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RI Interview: Kevin Parker talks alpha and Sustainable Insight

New firm launches with joint CDP research on climate reporting and corporate performance.

Mainstream fund management must consider sustainability as part of its ‘alpha’ proposition today, according to Kevin Parker. And as RI reports today, the former Deutsche Asset Management (DeAM) chief is putting his money where his mouth is along with other ex senior DeAM professionals. Elaborating on the new asset manager they have set up, Sustainable Insight Capital Management (SICM), Parker refers back to a market study that he commissioned, and which was put together by Bruce Kahn, then Director and Senior Investment Analyst at DB Climate Change Advisors, and a Partner at SICM, and Mark Fulton, DeAM’s former Global Head of Climate Change Investment Research: “There has been a perception in the market that you can’t have both performance and sustainability. Fiduciaries have been hamstrung by the perception that being sustainable will cost returns. We set about to test as thoroughly as possible the hypothesis that you can have both, with the proviso that if it turned out that you couldn’t then RI would be relegated to faith investors or be a regulatory push only.” SICM, he says is the fruit of the positive financial/sustainability results of that work, which has become a much cited study: “The broad conclusions of the paper were that there is a fundamental mispricing of risk and that companies that are acting sustainably are driving better financial performance. The stock market hasn’t quite figured out what to do with this, but we’ve shown that sustainable companies have higher cash flows, dividends and returns.”Asked why he and his former mainstream DeAM colleagues would go to the length of launching a full blown sustainability orientated fund manager on the back of the findings, he says: “This is about a scarcity of resources in the face of challenging demographic trends: enlightened 21st century resources management, if you like. It’s not saving the whales, it’s just good old environmental and economic common sense.”
SICM is launching with new research in tandem with CDP, released today (September 23), which builds on the sustainability/alpha theme.
The research by Bruce Kahn and Marc Fox, the former CDP North American Director of Investor Engagement and ex Goldman Sachs analyst, based on the CDP Global 500 universe of companies, finds that superior corporate climate reporting, as measured by the difference between Q1 industry leaders and Q5 industry laggards on CDP disclosure scores, signals a “quality premium” equivalent to +5.2% return on equity; +18.1% cash flow stability and +1.6% dividend growth. Link to CDP/SICM research
It reports that there is also currently no observable valuation premium for Q1 industry leaders, which it says presents an attractive opportunity for investors. Parker says the research is one of the most extensive studies on the potential link between corporate profitability and environmental benefits to date. It is also, he adds, another empirical step towards SICM’s belief that sustainable investing involves identifying the most enlightened managed companies that promote corporate
environmental stewardship, consumer protection, human rights, and diversity while driving higher revenues, lowering costs, reducing waste, and delivering superior returns. He says SICM has “fully integrated” combined financial/sustainability research into its investment process and offers institution-grade middle and back office capacities with transparency around reporting and performance attribution. He says the manager aims to add investor engagement to its service in time and to sign up to initiatives like the UN-supported PRI as soon as practicable. The family office that has backed SICM to the tune of $100m in investment, he says, has been investing around the sustainability theme for many years: “Family offices are concerned about the transfer of generational wealth in a resource-squeezed world, and what sustainability means for that. Their investment horizon tends to be a lot longer than your average investor.” He believes that there is also a broader social transition occurring whereby younger savers increasingly want to see combined financial/sustainability returns for their money: “There is a serious generational shift going on. If you speak with young people from 25 down, they get sustainability, they’ve grown up with it. The slightly older generation, 30-40, are also very concerned/interested in the theme and thinking about what to do with their money as a result.” Talking of the word generation, how does Parker compare SICM with Al Gore and David Blood’s investment firm, Generation Investment Management? “We are friends and friendlycompetitors,” he says, “and they have their proprietary view on sustainability companies and themes and so do we.”
Speaking to RI in March 2011 , Parker was bullish about the potential for climate change investment at DeAM, which at the time was running $12 billion in assets on the theme. RI puts this back to him, given the subsequent blow out in the sector: “I think that broadly we were right; investment into renewables has outpaced investment in fossil fuels in the last few years. I think that what we all missed though was China getting massively into the game and for example building the three largest solar firms that were willing to lose money to get into the market and corner it on the premise that they could stay alive and remain in the game. We got the trend right, but the granular economics are the day-to-day job.” He says the sustainability theme is somewhat different: “If you look at the level of signatories to sustainability initiatives they have been growing unabated for the last ten years. Some companies are seriously ‘doing’ sustainability these days and operationalising it for profit. They are becoming good investments as a result. The institutional investors with $35 trillion in assets signed up to the PRI are a problem looking for a solution. Time is on the side of sustainable investment because of the global levels of the resources, water and climate problems that need to be solved; the question is how quickly? We believe there’s a business tailwind, but we also believe that it needs to accelerate: that’s the part we can’t answer, but we’re excited to be part of it.”