By Lew Koflowitz
The sustainable investing movement has generated interest in many areas, including renewable energy sources, reduction of greenhouse gas emissions and technologies that recycle materials into new uses rather than discarding them. At Generation Investment Management, co-founded by former U.S. Vice President Al Gore, the firm's investment philosophy is based on the concept that "sustainability risks and opportunities directly affect long-term business profitability." The firm believes that "the interests of shareholders, over time, will be best served by companies that maximize their financial return by strategically managing their economic, social and environmental performance."
In that vein, Generation believes that, since "most of a company's value is determined by its long-term performance…, a short-term orientation has significant negative repercussions for businesses and the global economy." It believes that "a short-term perspective hinders innovation and R&D, diminishes investment in human capital, encourages financial gymnastics and discourages leadership." Therefore, its investment decisions are based on long-term considerations.
Further, the firm believes that "sustainability factors directly affect long-term business profitability. The interests of shareholders, over time, will be best served by companies that maximize their financial performance by strategically managing their economic, social and environmental performance."
The Growth of Sustainability Investing
Sustainability -- or socially responsible investing -- is being put into practice by an increasing number of investing organizations, and this is influencing the attitudes and actions of corporations in the US and around the world. A report from PricewaterhouseCoopers' Investor Resource Institute, released in May and titled "Sustainability Goes Mainstream: Insights into Investor Views," shows how far the sustainability movement has come. The report states that professional investors "are increasingly factoring sustainability into governance policies, portfolio decision-making processes and investment allocations."
The report is based on the results of a survey of institutional investors, which was conducted to assess the influence of sustainability issues among these institutions. Respondents included a broad mixture of asset managers, pension funds, mutual funds, and hedge funds -- with total assets under management of $7.6 trillion.
In explaining the rationale for conducting the survey, Kayla Gillan, leader of the PwC institute, said, "We sought to gain insight from investors about how they are incorporating issues of climate change, resource scarcity, extreme weather events and evolving corporate responsibility expectations into their investment decisions and strategies." She added that, "We found significant evidence that an effect is occurring today-and that it is likely to increase in coming years."
Four out of five survey respondents said they considered a variety of sustainability issues in at least one, if not more, investment contexts in the past year. And 85% said they anticipate doing so within the next three years.
Dissatisfaction with Current Sustainability Reporting
The study also revealed that institutional investors are not satisfied with the amount or quality of sustainability reporting and the information they are able to obtain from corporate managements. "Investors want to be part of the sustainability dialogue," PwC pointed out. "And they want direct engagement with the companies in which they invest."
Gillan noted the acceleration of interest in sustainable investment over the past several years. She said that in 2009, over 560 investment institutions with more than $18 trillion in assets worldwide signed on to the United Nations' Principles for Responsible Investment (PRI) Initiative. That number has grown to over 1,200 with approximately $34 trillion in assets under management today, "as institutional investors increasingly see the importance and value of integrating environmental, social and governance issues into their strategic decision-making and portfolio management processes."
Lobbying at the UN for Greater Sustainability Leadership
The Forum for Sustainable and Responsible Investment, a U.S. membership association for professionals, firms, and institutions engaged in sustainable and responsible investing, participated in the Climate Summit held at United Nations headquarters in New York in September. It called on world leaders to advance policies needed to curb runaway climate change.
In a statement in conjunction with its participation in the Climate Summit, the organization said, "The stakes are high. The world has a rapidly narrowing window of opportunity to prevent the rise of global temperatures … Rising global temperatures are threatening water supplies, agricultural production, biodiversity and human health and property. It is critical, therefore, to invest in the technologies for the transition to a low-carbon economy. Sustainable and responsible investors are helping to show the way forward."
Morgan Stanley Seeks Creative New Ideas from Students
In an effort to elicit creative new ideas for financing sustainability and develop future leadership in this field, Morgan Stanley is now running a Sustainable Investing Challenge, where teams of graduate students will pitch their ideas for "developing institutional-quality investment vehicles that seek positive environmental or social impact and competitive financial returns." The Challenge "seeks to identify the next generation of sustainable finance practitioners, connect emerging leaders with industry professionals, and foster even greater emphasis on sustainability at graduate schools around the world," Morgan Stanley said.
"The competition is an opportunity to apply core finance principles to target the economic, social and environmental challenges that drive the field of sustainable investing," Morgan Stanley said. Areas of focus may include water, energy, food, social mobility, climate change, education and healthcare, among others.
In the Challenge, teams of students will submit proposals, by February 25, 2015, on innovative financial vehicles designed to address a sustainable challenge. Ten finalist teams will present their proposals to a panel of judges at Morgan Stanley in London on April 17. A panel of experienced investors and officers who currently manage pension funds, foundations, and institutional assets will review and judge the pitches.
Where to Look for Sustainable Investments
Because of the strong and rising interest in sustainability and socially responsible investing, there are many avenues for locating such investments. One can seek out mutual funds or ETFs that specialize in socially responsible investing. One such fund is the Domini Social Equity Fund (MUTF:DSEFX) offered by Domini Social Investments. Calvert Investments offers a range of socially responsible investment funds. You can also find a list of dozens of such funds in an article by Morningstar analyst David Kathman published earlier this year titled "Find the Right Socially Responsible Fund."
There are also lists of individual stocks of companies that are very strong in promoting sustainability and social responsibility in their business operations, and that have achieved significant returns. For example, MSN Money recently published an article by David Paul Morris of Bloomberg, titled "Best Stocks for Socially Responsible Investors." The article highlights 10 individual stocks that are popular with socially responsible funds. Nine of the 10 have been in existence for a decade or more, and of these nine, eight have outperformed the S&P 500 over the past 10 years on an annualized basis. Companies on this list include Apple, Gilead Sciences, Google, Nestle, and Praxair.
The Bottom Line
As society encounters a wide variety of challenges to sustainability, investors of all types and sizes -- both individual and institutional -- will need to be mindful of how these challenges can be resolved. As the information in this article indicates, an increasing number of investors are applying pressure to corporations and political leaders around the world to be more sensitive to these issues. In the years ahead, investors who invest for sustainability and social responsibility, and resist investing for short-term profits, are likely to achieve significant returns.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.