Some questions have arisen in recent times as to whether sustainable investing on public companies is important as opposed to the allocation of capital to new sustainability-oriented projects in other asset classes.
Sustainable investing practices vary of course, so not all of the practices necessarily help, but a more granular look is in order, as is what corporate practices should be encouraged.
First of all, negative screening is unhelpful in general, aside from being one mechanism for raising awareness. Keep in mind first of all that the companies being negatively screened will still exist, only with arguably less responsible owners. Also, in many cases, negative screening has been a suboptimal strategy for anyone looking to maximize financial returns, combined with the fact that as of 2014, most socially responsible assets performed negative screening as a primary strategy, means that many have the perception that sustainable investing isn’t for them and may be a breach of fiduciary duty. So such negative practices have been and are an obstacle to achieving the scale necessary to have a meaningful effect.
On the other hand, you have more positive sustainable investing options such as sustainable value (Generation, Parnassus, Impax) and shareholder engagement, not to mention thematic strategies and ESG integration techniques.
Regardless of the strategy, as long as you are trying to isolate and encourage better future practice, this avoids the pitfalls of negativity and helps encourage companies to commit to better practices, creating a positive dynamic race for capital and value.
This last aspect is a critically important dimension, when one looks at what companies can and arguably need to do in the face of worsening climate change.
Companies need to innovate, such as creating and championing driverless electric transportation and other related aspects of green infrastructure. This bit is super critical, including non-public equity allocations, but public companies have a key role to play, and need to be encouraged to do so by shareholders who both choose to own them, and make clear what they expect.
Further, minimum standards and practices are what’s needed on issues from deforestation to electricity generation policies to the circularity of business, all of which shareholders need to encourage best practice with their ownership choices and their expressions to management. Active ownership and engagement become an important aspect of what is needed.Lastly, companies need to be encouraged not only to not lobby against policies that are needed such as the Clean Power Plan, but also to be encouraging global commitments to a price on carbon that transcends borders. Active ownership and the race for capital are needed to ensure that the right positive dynamic is in place where companies are rewarded for best behavior and punished when they get it wrong (VW proved that punishment is readily available).
There are five areas of global commerce where lower carbon strategies need to be scaled and those are lower carbon Electricity Generation, lower carbon Transportation, AFOLU (agriculture, deforestation, land use), better Industrial Processes/Circularity and more efficient Buildings.
In each case, public companies can and will play a critical role going forward as to what will or will not happen. Better standards and practices are needed, and companies need to proactively and positively participate in the development and encouragement of solutions in each case, whether on policy and standards development or on strategy deployment.
Picture a scenario where there is no responsible ownership of the largest public companies versus one where a majority of owners encourages necessary practices. The latter seems essential, the former is a nightmare, arguably potentially of biblical proportions.
At minimum, companies need to understand that there is a financial penalty for getting environmental and social issues wrong and it helps as well if there is a reward for making smarter choices – that in effect is how capitalism should work best.
And even if we also need action in other asset classes, public companies are worth something like $70-75trn, and they remain a critically important component of what will occur environmentally and socially going forward.
Companies are responsible for a majority of the global footprint when you include consumer use of products, so the future decisions companies make are arguably as important as how we choose to allocate future fixed income and infrastructure investments.
And sustainability itself needs a business case.
All too often we see sustainability and impact initiatives either not achieve the scale required or fail to continue in perpetuity when sufficient financial value is not generated from such efforts. The nexus of sustainability strategy and the generation of financial value remains mission critical, as does sustainable investing itself.
Cary Krosinsky is Adjunct Lecturer in International and Public Affairs at Brown University.