CFA Conference: Sustainable and Responsible Investing: Can Markets Save the World? (Panel)

CFASustainable and Responsible Investing: Can Markets Save the World?

Moderated by Roger Urwin, Towers Watson Limited

David Blood is co-founder of and senior partner at Generation Investment Management, LLP. Previously, he served as co-CEO and CEO at Goldman Sachs Asset Management. Mr. Blood is on the boards of Harvest Power, New Forests, SHINE, Social Finance US, and The Nature Conservancy. He holds a BA from Hamilton College and an MBA from the Harvard Graduate School of Business.

Stephen Rumsey is CEO at Permian Global Advisors LLP and an environmental conservationist. Previously, he served on a number of environmental not-for-profit boards and as the deputy chairman and treasurer at BirdLife International. Mr. Rumsey also served as investment manager at a large UK pension fund and designed and ran the debt markets business at Barclays de Zoete Wedd (now Barclays Capital). He also worked at Merrill Lynch and founded European Credit Management (ECM), which was sold to Wachovia/Wells Fargo. Mr. Rumsey is a graduate of the London School of Economics.

Janet Ranganathan is vice president for science and research at the World Resources Institute (WRI). Previously, she founded and directed WRI’s People and Ecosystems Program and served in WRI’s Markets and Enterprise Program and Climate and Energy Program. Ms. Ranganathan also developed and directed WRI’s US Climate Policy Initiative and the Greenhouse Gas Protocol Initiative, a partnership convened by WRI and the World Business Council for Sustainable Development. She also served as a senior lecturer at the University of Hertfordshire and in a regulatory capacity at the Department of Environment and Hertfordshire Water Regulatory Authority. Ms. Ranganathan serves on the boards of Ceres, the International Integrated Reporting Council, and the Mars Science Advisory Committee and is a member of the International Programme Advisory Committee for the Ecosystem Services for Poverty Alleviation Programme supported by the UK Department for International Development. She has written extensively on a broad range of sustainable development challenges. Ms. Ranganathan holds a BSc and an MSc in environmental technology from Imperial College.

Key questions:

  • What are the sustainability challenges facing the world and the resulting opportunities and risks for investing? Are current “sustainable investing” approaches viable and scalable?
  • Can markets be used to effectively price environmental externalities and create incentives for sustainable investment practices?
  • What conclusions can be drawn from empirical evidence about the performance of sustainable and responsible investing?

My session notes follow. As always, these are contemporaneous notes. I make no guaranty as to their accuracy or completeness.

Irwin: Sustainable investing has an ethical component, but is distinct from socially responsible investing. Takes a responsible position where companies meet society. It involves the merger of investor goals and investor beliefs. So-called “impact investing” is an extreme form of this concept. The “direction of travel” is to see sustainable investing as more and more important going forward. Involves environmental, social and governmental factors.

Blood: The business case for sustainable investing. His firm’s approaches are long-term, but don’t involve trading value for values. Manages risk first. Obviously, holistic risk management makes enormous sense. Most focused on businesses using sustainability to drive returns (though the jury is still out). The best case for sustainable investing will be solid returns. The key will be making good long-term investment decisions.

Rumsey: His primary focus is “impact” investing. He’s an environmentalist (related to his being a native of Africa). No compromise on returns necessary. Look at the past to understand the future. For example, climate change is a huge problem. Sea levels and global agriculture are at risk. We need a low-carbon economy, but we also need reforestation too – the least expensive means of CO2 mitigation. Private sector capital can help to make that possible. Climate change mitigation will uncover major investment opportunities.

Ranganathan: Good news – world economic growth has achieved remarkable success. Bad news – growth has environmental consequences. There are impacts and dependencies. Infinite growth on a finite planet can’t work forever. It’s different this time because (a) environmental risks now have business risks (especially agriculture and energy); (b) we have better metrics available today; and (c) financial community now “gets” sustainability. Key issues include water, climate change and extreme weather. $36T needs to be invested in green energy. That will leave stranded assets (e.g., coal). End Game: integrate sustainability into global managed assets. Per Mandela “It always seems impossible until it’s done.”

Q: Stranded asset problem:

Blood: Stranded asset problem (especially carbon) is primarily a risk management problem. For example, Exxon Mobil expects no carbon tax and thus no stranded assets – do we as investors agree?

Rumsey: Stranded asset problem – huge problem. There’s no way around it.

Ranganathan: Re stranded assets, carbon only the tip of the iceberg. E.g., water.

Q: Does it make sense for the business sector to address these issues?

Blood: Yes. Markets better at dealing with these issues than governments – they see opportunities as well as risks.

Ranganathan: Top ten global firms are heavily focused on carbon – huge risks. We may need to change the rules or it will never pay to do the right thing.

Q: Returns and how to benchmark?

Blood: His firm shoots for 300bp and has returned 500bp annually so far (limited term). Sustainable investing is just common sense. Sustainability drives long-term success of businesses and industries. Keys: Sustainability, incentives and culture.

Rumsey: We’re creating an entirely new market – extremely high risk.

Q: What about corporate governance (a major factor in investment returns)? Method and mechanism to influence corporate behavior?

Blood: Incentive structures, dividend policies and the like make an impact. Focusing not on next Q’s earnings but rather upon the long-term success of the business. Understand the board structure and who influences whom.

Q: Would six-month rather than quarterly reporting help?

Ranganathan: Since costs are up-front and benefits later here, anything that pushes the focus further out helps.

Q: What about China and the tension between sustainability and progress?

Ranganathan: China doing more than we think. E.g., pollution control and solar power.

Q: Allocation to “impact” investing?

Rumsey: Huge opportunities here. We need governments to regulate, but private industry needs to drive investment.

Q: Is the market pricing environmental risk properly?

Blood: A number of factors aren’t being priced properly – stranded assets. Focus on first principles. It’s a risk management problem and an investment opportunity.

Rumsey: We don’t do “gradual” very well. We respond to shocks of various kinds (e.g., El Nino in 2014 and 2015). Opportunities for those who will anticipate.

Q: Key takeaway?

Blood: Consistent with fiduciary status and may be required. About better decisions, not a trade of value for values.

Rumsey: Don’t give up. We can and will come up with ingenious solutions.

Ranganathan: Were the earth a business, it is in trouble due to a failure of internal controls. We need a bail-out package of enormous proportions.

Urwin: Look for performance with purpose – fiduciary finance.

One thought on “CFA Conference: Sustainable and Responsible Investing: Can Markets Save the World? (Panel)

  1. Pingback: CFA Conference: Post Compendium | Above the Market

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