Of all the activists at large in the world today, sustainable investors must be among the most patient. For decades members of sustainable investment organizations in the U.S. and abroad have incorporated environmental, social and corporate governance (ESG) criteria into their investment decision making. And the fiduciary duty of pension funds and other institutions to consider ESG factors has been strongly recommended since at least 2005, when the first Freshfields report was published.
It is undeniable that the pace at which capital markets have embraced sustainability proceeds too slowly, while critically important issues such as the natural boundaries of the planet and the stranded assets of the fossil fuel industry demonstrate that business as usual must not continue. And as long as the markets are rigged to reward short-termism, the insufficient uptake of sustainability is likely to continue.
But it is also likely that increasing numbers of mainstream investors are recognizing the benefits of a long-term investment horizon, both for financial and ESG benefits. Investors who have incorporated sustainability for years have responded with a number of reports this summer to help mainstream investors make the transition.
Last month, I wrote about the four pages of insights on climate change published by the Interfaith Center on Corporate Responsibility (ICCR). “The majority of the energy sector remains mired in its old model and demonstrates through its actions that it is in apparent denial of the terrible price future generations will pay for its resistance to reform and/or to conform to measures that can produce change,” ICCR concluded.
However, the organization's members prefer to maintain engagement instead of divesting their holdings in fossil fuel companies, as the widely publicized campaign of 350.org recommends. Divestment, ICCR argues, runs the risk of ceding active ownership and, “in effect, serves to strengthen management control.”
Ceres also published a guide for sustainable investment last month, “The 21st Century Investor: Ceres Blueprint for Sustainable Investing.”
“The nature of risk facing investors, communities and businesses in the 21st century is different — even unprecedented,” the report says. “These emerging risks will almost certainly have more severe and longer lasting economic consequences than the recent financial crisis.”
The report lists 10 recommendations for investors who recognize the urgency of incorporating sustainability criteria:
1. Establish a commitment to sustainable investment though a Statement of Investment Beliefs
2. Establish board-level oversight of sustainability policies and practices
3. Identify sustainability issues material to the fund
4. Evaluate asset allocation for material sustainability risks
5. Select an investment strategy and integrate sustainability criteria
6. Require sustainable investment expertise in manager and consultant procurement
7. Evaluate manager performance against sustainable investment expectations
8. Establish corporate engagement strategies and proxy voting guidelines consistent with sustainable investment goals
9. Support policies and market initiatives that promote a sustainable global economy
10. Integrate sustainable investment criteria across all asset classes and strategies
“The financial risks of climate change and other sustainability threats will have profound effects on investment returns in the years to come, yet the traditional methods of financial analysis used by most large investors ignore these factors,” Ceres president Mindy Lubber said. “The blueprint provides a clear path for integrating sustainability challenges into investment strategies, and shifting from short-term thinking about earnings and profits to longer-term risk-adjusted returns mindful of the present as well as the future.”