Seeking Optimistic Sustainable Investment Managers

By Graham Sinclair

Are you a superhero or a supervillain? The Late Show’s new host, Stephen Colbert, put the question directly to the enigmatic CEO of Tesla and SpaceX, Elon Musk. In his first week of the Late Show franchise, the "real Tony Stark aka Iron Man" analog was a high-profile win for the show. No doubt heavyweights like Uber and Tesla are looking to benefit from Colbert's sway with millennials, as Institutional Investor highlighted. Colbert playfully aimed to pinhole Musk as supervillain or superhero as the two flicked through subjects like Tesla cars, exploding Falcon 9 rockets and thermonuclear explosions to “warm” Mars. Colbert ended by saying Musk’s “vision of the future is very hopeful, that is, it is fixable." It was an uplifting end to the interview.

Back here on planet Earth, we have much to be bleak about. The WWF Living Planet Index tracking humanity blowing through the earth's annual resources flagged Earth Overshoot Day on August 13, 2015, six days earlier than in 2014. According to Steven Nerem of the University of Colorado, we are "locked into at least 3 feet (1 meter) of sea level rise, and probably more." It has me wondering: How optimistic are sustainable investment practitioners about the future?

Whether in Boston, London, Singapore, Sao Paolo, Johannesburg or Melbourne, sustainable investment practitioners have access to the latest data from science, business, economics and policy analysts. They also have access to business leaders' thoughts and actions, so investors should have a very sophisticated perspective. For example, each of the more than 315,000 Bloomberg terminals worldwide has over 30,000 functions delivering a firehose of data to the minute. Increased demand is confirmed by Bloomberg, citing a substantial increase in the number of customers using environmental, social and governance (ESG) data (from 2,415 in 2009 to 17,010 in 2014).

With so much information, investment practitioners have some of the most nuanced and fresh perspectives on what is the state of business-as-usual. Investment decisions are about future forecasts as investors make bets on uncertain futures calculated using their best predictions, from the certainty of data on the current and the past.

Are we screwed?

So, investment practitioners' hopefulness -- or lack of it -- may say a lot about the state we're in. For me, it’s been a little depressing. In my seminar at Duke Fuqua MBA last week, I found myself confessing to graduate students that I am coming out of a dark season in the past year or two. And I am not alone. There’s an exhaustion, a chronic climate change political fatigue, that has many saying, "We're screwed, bag it!"

The black mood is fostered by each new report mapping out negative sustainability trends (whether in endangered species or a dirtier planet), the realpolitik of contingent policies and misapplied regulations, the few businesses that are authentically good corporate citizens, the great inertia of institutional investors, and the malaise of talking heads shouting at each other, only some of which make sense.

For every new dollar added to sustainable investments through industry-wide initiatives like PRI (US$59 trillion assets under management (AuM)), or sector-wide initiatives like the Access to Nutrition Index (US$2.6 trillion AuM), are we that much closer to a brave new future? Or are we simply getting better at figuring out how much has to be done?

Progress has happened. It may be measured through the advances in data, analysis, education, investor demand and investment services supply, even some seachange in conventional wisdom on how investment practitioners do their job. My conversations in the industry with experienced professionals offers points of view that are more sanguine, sometimes more positive, sometimes more snarky.

The CFA ESG survey in August 2015 polled 44,131 CFA members and reflected back changing attitudes: The main reasons survey respondents take ESG issues into consideration in their analysis were firstly, to help manage investment risks (63 percent), and secondly, because clients/investors demand it (44 percent). But will this be enough, soon?

Pivot to investing in sustainability

What will it take to pivot to aggressive investment in a better future? We will need sustainable investment practitioners may shift from "less bad" to "more good." Less money into companies tidying up things on the business-as-usual vector, and more money into new businesses or models that design for a sustainable future. Less GM, more Tesla. Less General Mills, more Luvo.

The excellent longform Institutional Investor Magazine piece by Imogen Rose-Smith on pure-play sustainable investment boutique Generation Investment Management (“David Blood and Al Gore Want to Reach the Next Generation”) is new required reading in an industry better known for whispers than words. Her piece maps the evolution of the investment philosophy and the adaptation of the investment talent to changing investable opportunities and the business of asset management. It also flags career transformations like Erika Karp's from UBS research head to founder of Cornerstone Capital in 2013, switching from an internal agent in a global investment machine to the leader of a pure-play sustainable investment boutique.

Maybe impact investing offers some hope. This investment theme maximizes social and/or environmental "returns" with investment returns ranging from commercial rates to zero. Since the term “impact investing” was coined at The Rockefeller Foundation’s Bellagio Center in 2007, impact investing has been shaped by new framing of investment philosophy, new policies, re-modeling of intentional investment and funding, new talent and some newly-expressed demand for asset management.

Eight years later the glow of the new is fading into normal, but the blue ocean strategy possible in impact investing has generated new positive energy. It's so pronounced that executive recruitment firm Korn Ferry even has a dedicated recruitment theme for it. But the super-positive estimates are for a $1 trillion market in 2020, still a tiny fraction of the institutional investment universe: In 2011, the combined holdings of all institutional investors represented was US$84.8 trillion.

How are you feeling about sustainable investment in the future? When Colbert described the hope in Musk's engineered widgets and business models, he reminded his audience ("Hello Nation!") of the human propensity to think tomorrow will be better, a Darwinian bias described by Prof Dan Ariely in The End of Rational Economics. Maybe Colbert’s millennial fanbase will add some new positive energy through their career, consumption, investment and voting patterns. Sustainable investment professionals who have been doing this for a while have more lines and more silver hair.

Hopefully the evolution of sustainable investment - new talent, new models, new investable opportunities, new entrepreneurs - may add as much optimism. More superhero, less supervillain.

Image credit: NASA, public domain

Graham Sinclair is Principal at SinCo LLC – Sustainable Investment Consulting LLC. Connect with him @ESGarchitect or LinkedIn.com/GrahamSinclair.