As we get ready to turn the page on a turbulent year which saw stock markets around the world collapse and long-established financial institutions disappear overnight, the Xmas period offers a welcome opportunity to take a step back, reflect on the root causes of these upheavals and contemplate what may be in store for us in 2009.
In this context, the release of 2 new books on “sustainable investing” by highly respected practitioners in this field is a very timely contribution. Published wihtin a few weeks of each other, the authors provide valuable insights about this “enhanced” approach to investing, which has been gaining momentum over the last few years and which, in my view, is reaching a tipping point. Why? Because we are currently at the critical juncture where a convergence of forces is making sustainable investing more compelling than ever.
Firstly, this “integrated” approach to investing has evolved from a pioneer experiment to a more mature, credible and tested investment philosophy. This has allowed more practitioners – beyond the early adopters – to consider the merits of sustainable investing without having to step too far outside their comfort zone.
At the same time, society’s collective consciousness has never been so “green”. Following Al Gore’s Inconvenient Truth, we have witnessed a surge in people’s interest for anything green. Financial products for retail investors have arguably been the last to be “greened” but demand in this area is also growing rapidly, as Claudia Langer reminded investors at the TBLI conference in Amsterdam last November (listen to her inspiring speech here: claudialanger_64kb.mp3).
Finally, the credit crunch and ensuing financial crisis have revealed some of the systemic failures of the financial markets, thereby providing us with a “once-in-a-lifetime” opportunity to rethink market mechanisms and re-align them with the fundamental purpose of financial markets, i.e. to allocate capital efficiently in order to meet the needs of people in an increasingly resources-constrainted world. In some way, sustainable investing is all about making financial markets “fit for purpose” for the 21st century reality.
So against this backdrop, sustainable investing has clearly become more relevant and legitimate. In fact, it now has for the first time a unique opportunity to become mainstream. And in some way, the publication of these 2 books is in itself a sign of mainstreaming, showing that the concept is ready to be adopted by a wide range of interested readers from all walks of life (and in particularly by those whose pensions might be at stake).
And after reading these 2 books, I believe we have reasons to be optimistic.
In “Investing in a Sustainable World”, Matthew J. Kiernan, the founder and CEO of Innovest, describes what he sees as the “Sustainable Investment Revolution”. In a very insightful and personable way, he traces this investment philosophy back to its origins, offering colourful accounts of the many characters that helped shape the vision, promote the idea (for instance through innovative industry initiatives such as the EAI, UNPRI, Ceres, CDP, etc) and make it happen. Leading pension funds and other financial institutions that dared to be different come to mind – and Matthew provides a great overview of their leadership in that area.
Most importantly, Matthew offers by far the most articulate “business case” for sustainable investing. He demonstrates the relevance of sustainability issues (i.e. environmental and social considerations) for financial analysts as they try to assess the intangible value of a company (which makes up close to 80% of a company’s valuation), and shows how ESG issues can provide useful indicators for the quality of management and its ability to create sustainable value for shareholders in an increasingly resource-constrained world.
Furthermore, Matthew looks at all the arguments commonly put forward by skeptics in the financial industry and turns them on their head. ESG issues can’t be quantified? Neither can other apsects of a company’s intagible value that are neverthless incorporated in financial valuation models. Sustainability investing doesn’t guarantee outperformance? Neither does active stock picking – on average.
Finally, he provides some excellent guidance on cutting-edge approaches to integrating sustainability in financial analysis. Whilst he recognises that there is no magic formula, he describes many practical ways to incorporate sustainability factors in fundamental analysis (e.g trend analysis, modelling marginal abatement cost of environmental resources).
No doubt Matthew’s book will one day be seen as a living testimony of “history in the making”. Matthew has already made a sizeable contribution to the “Sustainable Investment Revolution” (through his leadership at the World Business Council for Sustainable Development; and in creating Innovest and subsequently turning it one of the most successful independent sustainability research providers), and the fact that he has published this book and given us an open honest insight into his thoughts and his vision is an amazing gift.
In a completely different style, “Sustainable Investing – the art of long-term performance” provides a panoramic review of the state-of-the-art best practices across the field of sustainability investing. Co-edited by Nick Robins (HSBC Head of Climate Change Centre of Excellence) and Cary Krosinsky (Vice-President of Trucost), it is a collection of essays exploring the many facets of sustainability investing, how it can be applied to different classes (including carbon finance, real estate, fixed income, microfinance, social investing, private equity) and how it is gaining ground in emerging markets such as India and China – where ESG issues have traditionally been under-researched or under-reported.
Bringing together many leading voices in the industry, including Ivo Knoepfel and Gordon Hagard (OnValue), Valery Lucas-Leclin and Sarbjit Nahal (Société Générale), Emma Hunt and Rachel Whittaker (Mercer), Matthias Kopp (WWF) and Björn Tore Urdal (SAM), Steve Waygood (Aviva Investors), the mythical Tessa Tennant and many more, this book shows how sustainability investing is breaking new grounds and becoming increasingly relevant in all aspects of financial markets operations. And although sustainable investing has come a long way, I would agree with the authors’ conclusion that there is still a “distance to be travelled” before we truly integrate sustainability risks and opportunities in all investment decisions, systematically and across all asset classes.
Encouraging nevertheless!
Happy holidays 
PS: Looking back at the FT article on ESG labels this summer, it appears that “sustainable investment” has won the day in the terminology debate. We welcome this clarity of vision and purpose, and believe it will further contribute to the broad acceptance of this investment philosophy by the “mainstream”.
