One of the late Kofi Annan’s legacies, largely overlooked in the tributes marking his recent passing, is sustainable investing. As United Nations Secretary General, Annan launched the U.N. Global Compact in 2000, a voluntary corporate citizenship initiative based on a set of human rights, labor, environmental, and anticorruption principles. Its objective was to get companies to operate more sustainably and with a greater sense of corporate responsibility. Today, more than 7,000 companies are Global Compact signatories.
A few years later, in 2004, Annan led a Global Compact initiative to encourage the integration of environmental, social and corporate governance factors into capital markets. The resulting report, “Who Cares Wins,” laid out the thesis for sustainable investing:
“In a more globalised, interconnected and competitive world the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully. Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”
This was the beginning of what we call today ESG or sustainable investing, and it led directly to the formation in 2006 of the U.N.-backed Principles for Responsible Investment focused on encouraging the development of sustainable investing. Asset-manager and institutional-investor signatories commit to integrating ESG issues into their investment processes. The number of signatories, which started to take off in the aftermath of the financial crisis, is now approaching 2,000 and represents $70 trillion in assets. They include 44 of the 50 largest asset managers in the world.
Last week, two events, one at the U.N., the other at PRI’s annual conference, highlighted the success of sustainable investing and some of the challenges it faces.
The first event was at Annan’s old stomping grounds, where hundreds of financial advisors gathered for The ESG Investing Conference at the United Nations, run by Gitterman Wealth Management. Jeff Gitterman is a New York financial advisor who wants to help other advisors integrate sustainability and impact into their practices and their clients’ portfolios. Gitterman sponsored a modest daylong conference two years ago attended by 140 people; it grew to 240 attendees last year. Last week’s conference at the UN drew a capacity crowd of 570. And later in the week, across the country in San Francisco, a record number of 1,200 delegates attended the PRI in Person conference, mostly asset managers and large institutional investors. Both events were oversubscribed and had to turn away attendees. There are a lot of people and institutions now doing sustainable investing and a lot more people and institutions who want to learn more about it.
Here are a couple takeaways from last week’s conferences.
Meeting the demand. According to Morgan Stanley, more than 80% of institutional investors have not only embraced the idea of sustainable investing–they are in the process of integrating ESG into their investment processes, something most of them have begun doing in only the past four years.
While investment consultants and lawyers who hold more-traditional views of investing and fiduciary duty can still be roadblocks to greater adoption, most intermediaries appear to have largely gotten on board with the notion that ESG is aligned with fiduciary duty and can help investors manage risk and enhance returns.
That’s not as much the case with individual investors. While a similarly large proportion of individuals exhibit interest in sustainable investing, with women and millennials showing even higher interest, their intermediaries–financial advisors–have not been so quick to jump aboard. That creates a pinch point. Many individual investors may be interested in sustainable investing, but their interest may not be sufficient–or well-enough defined–for them to actually bring it up with their advisors. As a result, many advisors say they are not experiencing the demand that might be expected based on the interest shown by investors in surveys, and that leaves them with less incentive to get up to speed on the topic.
But if advisors ask about ESG proactively, they are likely to elicit a positive reaction from most individuals. Gitterman says he now incorporates ESG into all client portfolios, whether they ask for it or not. Like many asset managers who are beginning to do the same thing, for him, it’s a matter of prudence. Fiduciary duty requires the systematic consideration of risks that can arise, often unexpectedly, from ESG issues and of the opportunities for enhanced returns from investments in companies that have reduced their operating costs, are effectively managing the transition away from fossil fuels, or are benefiting from a positive reputation as a sustainable firm.
The SDGs and Impact. In 2015, the U.N. General Assembly passed a resolution in support of 17 Sustainable Development Goals, which cover an array of global social, economic, and environmental challenges to solve by 2030. While the SDGs serve as a general framework for sustainable development that can be used by governments and nongovernmental organizations, they have been embraced by investors and companies who want to contribute to sustainable development. Asset managers are beginning use the SDGs to develop impact reports for their investors.
Sustainable investing is both value-driven and values-based. A lot of asset managers, investors, and advisors are emphasizing the value-driven component. That is, they are using ESG to help drive value in their investments, through risk reduction or return generation. But sustainable investing is inevitably values-based, as well. Go back to the original thesis for sustainable investing from 2004 quoted above and you can see both components defined. For sustainable investors to drive value, or make a difference in their risk-adjusted returns, they integrate ESG into their investment process; for sustainable investors to have impact, or make a difference in the world, they are using the SDGs as a framework.
Better Capitalism. Unilever CEO Paul Polman gave the closing keynote at PRI in Person, telling delegates that investors must focus on the long term and work with business to create a different kind of global capitalism, which can help solve, rather than create, global problems. In focusing on the long term, investors need to consider long-term system stability. From a narrow investment-centric point of view, investors’ long-run returns depend on a healthy global economy. Looking at rising inequality, he noted that when the system isn’t working and too many people are left behind, they will rebel. Governments should play a role, but reliance on governments is unlikely to be sufficient to solve problems of global scale. Business can’t be bystanders, he said. Sustainable investing is a way to encourage businesses, in the words of the 2004 “Who Cares Wins” report, to contribute to the sustainable development of the societies in which they operate.