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Is There Any Hope for Sustainable Investing?

3p Contributor | Friday June 14th, 2013 | 3 Comments

does sustainability equal stock growth?

By Chris Kaiser

I’m a big believer in Sustainability.  At work, I sell energy efficiency and clean energy solutions to large companies. I’m an avid cyclist, I try to eat local food when I can, and I even have a compost pile.  I spend a lot of time thinking about sustainability and its impacts on business, individuals, and society as a whole.  I also want to be rich one day (I’m a sustainable capitalist) and I enjoy dabbling in the stock market, so I spend a lot of time thinking about how I can invest money in sustainable companies because I believe that sustainable companies will produce greater returns over time.

A sustainable company is a company that operates as efficiently as possible.  Efficiency in all aspects of a business means more revenue through a more efficient sales force, reduced costs, and lowered environmental impacts.  All of these factors mean increased profit margins and profit growth, which should lead to higher share prices.

A sustainable company also manages its finances for the long term and doesn’t care about gimmicks to increase quarterly earnings because the management of a sustainable company cares about the long term value.  Increasing long term value increases share price.

So now that I’ve touched on all the reasons why I choose to invest in sustainable companies, the question becomes: How does one find a sustainable company to invest in?  This is where the fun begins.

One could start with the Dow Jones Sustainability North America Index (DJSNAI).  The Fact Sheet states that “the index represents the top 20 percent of the largest 600 North American companies in the Dow Jones Global Total Stock Market Index based on long-term economic, environmental, and social criteria.”  That surely sounds like it would be the best place to find sustainable companies to invest in!  The Fact Sheet also tells me there are 141 companies in the index, and the largest holding makes up a whopping 6.42 percent of the index.

Surely this company must be one of the most sustainable companies in the world!  What is the company you ask?  Exxon Mobil Corp. The fourth largest holding at 3.78 percent is Chevron Corp.

My personal goal in sustainable investing is to invest in a company whose product at least does no harm to society.  And while I still use their product (even if I drive one of the most sustainable oil fueled cars on the market), I can’t exactly say I’m thrilled about investing in oil companies for their sustainable attributes.  But alas, the goal of the DJSNAI is to pick the top sustainable companies in each sector (excluding sectors they deem harmful), so if Exxon is more sustainable than BP, so be it.  But how does the DJSNAI perform as an investment?

Comparing the suggested symbol of the DJSNAI in Google Finance (A1SGI) to the Dow Jones Industrial Average and the S&P 500 over 5 years shows that the sustainable index doesn’t exactly meet my criteria of performing better than broader market indexes (although at least it’s not worse):

Sustainability_stock_performanceThere are other models I could use to find sustainable companies, like CSRHUB widget found right here on Triple Pundit.  But according to this widget, McDonald’s gets a higher sustainability score than Chipotle:

mcdonalds vs chipotle sustainability

I recently read a great article in Time Magazine about Chipotle’s CEO’s sustainability beliefs titled “The Fast-Food Ethicist” and I’ve yet to see anything quite as impressive in regards to sustainability in regards to McDonald’s CEO.  Plus Chipotle has this amazing commercial featuring Willie Nelson about their sustainably sourced meat and while I’ve seen a few McDonalds commercials on fisherman or potato farmers, nothing compares to what Chipotle has put out there.  And finally, I feel the food I’m eating at Chipotle (when I’m brave enough to wait in line) is healthier than what I’m getting at McDonald’s.

So what’s the right way to pick and invest in sustainable companies?  Is it finding the “most” sustainable company in an individual sector?  Is it coming up with a propriety model and assigning a score?  Or is using my non-scientific model of investing in companies based on what you hear their CEO’s say about sustainability, how heartfelt you feel they are on the topic (i.e. are they saying they like sustainability because they believe it, or they just believe that’s what Wall Street wants to hear), and what your personal experience is with the company and their product?

