non-U.S. investment banks. This has geopolitical and economic ramifications, as well as conflict of interest, transparency issues, and more. President Trump announced that the U.S. would begin its formal withdrawal process from the Paris Accord, and the Securities and Exchange Commission voted to change the existing shareholder resolution filing requirements. The SEC proposed changes would limit smaller shareholders.
The stakes are greater now than they were several years ago, and the complexity of the issues continue to increase. In a dynamic and divisive sociopolitical environment, corporations and investors must be more nimble than ever. Mainstreaming may be the way forward, but it doesn’t mean the path is a straight or easy one.
Article by Lydia Miller, Senior Vice President of Dana Investment Advisors and focuses on the firm’s Sustainability and ESG investment strategies. She spearheads the firm’s collaborations with the Ceres Investor Network, including the Water Hub. Lydia has been a guest speaker at University of Michigan, DePaul University and University of Wisconsin’s MBA programs, as well as various industry conferences, on topics including water risks and opportunities, ESG integration and portfolio management. She is an advisor to Equarius Risk Analytics, a water risk management entity.
Prior to joining Dana, Lydia was a Managing Director at Big Path Capital (formerly Watershed Capital Group), an investment bank focused solely on sustainable and impact-driven private equity funds and companies. She was a Managing Director at UBS (and predecessor Swiss Bank Corporation) in New York and Chicago where she managed public global equity portfolios for large institutions, public funds, foundations, sovereign wealth funds and ultra-high net worth individuals.