Here’s a radical and counter-intuitive proposition for you: what the sustainable finance and investment field desperately needs at this critical juncture is – wait for it – another acronym!!
A casual observer might have thought that with ESG, RI, SRI, CSR, and SI already in hand, we were already reasonably well provisioned in this regard. Well we’re not. I think that we desperately need one more, and the right one just might alleviate some of both the intellectual and commercial confusion and anarchy of the current situation, where everyone seems to be clamouring for more “mainstreaming”, while the aforementioned mainstream itself remains either largely oblivious or, at most, sublimely content with only leisurely (glacial?) movement.
This situation would not be so alarming were it not for the bizarre and pernicious real-world consequences which it has spawned. Ponder for a moment just a few of the most outrageous results of the almost Pavlovian rejection of all of the aforementioned acronyms, tarring them all with the same brush, and throwing multitudes of babies out with the bathwater:• Some of the world’s largest and most prestigious foundations give away literally hundreds of millions of dollars worth of grant money to advance environmental and social causes each year, while having fully 95% of their assets invested without even the faintest regard for their environmental or social impacts, which could easily be undoing all of their good work on the program side.
• The same is true for the staff pension funds of both the United Nations and the World Bank, despite the enormous efforts that both organizations devote to ameliorating environmental and social conditions worldwide. In the case of the former, the UN came within a hair’s breadth in 2006 of not signing its own UN Principles for Responsible Investment! (I am not making this up).
• By some estimates, less than 5% of the assets pledged to support – and implement – the aforementioned UN PRI are currently subject to a consistent, systematic assessment of their environmental and social impacts or risk. Sadly, some of the most derelict signatories can still be found adorning the podiums of SI/RI conferences, professing their undying devotion to the Principles.
This, folks, is not good. But there is hope on the horizon —- a new acronym! I truly believe that one of the primary causes of the painfully slow pace of “mainstreaming” (but by no means the only one ) is the enormous confusion and conflation between and among the various acronyms. The sad result has been the stigmatization of most if not all of them by mainstream asset owners and their traditional advisors and asset managers. (And by the way, while we’re on the subject, I also believe that it is high time that more asset owners in this world reasserted their claims to their rightful place at the top of the investment management food chain, rather than contenting themselves with the relative servitude of the bottom, where so many, unhappily, reside today. But I digress….) So what is this new magic, silver bullet acronym? Well, I propose SAI, which stands for “strategically aware investing”. Words do matter, and if sustainability concerns could be shorn of their historical, ideological, and emotional baggage – on all sides – we’d all be a good deal further ahead, and so would global environmental and social conditions, not to mention investors’ risk-adjusted returns. After all, just think about some of the powerful global megatrends that are currently radically reshaping the competitive landscape for both companies and their investors:
• The dramatically increased complexity, transparency, and velocity of change in companies’ business environments, which places an unprecedented premium on strategic management and innovation skills, as well as corporate adaptability and responsiveness.
• An inexorable shift in the world’s economic center of gravity and dynamism towards emerging markets, where “sustainability “-driven risks and opportunities are inherently greater.• Substantially increased demand for energy, as well as water and other critical natural resources, driven by a combination of explosive population growth, urbanization, industrialization, demographic shifts, and growing consumer affluence and consumption, particularly in emerging markets.
• A general decline in both the credibility and financial capacity of governments worldwide, with a corresponding increase in the necessity for corporations to shoulder greater responsibility for tackling environmental and social challenges.
• Substantially increased stakeholder expectations for improved sustainability performance from both companies and investors, accompanied by much greater information transparency with which to assess that performance, and more effective communications tools with which to disseminate criticism.
• Growing threats to social and political stability, driven by income inequality and public health issues such as HIV/AIDS and malaria.
• The incipient trend among public and sovereign wealth funds, especially in Asia, to diversify and internationalize their investment strategies, in search of the higher returns necessary to provide adequate retirement and health benefits for rapidly ageing populations.
• The emergence of a new fiduciary paradigm for investors, requiring much greater transparency and attention to sustainability issues.
Now, few if any thoughtful investors would dispute either the existence or the direction of these megatrends. Taken together, they are creating a competitive environment that demands new capabilities and even mindsets from companies. The competencies which may have served them well historically are no guarantee
whatsoever of future success; indeed, some of what used to be positive attributes have now become liabilities. Under these new, rapidly evolving circumstances, how are investors to distinguish between the future corporate winners and the losers? While most investors, when pressed, would acknowledge that these tectonic changes are indeed taking place, very few have actually translated that general awareness into a modernized, forward-looking approach to their investment strategies. Some will undoubtedly claim that they are already taking them on board. But we’re talking here about taking them on board in a meaningful, consistent, and systematic way. This means, inescapably, at least two things: new analytical models and tools, and company-specific research on a new set of risk and value drivers – not just on an occasional, ad hoc basis, but comprehensively across a substantial potential investment universe. Why are new tools, approaches, and research so necessary? Well, primarily because few if any of these emerging megatrends (not to mention companies’ wildly varying responses to them, or lack thereof) can be adequately captured by traditional, backward-looking analyses of P/E ratios, balance sheets, or even consensus forward earnings estimates. In that very narrow sense, these new risk and value factors can be considered “extra-financial”, and generally are demeaned in that fashion.But labelling or dismissing them as such in no way mitigates their capacity to propel companies to the top of their industry league tables – nor to eviscerate them entirely. For a recent example, think: “BP”.
So we come to the critical question that triggered this article: is paying careful – and systematic – attention to these emerging global megatrends a controversial or ideological act that calls into question the fiduciary bona fides of any investor rash enough to do so? No, I would argue that it’s simply strategically aware investing – SAI. Indeed, the current orthodoxy of fiduciary responsibility needs to be turned 180 degrees on its head; it seems to me (and a growing body of other observers) that one would be a miserably derelict fiduciary if one didn’t take into account factors which could manifestly be directly material to the long-term returns of potential investee companies.
Perhaps if doing so could be rebranded and conceived as simply strategically aware investing, rather than stigmatized or ghettoized as “ESG/RI/SI investing” more institutions and asset managers might actually try it. And who knows, if they did, both the planet and the investor/fiduciaries’ risk-adjusted returns would likely be the better for it. Investors, advisors, shake off your current acronyms and embrace SAI —- you have nothing to lose but your (intellectual) chains!
Matthew Kiernan is founder and chief executive of Inflection Point Capital Partners