5 Reasons Sustainable Investing Is Here to Stay

Although many professional investors still think investing with the environment, social considerations and corporate governance issues in mind comes with a penalty, it turns out that the reverse is the case.

In a time where most active fund managers underperform their benchmarks, the better sustainable investors have been outperforming theirs.  

Sustainable Investing can come to the rescue!

The Financial Outperformance of ESG and Expertise

woman with illustrated globe in hands
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The more thoughtful investors such as Generation Investment Management based in London and operating out of the US as well have instead outperformed benchmarks over the past 10 years. Now managing something like $12 Billion in assets, the firm is run by ex-Goldman head of equity David Blood and former US Vice President Al Gore, and their work is outlined well here by Institutional Investor magazine.  

Also well worth a watch is this 23 minute Atlantic magazine video which outlines the method, the investment imperative and the outperformance they have experienced through their unique combination of ESG and expertise.  Generation famously ranks companies on their BQ (Business Quality) and MQ (Management Quality) while also looking at sustainability themes.

Business Quality reflects how sticky a business is, a concept often referred to as an
investment moat, something also championed by Warren Buffett, and so Generation represents a more modern Berkshire Hathaway in a way, exactly what we have long been seeking.  If more investors took a buy-and-hold approach to the solutions providers of tomorrow, it would create the needed race to positive sustainability and financial returns that is now simultaneously necessary.

Another investor experiencing similar success is Parnassus Investments out of San Francisco, whose slogan is Principles and Performance. Parnassus has been leading the way among US SRI Fund Managers.  Having managed less than $1 Billion as recently as just before the Financial Crisis of 2008, through ongoing financial outperformance, a rigorous approach to large-cap value and a value first approach to sustainable investing in a related style to Generation, Parnassus now manages over $15 Billion.  It's flagship Parnassus Core Equity Fund gets 5 Stars and 5 Globes from Morningstar, an amazing feat unto itself.

As per the Parnassus website: "The Parnassus Core Equity Fund invests with low turnover and high conviction in approximately 40 holdings. The Fund focuses on identifying companies with:

  • Wide moats or strong competitive advantages that protect market share and profitability
  • Relevancy over the long term, which provides a compounding growth component
  • Quality management teams that will act in the best interest of shareholders
  • Favorable three-year investment horizon

The Fund strives to outperform the S&P 500 index on a risk-adjusted basis with a high active share. The Fund attempts to shield investors from losses during bear markets while offering significant upside participation during bull markets."

Also of interest is the Parnassus Endeavor Fund, another sustainable fund with 5 Stars and 5 Globes from Morningstar, a rare and important combination.

Parnassus Core Equity and Parnassus Endeavor are also the two sustainable investing funds in the US with the best financial performance over the past 10 years as per this Bloomberg maintained this page of sustainable funds.

Parnassus Endeavor as per the Parnassus website has the following approach.

"The Parnassus Endeavor Fund invests with low turnover and high conviction in approximately 30 holdings. The Fund focuses on identifying companies with:

  • Wide moats or strong competitive advantages that protect market share and profitability
  • Quality management teams that will act in the best interest of shareholders
  • Favorable three-year investment horizon

The Fund invests in large-capitalization companies that represent Parnassus' clearest expression of ESG investing: portfolio companies must offer outstanding workplaces, and must not be engaged in the extraction, exploration, production, manufacturing, or refining of fossil fuels. This workplace focus can result in significant exposure to technology companies, many of which are leaders in offering positive and innovative workplaces."

As we saw however back in January in this piece, some of the other largest US SRI funds have not outperformed benchmarks.  Those funds are not value-first, rather looking at either negative screens or a more blended ESG ranking of companies.

Asset growth has gone to the likes of Generation (who no longer takes new money in its Equity fund) and Parnassus with other longstanding players such as Calvert, Domini, and Pax still struggling to catch up.

Outperformance is available and needs to be sought for the field to succeed.  The mantra that you leave returns on the table by investing in a sustainable manner could be true if you aren't a sharp investor.  However, in an age of active managers underperforming benchmarks, ESG and expertise have emerged as the way forward.

Low Carbon Energy Cost Curves

In the late 70's when Jimmy Carter was installing solar panels on the White House, solar panels cost in the $70 dollar range per watt of energy generated.  Since then, the price for panels has dropped 100 times, down to what was 73 cent per watt in 2013, a shift that continues in the downward direction, and that is expected to continue to drive cost competitiveness across energy categories.

Solar costs are expected to fall another 40% over the next 2 years alone.  As this CleanTechnica piece indicates, Saudi Arabia isn't daunted by this, rather they are scaling up solar to replace electricity they generate from oil so that they can maximize the revenue they generate from global oil sales.  

Saudi also is planning fully for a post-Oil world, including the formation of a new $2 Trillion sovereign wealth fund, which would be the world's largest asset owner, surpassing the new Japanese pension system GPIF at $1.3 Trillion and Norges Bank expected to soon be a $1 Trillion dollar investor.

Expect solar costs to be part of a global trend of lower energy costs in general, placing downward pressure on oil use and production, with hedge funds betting on a higher price of oil getting squeezed.

