Responsible Investment Forum with Steve Schueth

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A reader of this column has asked for a succinct explanation of why sustainability should be important to a company's shareholders (investors). Fortunately, there is a large and growing body of academic research and real world experience on this topic. In fact, a new book Managing the Business Case for Sustainability: The Integration of Social, Environmental and Economic Performance provides a valuable new resource for those interested in digging deep into the research on the links between corporate social responsibility and profitability. But it's 600-pages long! Recently I sat down with Carsten Henningsen, chairman of Progressive Investment Management and founder of Portfolio 21, a global mutual fund that invests in sustainability-minded companies, to find out what he has to say on the subject.

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Enlightened Self-Interest

Steve Schueth: The fundamental economic rules underlying business risk and return assumptions have changed little since World War II. What's different about the economic environment in which businesses operate today?

Carsten Henningsen: During the last 60 years, investing has been about achieving the highest possible rate of return with the least amount of downside potential. However, the expectation of positive economic growth and positive investment returns has been predicated on the assumption that natural resources like clean air and drinkable water are plentiful and free, or at least pretty cheap. In addition, business strategies have sought to externalize as many costs as possible. The resulting pollution and sky-high health care costs, for example, have become the responsibility of citizens and tax-payers, rather than the source companies. In essence, the role of natural capital has been assumed out of the equations used to calculate growth, costs, profits, assets, and liabilities.

SS: So, there's a fundamental problem with the way business leaders make decisions, and the way business schools train business leaders to make decisions.

CH: The critical flaw in our current economic system is the assumption that natural capital and therefore economic growth is unlimited. There are over six billion people walking the earth today. We are running a natural capital deficit of over 20 percent annually—in other words, we are consuming 20 percent more natural resources than the planet can renew, recycle, or produce. In investment terms, the global economy is consuming principal at an alarming and unsustainable rate. The idea of continuing the economic growth of the past 60 years is simply impossible, if not simply silly. Yet, we march on in denial, as if nothing has changed since 1945.

SS: It sounds like there are a variety of new business risks to navigate and manage. What are the characteristics of companies that will succeed and thrive in the 21st century?

CH: The admonition, "Past performance is no guarantee of future results," has never been more true. Today, superior business strategies require awareness and management of a whole new set of risks. With increasing concerns about climate destabilization, peak oil, and the earth's limited biocapacity, the business and investment case for environmental sustainability is becoming increasingly clear. In many ways, today's financial climate is as much about understanding, redefining, and managing risk, than it is about generating returns. Companies best positioned to survive and thrive in the 21st century must actively work toward an economic model that does not undermine the productive capacity of nature, but rather values and conserves our precious natural capital.

SS: What are the cutting edge companies doing to minimize risks and maximize returns?

CH: Smart corporate leaders are beginning to realize that future successes lie in understanding the ecological crisis and figuring out how to integrate environmental sustainability principles into core business strategies. Many companies are now beginning to recognize the enormous business opportunities that exist in providing products, services, and technologies needed to create a sustainable society. Real world experience of cutting edge companies shows that sustainability initiatives can be very profitable.

SS: Socially conscious investors want to own shares in companies that are leading the charge toward sustainability—companies that are strategically positioned to better mitigate the risks and take advantage of the opportunities. Give us a few examples.

CH: Savvy investors are seeking out companies that are developing cleaner energy sources, resource-efficient production methods, products designed to be reused, rebuilt or recycled, using more benign raw materials, and developing processes that produce little or no waste. Here are three great examples of profitable industry leaders, using sustainability strategies to their competitive advantage.

• Electrolux (Sweden)
  Electrolux designs and manufactures everything from dishwashers and vacuum cleaners, to washing machines and lawnmowers. Fittingly, given the fact that its core business is cleaning appliances, Electrolux is mindful of the mark its business leaves on the environment. Electrolux was the first in its industry to identify the business value and money-saving potential of recycling and lobbied actively for producers to take individual responsibility for managing their waste. The company has challenged itself to exceed market expectations by developing a range of products that do not contain hazardous materials and are capable of reducing their environmental impact. As a result, Electrolux has developed the world's most water efficient washing machines. The market for these machines is huge, especially in China.
  
  
• Interface (USA)
  In 1994, after reading Paul Hawken's Ecology of Commerce and Daniel Quinn's Ishmael, CEO, Ray Anderson, had an epiphany and began to infuse sustainability into the Interface corporate culture. The world 's largest manufacturer of commercial carpets, Interface was one of the first companies in the U.S. to adopt The Natural Step principles. It developed the first "climate neutral" durable goods by offsetting CO2 emissions associated with the lifecycle of its floor-coverings. Photovoltaics provide solar power to three of its facilities, and the company has begun the shift from selling carpet to leasing flooring services, closing the manufacturing loop and minimizing waste. Interface is currently developing carpet made from renewable natural materials that can be composted or recycled back into the same product.
  
  
• Whole Foods Market (USA)
  With 184 stylish stores in North America and the U.K, Whole Foods is the world's leading retailer of natural and organic foods. The company has gone a long way to help counter the detrimental affects of industrial agriculture which include soil erosion, water pollution, dependence on pesticides, and the disappearance of local family farms. Whole Foods has removed genetically engineered ingredients from its private label products and helped to develop rigorous standards for the humane treatment of farm animals. Special attention is focused on addressing the environmental impact of its own operations. In an effort to reduce packaging and the resulting waste stream, Whole Foods sells many food items from bulk bins. Currently, 100 percent of this company’s total national power load comes from green power sources.

Summary

As investors, we are responsible for the consequences of our investments. Socially conscious investors have begun to recognize the links between long-term economic well-being and the real-world decisions made by businesses every day. In the 21st Century, we must learn to value and respect natural systems and to wisely manage what natural capital remains. Corporations that choose to be early adopters will be positioned as leaders and winners. The argument for integrating sustainability principles into core business strategies can be summarized in three words: enlightened self-interest.

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Steven J. Schueth is president of First Affirmative Financial Network, LLC. An independent investment advisory firm registered with the SEC, First Affirmative specializes in serving socially conscious individual and institutional investors nationwide. A former director and spokesperson for the Social Investment Forum, Schueth lives in Boulder, Colo.

Reference to a specific company or mutual fund should neither be considered an endorsement of the company or fund, nor an investment recommendation. Past performance is never a guarantee of future results.