Understanding Sustainable Investment Strategies

In 2004, former United Nations Secretary-General Kofi Annan penned a powerful letter to 55 finance and asset management CEOs around the world, calling on them to explore the role they play in building a more sustainable world for future generations. He asked these international financial leaders and investment professionals to adopt and embrace environmental, social, and governance (ESG) factors into their investment practices and corporate decision making — to connect investors with helping to solve some of the most critical and complex global issues we face today. Although his vision wasn’t initially accepted by investment managers, Annan’s letter eventually resulted in the Principles for Responsible Investments (PRI) initiative, and an alliance of more than 2,000 financial management companies — like BlackRock and JP Morgan — that committed to report annually on their responsible investment portfolios.

Two years later Annan, backed by the strength of the UN, launched the PRI initiative at the New York Stock Exchange. Today, the PRI is a thriving framework of principles for constructing a global financial system that is both conscientious and sustainable, by incorporating ESG issues into investment strategies. It built the foundation for the current ESG investment movement, which began reshaping international finance long before the pandemic of 2020 and before global unrest about racial injustice and social inequality moved to the forefront of awareness and activism around the world.

Today ESG investing has progressed from a sidebar story of a nice-to-have, feel-good investment class to a front-page headline of must-have, sustainable investment process that is conscious and conscientious — one that thinks long and hard about a company’s long-term impact on society and the environment as much, if not more than, the organization’s business performance. ESG investing is integrating and embracing social and environmental issues into existing business models and strategies, or transforming them altogether, with the underlying rationale that running a responsible business will drive better investment outcomes in the long run — and that it’s possible for corporations to be successful and make a profit, but still do good in the world.

Climate Change
In early September 2020, the temperature in Los Angeles reached 121 degrees, the hottest ever recorded in Los Angeles County, according to the National Weather Service. Climate change is happening before our eyes. Extreme weather, from wildfires and hurricanes to flooding and record-breaking temperatures, destroys infrastructure and communities and can devastate entire economies. The destructive environmental impact from climate change is driving and reshaping finance and the global economy.

Sustainability
Consumers are demanding sustainable practices from the companies they purchase from and invest in; they want to support companies that possess ethical business practices that protect air and water quality, land, and public health — and those that reduce environmental risks, and prioritize combating climate change and sustainability over profit. They’re paying attention to things that wreak havoc on our the planet, like toxic emissions, carbon footprints, pollution, hazardous materials, packaging and waste— and they’re seeking out companies with high ESG values, those with sustainable practices in place like green buildings, renewable energy, sustainable supply chains, conservation, and raw material sourcing.

Governance issues encompass ethical standards for the way companies are run — from board independence and diversity to workplace equality and financial stability.

At the management and leadership level, it means putting systems in place to ensure accountability, strong oversight and transparency at every level of operation. What is the corporate culture like? Is there an overwhelming discrepancy between executive compensation and employee pay? Is there a diverse and inclusive workplace? Are wages fair? Do shareholders have rights? These are questions that must be answered.

Consumers and investors want to commit to companies that won’t tolerate discrimination and those that will promote inclusivity, equality, and fairness.

ESG falls into the category of sustainable investing along with socially responsible investing (SRI). Though they’re often considered synonymous, ESG and SRI are two different things, built around vastly different sets of criteria.

Socially Responsible Investing

An investment that is considered socially responsible due to the nature of the business the company conducts.

The SRI movement, which began in the 1960s, is what you might call sustainable investing 1.0, where investors exclude investments that fall short of a set of ethical and moral criteria — deliberately steering clear of funds in tobacco, firearms, or fossil fuel industries for example.

Environmental Social Governance

An investment that is considered socially responsible due to the nature of the business the company conducts.

ESG on the other hand, is sustainable investing 2.0 — thoughtfully and deliberately integrating ESG funds into investment plans, not only for the good they do for society and the planet, but also for the un-compromised financial returns.

Impact investing, though similar to ESG integration, is on an entirely different plane; it seeks to invest in businesses that benefit the environment or society, regardless of how the investments perform.

Kofi Annan’s visionary invitation to weave ESG values into business strategies and practices set the stage for sustainable investing today. Asset managers around the world have come to realize that investments that incorporate ESG criteria allow them to help investors align their investment goals with their conscience, and with the way they want to see change in the world. Responsible investing isn’t just the latest trend. Many studies in recent years have shown that investing in companies that have environmentally and socially conscious policies and practices, and stronger corporate governance, will outperform traditional investing over time.

No one knows this better than women and Millennials; they’re the largest demographic actively taking part in ESG investing. They have buying power and access to technology, which they use to dig deeply into a company’s story, history, and values.

Women and Millennials are the consumers most frequently seeking businesses with high ESG ratings, those that solve some of our biggest environmental and sustainability challenges – and then betting on them with their financial investment and support.

But the ESG investment movement is growing, and even with the US Securities and Exchange Commission (SEC) seeking more transparency and regulation on ESG indices, it shows no signs of slowing down in this era of social change and evolution. Whether investing in stocks, mutual funds, and ETFs or determining how and where we spend our money, it’s up to us as consumers and investors to seek out companies that prioritize sustainable practices and also drive change in organizations that need to step up their ESG business practices. We have to make investment decisions and use our spending power to support companies that don’t rely only on an altruistic narrative but truly make good on their ESG promises and performance. A company’s values will ultimately determine its value.

Though 2020 has brought numerous surprises around the globe — a global pandemic, followed by financial instability, civil unrest, and deep political divisions, one premise is clear: we have work to do. With respect to George Orwell, we have to replace the pre-pandemic Oldspeak — ignoring racial injustices and the needs of vulnerable communities, and the false perception that the planet will continue to tolerate our destructive behavior, as well as pretending that the two are not intricately linked — with a compassionate Newspeak that prioritizes the needs of all humans and invests in people and organizations that help build a more responsible, sustainable world. How a company conducts business and understands its role in society is woven into the same fabric of its ability to sustain financial returns. Companies that identify the biggest problems that plague the human race and work to eradicate them with a vision for the future, will be the companies that have the biggest social impact and the best market performance in this evolving global economy.

Kofi Annan said that we must “initiate a Global Compact of shared values and principles, which will give a human face to the global market.” If we follow his directive, 2020 could be the year that we learned to invest in our people and in a global economy that just might save the planet.