Sustainable Investing Goes Mainstream

But Exaggeration Should be Avoided for the Sake of Integrity

Strong continued interest is driving mainstream interest in Sustainable Investing at last, which is a very important development to those of us who have been in this field for a while.

Millennials are driving investment institutions to offer more products, such as June 2015's announcement of a new suite of offerings from Bank of America Merrill Lynch on Impact, Goldman Sachs' acquisition of Imprint Capital Advisors in July, and other new offerings and research is coming from Citibank,  Morgan Stanley and JP Morgan as well.

 As the next generation inherits today's wealth, they are insisting that their money has positive impact, and this changes everything (as Naomi Klein likes to say, much as we disagree with her call for divestment as a real solution to climate change).

Separately, the perception that you will perform financially worse if you attempt to invest in a sustainable manner is dying or dead.  As we reported here recently, Sustainable Investing is actually outperforming now, especially when you combine environmental, social and corporate governance (ESG) data with expertise.  Lazier forms of socially responsible investing (SRI) such as negative screening have long performed poorly and fortunately, better investment choices and strategies have emerged and are emerging.  

For example,  in perhaps the most exciting news we've heard all year, the world's largest investor Norges Bank, today announced (registration required) a four year partnership with Inflection Point Capital Management along with MSCI and McKinsey.

 Inflection Point is a global leader in the sort of positive sustainable investing we have long been advocating in our books, and writings through the leadership of industry Matthew Kiernan whose own book on the subject has paralleled our calls.

Negative screening is fine for those who want to match their values to their money, but the real opportunity is driving change with positive intent and it is great to see progress being made in this regard.

However, we need to not get ahead of ourselves as some do, in exaggerating the state of play.

For example, the GSIA in 2014 suggested over $21 Trillion dollars of investment had sustainability in mind.  After further review, taking out large pension funds who only had a single screen on tobacco or similar small action,the actual figure as per our recent Network for Sustainable Financial Markets paper was more like $1.5-2 Trillion about 10% the size of the GSIA figure.  

While interest is indeed on the rise, these exaggerations haven't been helpful in ensuring everything we do has integrity in the sustainable investing space.  Being realistic about the work that has been done and remains to be done, is critically important, to ensure that all of the important work if the field can be respected.

We see further evidence of exaggeration in this new report from the IRRC Institute and the CFA Institute suggesting almost three quarters of financial professionals use ESG considerations in their investment decisions.

This strikes us as another unhelpful and dramatic exaggeration.  There are over 120 thousand CFA Institute members globally, and this survey had a 3% response rate.  Given our experience and recent interviews and understandings, it would be closer to the truth to say that the 97% of global financial professionals who did not respond do not place primary importance on ESG factors as things stand, even if that is indeed changing.

 

Training and education on ESG remains lacking especially in business schools.  There is a long way to go to get to full integration as the financial services sector is filled with analysts and fund managers who simply don't look at these things, and this is true right across many US and other global investment institutions as things stand, so we take issue with the IRRC report and expressed "margin of error" rate.

We understand the need to "cheerlead" to get more countries involved in for example, the UN climate negotiations, but as investors, we need to be realistic and to have integrity.

This is also seen for example in the Impact Investing space,  which we applaud, but wonder if it is best suited for access to medicine, education and financial services for the poor type issues, and leave the environmental investing to other asset classes such as Climate Bonds and Green Infrastructure.

This exaggeration is also being seen by the fossil fuel industry who refuses to stop producing oil even when they know it won't be profitable.  I wonder what their investors think of that.

So all investors and industry analysts need to be more realistic about what is happening and not.

The exciting news is that interest is on the rise and the long wished for positive dynamic from sustainable investing at scale making companies more sustainable through a race for capital is now a reality right in front of us.  The only ones in the way of making that happen is our choices as investment consumers.  Express your desire to your pension fund, to your 401(k) fund, to your fund managers and your brokers.  That time is now.