Is green the new black for investors?
The investment world is finally talking about moving beyond short-term gains to consider looming financial risks related to sustainability. Here's where those efforts fall short.
I have worked in sustainable investment for 15 years.
During this time, several concepts have gained widespread acceptance in the mainstream investment community: stewardship, or better planning and managing resources; integration of environmental, social and governance factors (ESG); and increased engagement in the concept of responsible investment
Almost all investors now agree that these things matter to long-term investment returns. Look at the United Nations-supported Principles for Responsible Investment (UNPRI). Nearly 300 asset owners and 900 asset managers have agreed to incorporate ESG into investment analysis and decision-making processes.
The UNPRI is an international network of investors working together to understand the implications of sustainability for investors and help people incorporate these issues into their investment decisions.
Similarly, if you look at the European Social Investment Forum’s Sustainable and Responsible Investment study, $7,735,680,000 worth of assets are managed in strategies integrating ESG into their investment. There's also the fact that 80 percent of global CEOs (PDF) view sustainability as a route to a competitive advantage.
These would all seem to suggest that the investment community has realized that it was being a little myopic and short-term, but that has now been fixed. Investors have learned from the mistakes of the past, and investment is a very different game today.
So we can all feel happy that the negligence that led to the governance failures of the past decade won't happen again.
But is this actually the case? Have these codes, principles and reviews made any fundamental difference to investment practices?
Put another way, imagine a fund manager was put to sleep in 2004 and woken up in 2014. Would they notice any major difference in the way the investment world operated? Would they notice investments being held for longer? If they looked at companies, would they notice a greater emphasis on governance and sustainability issues?
Unfortunately, I believe that no is the answer to all these questions, in spite of all the commitments made to the contrary. For although pockets of governance and sustainability research are produced, it is still very much the exception. The majority focus, as before, is still on short-term financial analysis.
Business as usual?
Take, for example the energy sector.
Before BP's Macondo disaster, the largest oil spill in history, scant attention was paid to safety as a factor worthy of consideration. Then, while the well was spewing out over 4 million barrels of oil into the Gulf of Mexico, there was a period when tables on safety performance regularly were published.
However, this is no longer the case.
When I look at most research, and indeed company presentations, there is rarely any reference to safety performance. Yet this was a factor, which less than five years ago wiped 50 percent off the value of one of the U.K.'s largest companies and dividend payers. How could a factor be any more material than this?
Nevertheless, while there has not been wholesale change in the industry to back up the fine aspirations of the UNPRI and Stewardship Code, a growing number of people are looking for asset managers who really are embedding sustainability into the way they manage investments.
For these people, I suggest asking any prospective asset managers the following questions:
- Describe the trades driven by ESG factors over the last year.
- Select half a dozen stocks in the portfolio and ask for their view of ESG for each of them.
- Who does the ESG analysis and how are they linked to the investment decisions?
- If CO2 emissions are taxed/priced/regulated more stringently, what happens to the portfolio?
The answers to these questions should help in assessing which asset managers really have changed over the last 10 years and for whom sustainability and responsibility is anything more than a thin veneer.
This story originally appeared in BusinessGreen.