Editor's note: This article is extracted from the book Sustainable Investing (Dō Sustainability, May 2013) by Cary Krosinsky, Executive Director of the Network for Sustainable Financial Markets. GreenBiz readers can use code GBiz10 at www.dosustainability.com for 10 percent off this book.
In today's marketplace, investors have three prospective response scenarios to consider when it comes to issues of the environment and society. The first "option," business as usual, is where most investors are presently placed, leading to some form or other of catastrophe whether related to storms, biodiversity loss, sea level rise, etc., or some combination thereof, and very likely economic collapse.
A second overarching scenario -- incremental change -- appears to be insufficient. We struggle to find adequate pathways to sustainability through "wedge" theory. The latest estimates across analysis ranging from the International Energy Agency's future studies and similar from the International Finance Corporation (IFC), World Resources Institute (WRI) and UN Environment Programme (UNEP) suggest we are on the brink of big trouble with incremental approaches being anything but close to enough.
If the possible outcomes are either radical transformation or catastrophe, this has enormous implications for investors. A point to stress is that it should be clear that if investors stand pat, they will fail either way. Therefore, the only sensible choice is the third option: for fund managers and asset owners to change their priorities and perspectives and seek to become part of the solution instead of participating in an almost guaranteed economic or environmental failure over time.
The state of global ownership
The present state of global asset owners requires some consideration. Pension funds, endowments and foundations typically have ongoing shortfalls, paying out more on an annual basis than they earn in profit. Such pools of assets feel the need to use a mix of creative expectation to maintain as much of their own status quo as they possibly can.
Pension funds often report profit expectations of 5 to 8 percent per year even in an age where growth is fundamentally challenged. Yet these same asset owners insist on being universal owners, not factoring in ESG in any meaningful way, perhaps guaranteeing that they won't achieve their own goals if growth fails to continue.
Fortunately, many large asset owners are reconsidering this, including CalPERS, Norges Bank and many others, especially those in Scandinavia. Such asset owners represent well over $1T in public equity alone, making a pending shift of this capital towards sustainability focused companies another trend to consider.
Next page: Deeply rooted nature
Investor and flood photo by Peshkova on Shutterstock.