Even before the opening remarks at our November 19th Sustainable Investing session, we had already accomplished several of our goals. Interest in the topic was high, as we believed it would be. We had a full house at the Metro Meeting Center in Boston, surpassing our original estimates. In fact, we had to turn away a few prospective attendees in the last few days before the event.
Equally important was the breadth of organizations and investors represented by the attendees. The audience included investment professionals from firms serving individuals, family offices, endowments, foundations, pension funds and large institutional investors. Participants worked with a range of asset classes – public and private equities, fixed income and alternative investments. Most importantly to us as organizers, the mainstream investment community was well represented.
Having brought that diverse audience together, I wanted to make clear in my welcoming remarks that they should feel very comfortable at a seminar on sustainable investing. Why? Because the underlying principles of sustainable investing should look very familiar to investment management professionals.
When we define sustainability, a sustainable economy or sustainable investing, it’s often with a variant of a definition coined in 1987 by a United Nations commission on “sustainable development”. Mine reads:
Sustainability is the challenge of advancing global economic development and increasing standards of living worldwide in ways that do not compromise the ability of future generations to pursue those same goals.
That should be a familiar idea to anyone who has worked with an endowment or any long-term investor. In his book, Pioneering Portfolio Management, Yale’s David Swensen highlighted this intergenerational equity as the “essence of the investment problem facing fiduciaries”. He quoted economist James Tobin in a 1974 article:
“The trustees of an endowed institution are the guardians of the future against the claims of the present. Their task is to preserve equity among generations.”
While individual investors’ time horizon may only extend to the one or two generations they can see, they too certainly struggle – and cause their investment advisors to struggle – with the questions of today versus 20, 30 or 50 years from now.
A second reason Sustainable Investing should seem familiar to investment professionals is in the substance of their work. Investment professionals analyze the finite resources of assets and the finite flow of capital to build a model for projecting the future success, and therefore value, of an enterprise. We have 50 or 100 years or experience using the financial statements of businesses to make those assessments. But there are other factors and finite resources that are vital to the long-term success of business enterprises and the economy. These are only imperfectly, if at all, captured in the financial statements:
- environmental resources – raw materials, supplies, water, the physical environment in which the company operates
- social resources – the human capital of employees who produce the goods and services, the customers who buy those goods and services, suppliers, the shareholders as well as the citizens of whatever political entities provide the company a license to operate
- governance resources – the term “dysfunctional organization” makes clear that no complex undertaking – and anything that requires investment is a complex undertaking – can thrive without organizational processes, structures and some type of management
These factors – environmental, social and governance – are at the heart of sustainable investing. Selecting the factors that are important, understanding and assessing when they are material, and analyzing how they affect a business, industry or sector, are the challenges of sustainable investing. While the data and tools available to analyze these factors are not yet at the level of those we use to analyze financial statements, they are making rapid progress.
As our overview for this session summarized it:
Sustainable investing incorporates environmental, social and governance considerations into investment decisions to achieve competitive long-term financial returns and positive societal impact. It informs and integrates with existing investment practice.
In the substance of the day that followed, our speakers and panels discussed the what, why and how of sustainable investing as they practice it. Matt Orsagh of the CFA Institute provided a nice overview of the seminar in his blog post which is linked here. (Matt had to leave early to catch a flight, so his summary doesn’t include Steve Lydenberg’s excellent closing presentation on sustainability data standards and measurements.)
In future posts, I plan to highlight some of the ideas from individual sessions in more depth.
My thanks for a very successful event go to all our speakers and our seminar team of BSAS volunteers and staff:
- Lauren Antolini (BSAS staff)
- Robert Fernandez
- Stephanie Field (BSAS staff)
- Michael Greis (Chair)
- George Kimball
- Larry Pohlman
- Nate Riley
- Jose Luis Rojas
- Vitaly Veksler