By Charlie Henneman
The notion of socially responsible investing (SRI) has been with us in some form for a very long time, but as a professional category of investing, it has faced challenges of definition, not least because social responsibility is to some degree a subjective term (as competing political parties are all too willing to demonstrate). Even when we agree on what the goals for SRI ought to be, the other challenge is finding an investment thesis that allows professional money managers to meet their fiduciary obligations and achieve returns sufficient to avoid losing clients.
These challenges may explain why the naming convention for this style of investing has migrated from SRI to "ESG investing," the short name for "environmental, social, and governance" factors, and now, more often than not, "sustainable investing."
A passionate talk entitled Sustainability: An Investment Perspective at the 66th CFA Institute Conference in Singapore, delivered by Investment Solutions Chief Investment Officer Glenn Silverman, CFA, underscores the emotional appeal of sustainability, which can be broadly defined as "conditions under which humans and nature can exist in productive harmony," as he put it.
Silverman opened his talk with the disclaimer that "I've not been what you'd typically call an environmentalist. I'm no tree hugger. I'm a serious investment guy looking to generate returns for my clients."
Such disclaimers are important because this is an emotional topic, and certainly there are those who hold the belief that mankind and nature cannot live in productive harmony without the immediate cessation of industrial carbon emissions and the halting of economic growth, something not particularly compatible with currently held notions of what it means to invest.
But the picture Silverman paints of four unsustainable global trends can't help but make one at least sympathetic to the extreme case. These trends include:
- Growing resource constraints on our finite planet that we see developing in energy, water and food supplies, the ocean's fisheries, and the specter of climate change.
- Enormous global wealth and income inequality that threatens the social fabric within nations.
- Demographic trends that have not only seen people added to the earth at unprecedented speed, but which have created a growing demographic imbalance between aging populations and the young who must support them.
- Unsustainable financial trends that have built an overhang of debt and financial promises so vast that it strains credulity to suggest the obligations can ever be met.
Looking at these trends together, it is hard to draw the conclusion that we are on a sustainable path. As the late Herb Stein said, "An unsustainable trend will not be sustained." The enormous wealth lost in the bursting of investment bubbles in technology stocks in the late 1990s and the U.S. housing market in the mid-2000s shows what happens when investors are overly committed to unsustainable investment trends.
The challenge for investors, of course, is to invest responsibly and still achieve returns over the intermediate and long term. The problems Silverman describes are of such magnitude that it is difficult to conceive of an investment thesis that contributes to solving the problems we face - and still meets the return requirements necessary to retain management of the funds. The unsustainability of the tech and housing bubbles seems very clear in hindsight, but few were able to avoid them at the time, because to do so meant a degree of underperformance that would have driven clients away.
Similarly, it is difficult to develop a sustainable investment thesis aimed at reversing the massive and very worrisome trends facing the planet and mankind in the context of the modern investment industry. Yet investors themselves exist on the earth, and the industry can't help but be deeply affected by negative trends that impact earth and human society.
The true takeaway from Silverman's presentation, therefore, is that the short-term, performance-focused nature of the investment industry today is a contributing factor to the problems we face, which seem borne of a short-term oriented culture of consumption.
Changing the return-oriented culture of investment to one that focuses on longer-term outcomes, well beyond benchmarked returns, is essential to putting the industry itself on a sustainable path. In doing so, the investment business may perhaps be part of the solution to the massive problems we face as a world.
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