Sustainable Investing Evolution

How Sustainable Investing evolved during 2015

As we noted in January, 2015 was going to be the year in which Sustainability became Business As Usual.

We outlined some of the things to watch for at that time, including Pope Francis's visit to the US, and of course the entire year built up to the Paris Climate talks which ended in unprecedented success a few weeks ago, resulting in significant implications for all investors.

Also worth reviewing is where E, S & G, or environmental, social and governance issues are individually.

Social issues have been increasingly in the public eye, with emphasis on this in the new TPP trade agreement on labor conditions, and there are also endangered species provisions included.  Social issues are solvable largely through negotiations, not so much picking good or bad companies from a list.  This is where socially responsible investing went wrong, with the oldest firms such as Calvert now in a major struggle, but this is hardly a surprise. 

We have long written since our first book on Sustainable Investing in 2008 that the field needed to evolve towards more positive investment frameworks, and this is exactly where the assets are going.

A positive dynamic results in benefits for shareholders, stakeholders and society alike.  Negative approaches such as divestment simply aren't the answer more often than not.

Social opportunities on the other hand, are gaining some traction through the concepts of impact investing, large Foundations such as Ford are questioning whether philanthropy and charity are enough, but it is very early days on this front, and most individual investors can't play this game meaningfully.

So we should leave social issues largely to advocacy, where it belongs, solving problems through negotiation, while experimenting with social opportunities through investing and new business models such as B Corps, whose catch phrase is now "We Have a Dream" implying how much more work there is to scale such a good idea.

Governance has resonated most strongly to date among ESG, especially on the governance risk side, where a recent survey showed that a majority of financial analysts take governance into account, and why wouldn't you?  With company malfeasance on the rise at Volkswagen and the range of companies being spotted by activists who seek companies to short growing in interest, how well a company is run is a key indicator for Sustainable Investing practices as well, and the one which has gone mainstream first and foremost, which is partly why we argue that Sustainable Investing has become the New Normal.  Governance opportunity has long been harder to identify as investment criteria, but if you think of good governance being how well you manage your environmental and social risks, then it is of paramount importance.

Last but very much not least, environmental issues are fully expected to grow in importance in the years to come.

There is a wealth of reports out on this in the wake of the newly minted COP 21 Paris Agreement, where the world just agreed to tackle climate change without dissent.

It is nearly impossible to summarize all the reports which came out recently on the subject of climate change and investing, but the CFA Institute's Usman Hayat gave that a go here, including my work this year with PRI isolating a Framework for Investor Strategy Development on Climate Change and much more from organizations that include Mercer, BlackRock and many more.

Then there is the Journal of Environmental Investing where I act as Editor, and our main issue for 2015 was a balanced look at Responses to Calls for Divestment.  Our next issue in 2016 will be Environmental Alpha, 5 Years Forward, on the back of our publisher Angelo Calvello's original book on this question.

The Paris Agreement is clearly not enough to avoid the worst expected coming effects of climate change, and while their surely will be ups and downs, efforts such as the Mission Innovation effort backed by Bill Gates, Mark Zuckerberg et al alongside the Department of Energy, ensures that the pace of innovation will have every chance of accelerating, making environmental risk and opportunity the likely place where alpha will be found going forward.

Environmental investing has arguably never been so important, even while related investing practices remain nascent in the light of insufficient regulation and focus.

Our early new year's resolution for you would be to keep in mind that the low carbon energy transition isn't going away, it is only likely to intensify, and you would be wise to follow this closely going forward.

The next 5 years just won't be the same and neither should your portfolio.