At the end of this endless year of 2008, it seems nearly impossible to look to 2009 and beyond, but for investors that really is the only prerogative. For those with 401(k) plans and others who own equity securities either directly or indirectly, looking ahead is paramount for your financial well-being — and with that comes the responsibility of ownership. Fortunately for us all, the implications of this responsibility has started to correspond with what should be done for maximum financial return.
In general, investors are supposed to look ahead, positioning their portfolios for what will give them the best chance of the returns they seek, but you get the sense that markets and investors alike are in a protracted state of shock from what has happened in 2008. How do you value any company in this environment? Most legacy techniques rely on "backtesting" — factoring in financial criteria such as P/E ratios, cash flow modeling and more, all based on realities of the past. We are very much on new ground here, so one would suggest a clearheaded, forward-looking perspective is what is required. How will a price on carbon emissions affect company valuations? Backward-looking models have nothing at all to say on this and so much more.
The Obama transition team and future cabinet are full, thankfully, of people who believe in science and in the "polluter pays" principle. Aside from the appointees, transition team members who will most likely continue to advise Obama include Peter C. Fusaro, the outspoken respected voice on the need to act on the environment and cleantech now, and Daniel C. Esty of Yale and best-selling author of "
Green to Gold." It is also well known that Al Gore will continue to advise, and his opinions are clear. Add to this the likes of John Holdren and the long list of others, and you have a cabinet poised to act quickly and directly on environmental legislation. The United States will almost certainly lead the negotiations late next year in Copenhagen.
This has tremendous implications for public companies and therefore investors. It is the companies that look forward that will win in the end. Do I really need to say anymore than "Toyota vs. GM" to show you why this is essential? Regardless of Toyota's recent losses, it is very clear which company is best positioned, not to mention their recent relative returns. Over the last five years, Toyota's stock price has broken even — in other words, their forward-looking nature has allowed them to survive. GM's equity shareholders, of course, will be lucky to get anything out of their investment in the end.
Speaking of GM, when I joined Trucost this past June, I took a look at the ownership of GM, as it struck me as a company that was fairly doomed to fail. The stock price at the time was roughly $18 a share and, yes, shorting GM would have been about as good an investment idea as you could imagine as the price is now about $3. But I'm an observer, not an investor, let alone a short seller. Shorting GM of course was a fairly obvious, common-sense consideration under the circumstances. So who owned GM in June of 2008 and what were they thinking? Turns out, it was largely passive owners taking the ride down that steep hill. Index investors, long thinking that they were doing themselves a favor, were in effect stuck holding the bag as GM was and continues to be an upstanding member of all major indices, such as the S&P 500, Dow Jones Industrials, etc. Any pension fund, endowment or foundation, therefore, that had locked themselves into a passive approach would be ensuring a downward trajectory. What to do?
Study after study coming out now demonstrates that forward-looking, sustainable investment strategies have been outperforming. This is true from the chapter of our recent book, "
Sustainable Investing: The Art of Long Term Performance," where we demonstrate that classic, ethical funds that do nothing more than negative screening do mostly fail to perform financially, but removing those, sustainable funds had been outperforming mainstream indices for one, three and five years ending December 2007. Similar results have been shown by the 2008
Moskowitz Prize-winning paper by Meir Statman as well as recent books by Matthew Kiernan. "
Investing for Change: Profit from Responsible Investment" by Augustin Landier and Vinay B. Nair argues similarly, and other pending studies all now correlate.
There are many ways of skinning this cat, in effect. One can invest in carbon or environmentally optimized index portfolios — benefitting from low costs, while rewarding the most efficient companies in question, rather than investing in the underlying index, which would not be the best way to position oneself against changing carbon legislation. One could also diversify into clean energy and traditional companies adding forward looking strategies and divisions. And it would seem paramount to be active and avoid the GMs of the world. There are many variations on this theme, but the message is clear.
In general, it's taking direct responsibility for ownership that has been sorely lacking. Many philanthropists, those responsible for endowment and foundation investing, those overseeing well-minded pension funds and others who care, have been all too often looking the other way when allocating or investing their money. And now it has been proven to be not only to no effect, but likely harmful to net worth as well. Hedge funds disappear daily. What were otherwise fair-minded pension funds investing in such vehicles thinking? As Steve Viederman argues in our book, it is now against fiduciary duty not to factor in issues of the environment into one's investments.
It is time to take responsibility for what you own. Guess what? It turns out to be what's best for your wallet as well. What on earth are you waiting for?
Cary Krosinsky is vice president for Trucost, which has built the world's most extensive time series database of more than 700 emissions and pollutants as are generated by more than 4,500 public companies around the world. Cary is also co-editor of the recently released book "Sustainable Investing: The Art of Long Term Performance," with Nick Robins, HSBC's head of Climate Change.
