Measuring Investments in Sustainability and Investing

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Not everyone cares about every issue when it comes to Sustainable Investing.  There are after all hundreds if not thousands of issues of environmental, social or corporate governance concern to consider.

Where to even start?

One can be primarily concerned about human rights issues as says the RFK Human Rights organization overseen by Kerry Kennedy.

Or one can focus on jobs and economic inclusiveness as well as how companies are governed among many other mainstream issues which manifest in Sustainable Investing.

Ultimately, Sustainable Investing is about six things if not more.  These six are Environmental, Social and Governance (ESG) risks and opportunities.  In effect, there is an opportunity and a downside to each of ESG.  These are as follows:

E - Environmental impacts, risks and opportunities. For example, UK based data provider Trucost tracks environmental impacts data showing companies with the largest environmental damage costs per dollar of profit or revenue, and HSBC's climate change index, which looks at companies best attempting to find innovative environmental solutions.

As per the most recent IPCC Synthesis Report, there is also a clear need to invest in future energy transitions first and foremost as a key positive opportunity going forward.

S - Social risks and opportunities. Arguably, social metrics are the hardest to quantify, but firms like KLD (now part of MSCI ESG), EIRIS and Sustainaytics take a stab at that, reviewing issues such as employee relations, human rights, diversity and product safety among many others.

Any company failing to perform well on these issues runs the risk of not attracting or retaining the best and the brightest employees, nor retaining shareholders who focus on specific issues such as involvement in Sudan, and not retaining customers who focus on lifestyle choices and their consumer patterns accordingly.

On the plus side, plans have been forwarded for establishing the likes of a Social Stock Exchange, as funded by the Rockefeller Foundation, whereby companies would need to demonstrate best social attributes to retain exchange membership. This sort of "exchange plus" is already in place in Brazil and South Africa and has been successful. As investors, including union pension funds such as those administered by the likes of AFL-CIO, insist on minimum standards in investment, it would increase such risk and opportunity accordingly.   Impact Investing and B Corporations more recently have also emerged in this regard.

G - True governance risk, as performed best by the likes of The Corporate Library (now part of MSCI ESG), which highlights situations of overcompensation, board composition and related conflicts of interest. For example, The Corporate Library had flagged Bear Stearns and Lehman Brothers as Ds and Fs in its scoring system, which if used in an overall true sustainability risk system, as proposed, would have protected investors accordingly during the financial crisis of 2008.

On the positive side, companies that reward all employees, shareholders and investors equally, and have full checks, balances and incentives, arguably represent an ideal which few firms achieve -- but those that come closest may well outperform.

Private equity firms increasingly recognize that to best maximize their assets, they need to be top performers in these areas; there are increasingly creative and thoughtful short term investors who see that this is the way forward.

We like to further expand ESG into ESGFQ, adding Financial criteria (no company is truly sustainable without a business plan) and Q as in Quality as additional considerations.

F - Traditional financial criteria. For one of too many examples, GM would have been an automatic non starter on Sustainability some five years ago when bailed out, although owned widely by passive investors at the time. If you held a flat index that had GM as a constituent, that portion of your assets were doomed. The same as proved true of coal companies now mostly bankrupt (and unlikely to be bailed out).

  Hence even for passive investors, sustainability risk is essential to consider on financial grounds alone. And it should go without saying that combining positive financial criteria (value plays from traditional Ben Graham/David Swensen approaches etc.) with sustainability risk should offer the best of all possible worlds. 

Q - Quality of management is something that can be achieved only by direct interaction and investor judgment. Hence, sustainability inevitably needs human interaction, face-to-face dialogue and understanding that management is committed to full integration of sustainability -- walking the walk, not just talking the good talk.

Investing and measuring without such a framework in mind inevitably ignores some or all the risks that are critical to a company's success. Walmart's recently announced efforts, for example, fall short of what many investors require in a larger framework that includes judgments on management and other factors of direct relevance.

Ultimately, true sustainability is something of a holy grail -- something specifically sought, as opposed to something which can be pinned down completely.

This is likely a good thing, as markets need winners and losers, and those who best get this right through sound judgment, creativity and innovation should win in the end, and the process is most important.  

The business case ultimately always rules more often than not, and ESGFQ becomes a lens which any investor can use in this regard to form a strong opinion, as well as an investment strategy, that has both performed strongly, and is likely to continue to point out the winners and losers of tomorrow going forward.


(a version of this originally appeared in Evolutions in Sustainable Investing and at