Book reviews: the whys and hows of successful sustainable investing
Some excellent new books have been published with useful in-depth case studies: RI takes a look.
While there are many books on sustainable finance, a few recent attempts are worth discussing as they do an excellent job explaining how to navigate what has become an increasingly complex landscape of investment approaches to the environmental and social challenges of our time.
Sustainable Investing by Silvola and Landau (Palgrave, 2021) in particular strikes me as an excellent book to start with. It captures where we are as a field and helps the reader understand how to attempt to think about what they might do if they are newly interested.
Filled with useful case studies on companies and investors, the book discusses relevant recent trends, initiatives and approaches. The reader comes away with useful possibilities to consider, but also a sense of how much more there is to do and an understanding of why there are so many divergent approaches by investors being taken today.
Finland in particular is a country often heralded - rightly we would suggest in our experience - for being a sustainability leader and the “happiest” country in the world by at least some well documented measures. Finland’s culture of caring is central to these sorts of happiness results and this thinking permeates the book, making it a particularly fascinating case study of how to approach the sustainable investing subject as a nation of corporates and investors.
The useful case studies in the book such as those on Stora Enso, ABB, PGGM and KLP include organisations in nearby countries with similar cultural expectations of ensuring better outcomes are attempted. These are very specific case studies on how to measure corporates and their strategy success, or lack thereof, as well as how to best perform shareholder engagement and how to better understand how your investments can make a positive difference.
These case studies are explicitly detailed and applicable for readers, making the book a valuable resource on its own. One would like to think future books could be written about African and Asian countries with scalable case studies of success becoming part of their own cultures, with sustainable investing practices leading to better societal outcomes, learning from the likes of Silvola and Landau.
The book also takes the readers quickly and clearly through the key question of “why sustainable investing?” from its start. Here we think is an important aspect we often miss as an industry of practitioners, helping explain to those not yet involved why the field is necessary, how they can participate and with what approaches.
There is of course much contemporary criticism regarding ESG considerations and related investment practices. Some of this criticism is valid in my view, and some of it not so much. However, when a firm such as DWS has its share price hit by over 10 percent on the news that its legitimacy on this subject is being called into question, it makes sustainable finance both strategically important and material for all investors, and it makes every investor want to make sure its efforts on sustainability are legitimate. (RI note: DWS has said it denies the accusations) That’s actually a very good thing. Hence, books on the subject such as Silvola and Landau arguably become strategically important resources as well.
Imagine a world where no investors consider ESG issues at all. This would hardly be acceptable or ideal for the financial system itself, let alone societal outcomes. Our field by definition is constantly evolving, hence perhaps we should be a bit more understanding of the likes of Blackrock and DWS who have come under fire from former employees, while also being mindful of the importance of removing the “over promising/under delivering” greenwashing dynamic that critics rightly point out.
If we are being fair, many investors and data providers have been guilty of this in a race for market share, revenue and profitability. We’ve been critical of this ourselves for many years, but all we can really do is improve our practices. Silvola and Landau examine this well, especially from a public equity perspective, in a clear and concise manner, whilst recognising the complexities and limitations of the field and providing a useful perspective that other parts of the market should learn from as they look to improve their own culture and strategies.
A side note, however:
Not all ESG issues are addressable through investing, so we reject the increasingly used phrase “ESG investing” and wish others would stop using it!
On another brief note, another excellent recent book we can recommend is Mark Mobius’s Invest for Good.
Filled with anecdotes on how to invest in the developing world (Mobius led investing in Asian public equity for Franklin Templeton, often the largest investor in many Asian public companies at the time), this book makes clear why sustainable investing should be a key driver of active investment in so-called emerging market countries including wonderful examples of due diligence allowing either confidence in an investment or how to best avoid potential pitfalls. In fact, a recent paper just published by Usman Ali and Mark Mobius in the Journal of Applied Corporate Finance (JACF, see Usman Ali’s LinkedIn feed for the paper) further shows how ESG data can be all too easily misleading in identifying best actors.
With many active investors underperforming benchmarks, as our own research has long pointed out, and as the success of investors such as Generation Investment Management (the HBS Case Study on them remains the other seminal case study in the literature), Stewart Investors, Impax, Mirova and many others continue to demonstrate, combining ESG considerations while trying to financially outperform with applied expertise drives both financial outperformance and financial success for their investor clients and for themselves.
Sustainable investing should be the future of all successful active fund management, especially given the underperformance of large traditional active management. The recent DWS experience and related SEC investigation further underscores the dangers of saying you are doing sustainable finance but treating it as an afterthought. Not participating in sustainable investing further has become a non-starter as Silvola and Landau also illustrate. Embedded sustainability and purpose are essential for talent retention and market share, especially as younger generations continue to inherit and make trillions of dollars and increasingly drive innovation and strategic business decisions. Avoid sustainability considerations or treat things lightly at your own peril!
Passive investors also can learn from the sort of norms based screening approaches driving success in countries across Scandinavia and the Netherlands. Such minimum standards approaches were pioneered arguably by the likes of Norges Bank and increasingly drive the activities of the Yale Endowment and the NYS Common Retirement Fund. We see minimum standards in index investing being a critically important future paradigm, using shareholder engagement as a driver of required change, combined with a “carrot on a stick” approach of divestment embedded in the investment process.
Cary Krosinsky is an author and a lecturer at Yale and Brown universities. He was the founder of the Sustainable Finance Institute