Sustainable Investing: From the Margin to the Mainstream

The Boston Security Analysts Society recently held a full-day conference on “Sustainable Investing: Moving from the Margin to the Mainstream.”

The meeting room at the Boston Metro Meeting Center was filled to capacity for the program on the current state of sustainable investing — a conference that just a decade ago could not have filled such a space, and certainly not for an all-day event. Sustainable investing — incorporating environmental, social, and governance (ESG) factors into the investment process — has indeed become more mainstream in the investment process. CFA Institute now incorporates ESG readings into the body of knowledge that makes up the CFA Program curriculum; CFA Institute also published an ESG manual five years ago to educate members and investors. During the conference it was telling that a majority of participants spoke of ESG analysis as simply an accepted part of the investment process rather than some esoteric investment philosophy practiced by few, and understood by fewer.

Here are a few sustainability highlights from conference organizers to put the state of sustainable investing into perspective:

• More than US$13 trillion in assets worldwide are now managed with sustainability criteria and strategies.
• More than 1,000 asset owners and managers, responsible for US$34 trillion in assets worldwide, have signed the United Nations Principles for Responsible Investment, making the commitment to incorporate sustainability criteria into their investment decisions.
• A 2012 survey of more than 1,000 investment advisers found that 38% of respondents have a strong interest in offering sustainable investments, and 47% have clients currently engaged in sustainable investing.

Rob Lake, a leader in sustainable investing and an adviser to the Norwegian Government Pension Fund, framed sustainability (or ESG factors) as a way to uncover both great risk and great opportunity. Lake emphasized that it is up to investors to ensure that sustainability is part of the investing process. Large pension funds have incorporated sustainability in their fiduciary duty as they realize that more sustainable businesses are likely to outperform over the long term. Lake noted that companies that are strong in sustainability measures significantly outperform over the long term, citing the 2011 landmark study The Impact of Corporate Sustainability on Organizational Processes and Performance.

Erika Karp, CEO and founder of Cornerstone Capital Group, spoke about how the language of sustainability often gets in the way and can allow ideology to keep investors from incorporating ESG factors into the investment process. She stressed that sustainability analysis should simply be part of the investment process, as is increasingly the case even if the analysts and managers doing the analysis call it something else. Karp noted that there need not be a disconnect between investment returns and meeting society’s needs; over the long term, those two items are complementary. The short-termism of today’s markets unfortunately often keep investors from adequately taking the long term into account. To change that, business models need to evolve, and we have to address incentive structures throughout finance.

A panel discussion on implementing sustainable investment strategies featured Benjamin Lovell, CFA, president and portfolio manager at Zevin Asset Management; Cara Lafond, CFA, vice president and asset allocation strategist at Wellington Management Company; and Michael Mufson, CFA, CIO at Redwood Investments. There was agreement among the panelists that ESG investing is becoming just another part of the investment process, with Mufson emphasizing that his firm’s ESG analysis is simply part of the fundamental analysis that takes place for any investment it researches. The panel agreed that a number of companies that do sustainability well may not even call it that. They noted that companies consistently featuring high ROE and high margins likely have been leaders in addressing sustainability issues, regardless of whether they have formal sustainability functions in-house.

A panel discussion on “Fossil Fuel Investment or Divestment” featured Tim Brennan of the Unitarian Universalist Association and Cheryl Smith, CFA, managing partner, CCO, and investment manager at Trillium Asset Management. The panel discussed the issue of divestment from fossil fuel companies, which is still in its very early stages; for the time being, there is support on some college campuses but not among major investors. The panel discussed the issue of “stranded carbon,” which was highlighted most recently in a paper by the Generation Foundation on stranded carbon assets. Stranded carbon may become a problem for energy companies as temperatures rise due to global warming. Roughly two-thirds of the recognized carbon-based assets of the energy companies in the world would have to be left in the ground — and therefore worthless to energy companies and their investors — to avoid a rise in global temperatures of greater than 2 degrees Celsius (a dangerous climate tipping point according to most climate scientists). The panel agreed that the current valuations of these companies do not reflect the stranded carbon hypothesis, but expect this to become a bigger issue in the near future.

Eric Wetlaufer, CFA, senior vice president of public market investments at CPP Investment Board, emphasized that CPP looks at ESG investing from a risk–return framework. It believes that effective management of ESG factors can have a positive influence on investment performance. CPP incorporates ESG analysis into every asset class. For example, it would think twice about investing for the long term in ocean-front property where the sea levels are expected to rise due to global warming. Wetlaufer noted that improvements in ESG data and transparency are enabling better ESG integration and that investors are increasingly asking management about ESG factors in their investment decision-making process. More on how CPP invests can be found on the responsible investing page of its website.

Photo credit: iStockphoto/Brzi