Saturday, May 14, 2011

Sustainable Investing Conference

I recently attended a fascinating and energizing conference sponsored by the Boston Area Sustainable Investment Consortium.  The overriding message is that money can be used for good in the world, and investors who control large amounts of money can do good things while not sacrificing returns on their money.

It is unfortunate that the pioneering work in what was known as Socially Responsible Investing (SRI) was tagged with the dubious reputation that investment results suffer when social considerations are added to financial analysis.  The challenge with this approach isn’t that investment results necessarily suffer (they don’t), but that many investment managers or plan sponsors are reluctant to engage in the slippery slope of where to draw the line about what types of practices or businesses are objectionable.

The SRI approach has broadened in recent years from values-based screens that exclude certain industries or companies from a portfolio to a broader realization that a company’s practices can affect its profitability, competitive position, reputation, and even its long-term viability.   The emphasis is on risk assessment and consequently performance enhancement, and the evidence is that companies with progressive policies and forward-thinking senior management flourish.  This broader approach is known as Sustainable Investing or ESG –based (environmental, social, and governance) Investing.

One panel at the conference discussed the benefits of gender diversity in affecting positive change in both non-profit and profit-oriented enterprises.  Women make numerous contributions in the world, from fighting global poverty to improving the performance at major corporations.  In the business world, gender diversity is an example of progressive policies in the workplace, notably the extent of women in leadership roles.  Leading companies recognize the valuable contributions of women in the workplace, and gender diversity has positive financial consequences, as including women in leadership roles tends to make businesses better at anticipating changes.  It is anticipating change that helps a business not only to survive over time but to be a superior long-term investment.

Another panel at the conference discussed climate change, water scarcity, and fracking.  The science on climate change is indisputable among leading climate scientists, and climate change already is having large impacts on crop yields and the occurrence of violent storms.  Climate change already is a fiduciary issue, as the Securities and Exchange Commission in February 2010 deemed climate change a materials risk that corporations must disclose as it relates to that business.  How businesses are affected by tighter pollution controls (when climate change is finally addressed seriously) or a dependence on plentiful water are examples of significant risk factors in considering a potential investment. 

In addition, with drought exacerbating the water supply for crops around the world, water scarcity has other consequences.  In the U.S., e.g., 40% of water withdrawals are used for the cooling of power plants.  And the coal industry, despite its unfortunate political clout, faces serious risks relating to coal ash disposal, toxic air emissions, and the lack of feasibility anytime soon of carbon capture and disposal.  These are not just values issues but financial issues for potential investors.

Whether or not and how to invest in energy is a good example of the merit of a broader approach in effecting positive change.  Some firms refuse to invest in energy companies, as energy is one of the most environmentally damaging industries.  Yet energy is crucial for economic growth, and it is a significant segment of the stock market.   Instead of simply screening out energy producers from a portfolio, there are various ways to approach energy companies that might yield better results in energy conservation and pollution reduction. 

Some firms as shareholders use shareholder resolutions at annual company meetings to effect change in a company’s conduct.  Others engage company managements in direct dialogue to effect change in practices over time.  Still others invest in “best in class” firms, even if the industry overall is a major polluter or is otherwise not known as having progressive policies. 

And other firms invest in companies that are part of the solution to problems, in energy, e.g., by providing products or services that generate much cleaner or renewable energy, or which help to conserve energy.  Johnson Controls, e.g., has long been part of providing solutions as a leader in energy management of large buildings as well as its work in advanced vehicle batteries.  The company is already playing a significant positive role in advancing energy conservation and reducing pollution, with positive consequences for climate change.  The company also is rated #1 this year in Corporate Responsibility’s 100 Most Responsible Companies survey.

Overall, the conference showed that there are various ways that investment firms can effect positive changes even in sectors that produce negative externalities that are not captured in a market-based system.  It left me hopeful and energized to do my small part on behalf of investors and the world we share.

Steve Lehman

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