Investors and oil companies betting on a higher price of oil are likely to be stymied, so getting caught on this is a real danger for any investor or lender.

A lower price on oil and energy in general is good for many sectors of the economy, so this isn't bad news, but it might also limit the growth of solar in some cases.

Climate Change isn't going away either, which will continue to put pressure on fossil fuel use making the profit levels of the oil sector experienced in the 2000's very challenging to recreate.

The Aftermath of COP 21

The climate negotiations which wrapped up in Paris during December 2015 resulted in what is now known as the Paris Agreement and which was ratified by 177 countries during Earth Day which this year was on April 22, 2016.

An aggregation of what is known as INDCs or Intended Nationally Determined Contributions, the commitments represent the start of a road to a low carbon future economy, one that is expected to be filled with fits and starts.

There is no enforcement mechanism and these commitments are very clearly not enough to keep the world within climate change future safety.

And so the next five years are critical to move much faster towards a low carbon future, as Christiana Figueres, departing head of the UNFCCC climate negotiations body recently spoke to at Yale in some videos that are well worth a watch. 

Efforts in this regard are well underway, including moving towards driverless electric cars, more efficient buildings, greater energy efficiency, circular economies, more sustainable forms of agriculture and land use.  Much more is needed, but much is also now happening, and older ways of doing business are increasingly being left behind.

The Conviction of Pope Francis

The release by the Vatican last year of an Encyclical on Climate Change referred to on twitter as #LaudatoSi was a call to Billions of Pope Francis' followers for action which may well have major investment implications.

Highlights pointed out here (from what were Italian language translations) and much of which was tweeted by Pope Francis via @pontifex included:

  • “Science and religion … can enter into an intense and productive dialogue with each other”
  • “There is a very consistent scientific consensus”
  • “Never have we mistreated and offended our common home as we have in the last two centuries”
  • Climate change is “caused by the enormous consumption of some wealthy nations”
  • “It is impossible to sustain the current level of consumption”
  • “The environment is a common patrimony of all humanity”
  • “A truly ecological social approach should integrate justice in discussions about the environment”
  • “The Church … must listen and promote honest debate among scientists”
  • “It is urgent to develop policy”
  • “Heal our life, so we protect the world”
  • "I invite all to pause to think about the challenges we face regarding care for our common home."
  • "We need a new dialogue about how we are shaping the future of our planet." 
  • "There is an intimate relationship between the poor and the fragility of the planet."
  • "There is a need to seek other ways of understanding the economy and progress."
  • "There is a value proper to each creature."
  • "The throwaway culture of today calls for a new lifestyle. "
  • "“To commit a crime against the natural world is a sin against ourselves and a sin against God.” (Patriarch Bartholomew)
  • "The climate is a common good, belonging to all and meant for all."
  • "Climate change represents one of the principal challenges facing humanity in our day."

(and then perhaps one of the more very amazing tweets) 

  • "The earth, our home, is beginning to look more and more like an immense pile of filth."
  • "These problems are closely linked to a throwaway culture."
  • "One particularly serious problem is the quality of water available to the poor."
  • "The human environment and the natural environment deteriorate together."
  • "The deterioration of the environment and of society affect the most vulnerable people on the planet."
  • "We have to hear both the cry of the earth and the cry of the poor."
  • "To blame population growth and not an extreme consumerism on the part of some is one way of refusing to face the issues."

(some have pushed back on this previous tweet, noting that population growth is very much a related issue and that the Vatican's stance on birth control is in opposition with this call to action on climate change)

  • "A true “ecological debt” exists, particularly between the global north and south."
  • "Developed countries ought to help pay this debt by limiting their consumption of nonrenewable energy."
  • "There is no room for the globalization of indifference."

(and then a tweet all investors can easily relate to)

  • "Economic interests easily end up trumping the common good."

(then this tweet which seems odd given innovation's clear role in solving for potential future climate change)

  • "The alliance between economy and technology ends up sidelining anything unrelated to its immediate interests."

(and then the big criticism of investment as a key factor)

"Whatever is fragile, like the environment, is defenseless before the interests of a deified market.."

Perhaps an opportunity will emerge linking Pope Francis's followers on a global basis to investment options which address climate change.  

The Rise of Social Impact

Millennials want purpose and to make an impact. Increasingly, investors want to have a positive impact on their investment dollars, from the Ford Foundation to High Net Worth individuals to individual investors. There are now over 1700 B Corporations who require a minimum performance on how they govern themselves and how they treat their workers, the local community, and the environment. Social capital and social entrepreneurship is all the rage.  

Everyone seemingly wants to make a positive difference for themselves or their children or their children's children. Does anyone really want to leave the world a worse place for future generations?

This is why the pressure figures to only increase to transition successfully to a low carbon future and to focus on other societal impacts especially on inequality, inequity and access to healthcare, education, housing and financial services for those globally less well off, including here in the United States, where dissatisfaction has led to the rise of Donald Trump and Bernie Sanders who together have a majority of the primary vote.

Solutions will require positive and proactive implemented strategies with intentional outcomes in mind.

Investors not thinking we are headed this way are in for a rude surprise. It's time to get on board the sustainable investing train now before it leaves the station.