Ending Wall Street’s big sleep on sustainability

A recent closed meeting of investors looked at moving from words to action.

Companies often point to investors as a reason why they’re not doing more on sustainability: “We’d like to do more … but mainstream investors just don’t care about it,” is the common refrain, according to a survey by Accenture Link on CEO attitudes.
That’s starting to change. At a recent Wall Street closed meeting of 100 investor members of the $10 trillion Investors Network on Climate Risk sustainability leadership was the buzz. The gathering took pace on Jan 11, one day before the Climate Investor Summit at the United Nations. “The theme of the day is how to move from warm words to action, to the realm of the practical,” exhorted CalPERS Senior Portfolio Manager and Head of Corporate Governance, Anne Simpson. “Going to meetings and signing on to letters isn’t going to do anything unless we move the money.” CalPERS should know. It leads U.S. investors on sustainability with its commitment to integrate environmental, social and governance (ESG) factors across all of its asset classes. The giant pension fund has reviewed its entire portfolio through a sustainability lens and selected three key priority areas, climate change, human capital (labor, human rights, and health and safety), and financial alignment of interests (executive compensation).
Moving to action, however, must be accomplished on an issue-by-issue basis and for each individual asset class. It’s painstaking work, and a key barrier to moving more money, Simpson told investors, are the data gaps—some perceived and some real—linking sustainability metrics to financial performance. Among portfolio managers, she said, “there’s a fundamental lack of conviction that this will make any difference in our investments.”
What’s more, “money managers aren’t rewarded for getting it right.”Simpson called on investors to topple these barriers by identifying the data gaps and commissioning research, and by exploring ways to tie fund manager compensation to sustainability performance. Other remedies were put forward, such as requiring fund managers, by contract, to integrate sustainability into their practices, and to report on their efforts and results. Another idea: reward portfolio managers for their astute risk management of sustainability factors. But the need for more comprehensive data linking sustainability metrics to financial performance, especially for social issues, was continually cited as a key barrier. “Too many people believe ESG is about imposing values on portfolios, and about reputation management at its best,” said David Blood, co-founder and managing partner at Generation Investment Management. They don’t see that it’s about ESG driving profitability and long-term performance for shareholders.” Mark Fulton, Managing Director and Global Head of Climate Change Investment Research at DB Advisors, believes that when risk-adjusted returns are proven to be changed by ESG issues, the needle will really start to move. Deutsche already sees sustainability-assessed funds showing higher risk-adjusted returns: “When you lump the studies together you get mixed results. But when you disaggregate it and look at individual factors and assets, you start to get some interesting results,” said Fulton. So investors are ramping up their attention to sustainability, but they still lag behind many corporations.
As Blood put it, “CEOs are ahead of investors around the world. They may not call it sustainability, but they’re doing it. It’s a better way to drive their business success.”
A new global study by MIT confirms that assertion. It found that 31% of companies say sustainability
is contributing to their profits, while 67% think that sustainability strategies are necessary to be competitive. Coca Cola is one such company. Its managing director of global water stewardship, Greg Koch, spoke at the investor meeting about the steps his company is taking to address water availability risks. We’re “the canary in the coal mine,” when it comes to water scarcity risks, Koch told investors. For many companies, he said, “the risks are manifest; they’re happening today and impacting bottom lines.” Coca-Cola has worked with NGOs for years to protect community water sources but it’s recently taken its sustainability commitment to a new level, gathering data and building risk models that can predict stressed water supplies up to 2095.
“We’ve invested hundreds of millions of dollars to address sustainability issues,” said Koch, whose localized models factor such interrelated risks as waterstress, food production and energy supplies. “Not green washing, philanthropic nice-to-have initiatives. These are initiatives that impact our profitability.”General Electric (GE) is another prime example. GE launched its ecomagination unit in 2005 and has since invested more than $5 billion in renewable energy, efficiency and smart grid technologies. Its growth, $85 billion in revenues so far, is double the company’s overall growth. “There’s this theory that you have to pick one: economics or environmental performance,” said Mark Vachon, vice president of GE’s ecomagination. “That’s nonsense. Innovation is the way you can have both. Companies that don’t get this, really risk becoming irrelevant to the marketplace.” The bottom line: Companies may lead investors today on sustainability, but investors are starting to catch up. And pretty soon companies that lag won’t be able to point the finger at investors as an excuse for their inaction.

Mindy Lubber is President of Ceres and Director of the $10 trillion Investor Network on Climate Risk.