At this point, I have no clue.  If the comparison of DJSNAI vs. the Dow Jones Industrial average and S&P 500 is any indication, maybe sustainable investing for the purpose of increasing profits is an oxymoron!  But I don’t think so.  I still believe that companies that truly operate with core sustainability principles will increase EPS growth faster than non-sustainable companies, but I’m still searching for the best way to find those sustainable companies.  I believe there is hope for sustainable investing, we just have to ensure that in our sustainable modelling, sustainable factors that increase profit (i.e. energy efficiency that reduces costs) are weighted higher than those that don’t have as large of an impact on profit (carbon tracking for the sake of carbon tracking).  In other words, if my goal is to find companies that operate sustainably in the belief that they will produce greater EPS growth, then I have to ensure the sustainable model I’m using is weighted for that purpose.

What methods have you found to successfully gauge the sustainability of a company, and do you think there is any chance that a sustainable company can lead to better stock market performance?

Chris Kaiser is the founder of Mapawatt.com and the creator of the “sustainable pyramid.” 


▼▼▼      3 Comments     ▼▼▼

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  • http://twitter.com/SustainLandDev SLDI

    Chris asks, “What methods have you found to successfully gauge the sustainability of a company.”

    The Sustainable Land Development Initiative (SLDI), a member-owned organization dedicated to promoting land development around the world, seeks to balance the needs of people, planet and profit – for today and future generations.

    Rooting Your Portfolio in Positive-Impact Real Estate – http://www.triplepundit.com/2011/11/rooting-portfolio-positive-impact-farmland-real-estate-housing/

  • CSRHub

    Thanks for looking at CSRHub, as part of your investigation. As you know, we bring together hundreds of sources of sustainability information on more than 7,000 companies in 93 countries. Our goal is to create metrics that will help improve corporate social responsibility (CSR).

    Our site is not designed to help you pick stocks–or breakfast sandwiches! It is designed to help you evaluate whether or not a company is transparent about its social activities, how well it treats its employees, whether or not it has taken steps to cut its carbon and improve its supply chain, and so on. For instance, McDonald’s has reported its social performance using the Global Reporting Initiative framework–Chipotle has not. McDonald’s has won awards for supporting Hispanic suppliers, for its treatment of women managers, and it has joined the Sustainable Packaging Coalition. Chipotle hasn’t won these awards or joined SPC.

    At the same time, McDonald’s product (e.g., its food), doesn’t get good ratings for its sustainability from Better World (McDonald’s gets a D- compared to an A for Chipotle). Both companies get decent scores on their human rights performance from Human Rights Campaign, but McDonald’s has a more balanced board structure, that probably provides stronger oversight than Chipotle receives.

    From the above, you can see that if you want a more sustainable sandwich, you might choose Chipotle. If you want to eat in a place that friendly to Hispanics, you might choose McDonald’s. We believe that improvements in sustainability will be driven by a wide range of factors–and a wide range of personal views. We try to give you the data you need to make your own decision about which company you want to buy from, sell to, or work with–based on what is important to you.

    Our data probably won’t tell you which stock will go up and which will go down. Stock prices–at least in the near term–are driven much more by earnings and other corporate news than by what score a company gets from a ratings source. However, we believe your personal choice of a Chipotle meal rather than a McDonald’s meal–based on your understanding and knowledge of each company’s corporate social responsibility performance–should eventually make a difference in how each company behaves. Our goal has been to allow you to make more informed choices. We hope we’ve achieved that and given you reasons to probe further and to learn more.

    • Chris Kaiser

      That is a great response. I completely understand how CSRHub is not for investment purposes. I may be pessimistic, but my belief is that – generally speaking – companies choose to undertake CSR programs on the belief that their stock will perform better (or not perform worse) than a company without a CSR program; whether that is because of marketing, happier customers, etc. So I’m still searching for a sustainability metric that may show a correlation between sustainability factors that affect stock price (more sustainable food equals better tasting food equals more food sales equals increase EPS) vs. sustainable metrics that may not have as big of an increase on stock price (whether it treats its Hispanic suppliers well).