Sustainable Investing: An Opportunity for Bill and Melinda Gates
The ongoing evolution of Sustainable Investing, opportunities emerge.
We have long been preaching the potential benefits of more forward-looking, positive investment strategies that directly consider the emerging opportunities coming from sustainability trends, whether environmental or social in nature. Over time these trends will likely increasingly affect financial performance, which we have already seen in recent years.
Our first book on this subject, Sustainable Investing: The Art of Long-Term Performance, sold around 5000 copies in English and was translated into Arabic and Mandarin, making it one of the more popular business books of 2008, and so we clearly tapped into something of interest.
Basically, investors who had been seeing socially responsible investing practice largely not outperform the market nor result in changes to most business practice were thinking about how to evolve and move forward, and so our book looked at the trends in the field and tried to envision a better way.
The history of Socially Responsible Investing (SRI), as written in 2008 by the previous curator of this site William Donovan, both in the US and UK, was largely spurred on by specific ethical issues and morality, often dictated by religious mandate.
At the time, most SRI funds remained trapped in simplistic legacy negative screening methodologies with performance mainly a secondary consideration, and as we saw in our recent piece on the 5 largest Socially Responsible Funds in the US, it can be hard to teach an old dog new tricks.
Our first book reviewed the 850 global public SRI mutual funds and separated them into those with a more contemporary positive focus, and those rooted in older negative techniques.
Lo and behold, the more positive funds had been outperforming the markets for the 1-, 3- and 5- years leading up to the end of 2007, while the negative focused funds at best met market performance. We were very specific on our methodology in the Appendix to the book and followed up on these findings a few years later in our second book which we will review as well in a subsequent piece.
Fast forward to more recent times, and as we reported recently, some SRI fund performance has been strong, with the more positive opportunity-focused fund managers outperforming and gaining in assets under management and interest.
The momentum over the past few years has been tangible, but we believe this will be harder to detect in the future as the necessary evolution of all investing taking environmental and social trends into account continues to unfold.
Major progress is being made on many fronts in this regard, including the Investment Leaders Group I recently had a chance to advise at the University of Cambridge and which involves over US$5 Trillion dollars of assets. Hedge fund managers are known to be figuring out their next steps as have large pension funds such as CalPERS and New York State Common Retirement and the world's largest investor BlackRock is increasingly seeing the light .
So how did we do back in 2008 in predicting what was to come? Certainly, our call for more positive forms of sustainable investing is coming to fruition. The financial crisis of 2008 put a hold on financial evolution in general, with most new strategy considerations, SRI or otherwise, put largely on hold for the subsequent five years as the financial industry struggled to recover and survive.
But with a bit more confidence more positive trends are emerging, and which is encouraging.
Abyd Karmali's chapter on the benefits of cap and trade as a solution to carbon emissions run amok remains a work in progress as UN negotiations finished recently in Paris in 2015, but it remains an eloquent call for a solution that has been largely untried. Some sort of restraint on carbon remains necessary as even the mainstream, fossil fuel industry-backed IEA argues here, and so something will give at some point on regulation, which many companies expect, given the rise in internalized prices on carbon.
Other pieces in the book also remain a work in progress as well. A chapter on European Utilities suggested that natural gas would be the best replacement for aging coal-based power plants. The economics of this did not play out, for example, for then largest European utility RWE, whose investments in new gas plants did not succeed financially.
RWE struggled, but then again, it would appear that the entire utility sector globally is under great pressure with shifting cost curves and moves towards more distributed forms of energy, and so the entire model of the centralized utility is at threat.
Clean energy opportunities as reviewed by Mercer, turned out to be mostly poor investments at first, mainly due to the failure in 2009 of the UN negotiations in Copenhagen to result in action on fossil fuel restrictions. Instead, a Cleantech 1.0 bubble of sorts played out, burning many early investors. A Cleantech 2.0 is underway now, resulting in very strong returns for many investors including significant outperformance seen for example in First Solar's move from a low of $12 back to $70 per share. Many industries begin with fits and starts, such as Biotech, Radio, Railroads and much more, so perhaps this should have been expected of alternatives, and the Mercer chapter advised caution at the time.
We also discussed how water, private equity, social business, real estate, emerging markets and fixed income were additionally important emerging areas of sustainability focus to watch, and all have taken off in a good way. Overall, the momentum for sustainability as a positive force for all investors is only expected to accelerate.
Which is why this piece by Charles Piller on Bill Gates is so concerning. Piller famously found in 2007 (and I was very pleased and honored to consult with him on this) that while the Gates Foundation was funding health solutions in Africa, they were also investing in companies that were causing the problems they were trying to solve, including in the Sudan.
In 2014, there is now no excuse for any investor with a societal mission to solve the world's problems, to turn a blind eye to the side effects of any of their investments. Such a blind eye creates a vicious circle of corporate/investor behavior, which, given 70% ownership of public companies by institutional investors, basically locks in longer term environmental and societal trends on climate change, inequality, slavery in supply chains and so much more, if no further action is taken on ownership positions.
We do herald Gates for his leadership on Mission Innovation but what about his other investments?
Checks and balances are clearly needed. Steve Waygood of Aviva Investors argued in our book in 2008 for Stewardship, which now has great momentum in the UK, and which, at minimum, the Gates Foundation would be wise to consider.
The UK's Stewardship Code, developed in the past few years, aims to "enhance the quality of engagement between asset managers and companies to help improve long-term risk-adjusted returns to shareholders." Yet the Gates Foundation and their often partners at Berkshire Hathaway, do not participate in this sort of action on their responsibilities for the sake of their own long-term shareholder value. Given the systemic nature of institutional ownership, and the need for checks and balances now very clear, one thought quickly comes to mind.
Don't Bill Gates and Warren Buffett have a responsibility to be good stewards of their own investments, given their unique opportunity to set a positive public example?
Perhaps the right question to ask is: "if you were Bill Gates, what would you do?"
For one thing, as Stephen Viederman wrote for us in 2008, 'we are approaching a day when it will be against an investor's fiduciary duty not to take environmental and social considerations into account.'
If we were grading either the Gates Foundation or Berkshire Hathaway on the quality of their stewardship of the shares they own in public companies, they would almost certainly get a grade of F on the back of the articles of Charles Piller, across possible activities such as proxy voting and constructive engagement, as well as positions on issues such as climate change and ensuring minimum social standards are upheld within the supply chains of companies they often hold such large positions in. Their intentionality on environmental and social considerations as regards this ownership is also very much in question.
Who better to lead the way for a new age of positive stewardship of all companies than Gates and Buffett? Who else retains a unique opportunity to lead the way on the development of positive practice? This is not a political issue, rather simply as the UK Stewardship Code makes clear, a necessary step for companies to provide maximum returns to shareholders over time.
The ending of our first book stated quite clearly that "the challenge for sustainable investing is not to become like today's mainstream but, rather, to replace it."
That challenge as we can see remains.