By Ben Gruitt
Last month Morningstar Inc., an investment research and management firm, announced a new sustainability rating system would be available for funds on its North American and European websites as well as in Morningstar Advisor Workstation, the company's Web-based practice management platform for advisors.
The Morningstar Sustainability Rating aids investors in evaluating funds based on environmental, social and governance (ESG) factors for nearly 21,000 mutual funds and ETFs, encompassing $13 trillion in assets under management. Given that Boston Consulting Group put the 2014 global total of professionally managed assets at $74 trillion, this represents a hefty 18 percent of global fund assets that can now be dissected for their risk exposure to critical environmental concerns such as climate change.
This move by Morningstar represents the most significant move yet toward bringing impact investing to the general public’s attention. According to the Global Impact Investing Network, impact investments are “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” This takes conscious consumerism to a whole different level: Instead of simply buying ‘greener’ products when you shop for shampoo, you can put your investment portfolio toward improving the world while saving for retirement. This constitutes a much larger impact overall as the average American has $102,682 invested in their 401(k) alone.
Until recently, impact investing was the exclusive playground of well-funded foundations and venture capital firms eagerly seeking out the next big thing. The average person with a mutual fund had little chance of making a difference with their investments unless they had time to conduct substantial amounts of research on their own or were willing to invest significant amounts of money in a single stock. Tools such as CSRHub have an impressive amount of data on an organization’s corporate social responsibility record, yet fall short in giving the average investor the ability to diversify in a socially responsible way due to the cost of the service.
Recently though, companies such as Sustainalytics, which provides Morningstar with the research necessary to power the Sustainability Rating system, have made it easier than ever for the average investor to analyze and quantify a company’s sustainability metrics. And by applying this data to entire mutual funds and not just a single stock broadens the potential market to anybody with a 401(k) or IRA.
But comparing the tobacco industry to other sectors is apples to oranges. The reason? Cigarette manufacturers barely have to innovate to stay relevant to their customers or procure raw materials for production. Compare that to fossil fuel stocks: With the global momentum behind economic decarbonization, these could be considered among the least sustainable industries in the market. As the easily accessed reserves become scarcer, these companies have to spend a greater amount of capital on innovation to retrieve crude and natural gas that are deeper and harder to access. And with renewables continuing to push these traditional fuels out of favor, it will become more difficult to obtain the resources necessary for extraction. This transition can be seen today in the industrial mineral sector as the market shift from coal power to renewable energy and natural gas has been decimating coal company stocks for several years.
What is driving this trend away from fossil fuel companies? There are several converging factors that may help explain why the next generation of successful investing will be defined by the measurable sustainability of a company or industry. The first factor has become almost a cliché at this point: Consumer habits are changing. Survey after survey will tell you that consumers, especially millennials, are willing to pay more for products that are made in an ethical manner or that create positive social and environmental benefits. Whether or not this plays out in the real world on a significant scale is open for debate, but what is evident is that many large companies believe that consumers will and are responding to that demand. And it is a safe assumption that they have conducted substantial market research to reach that conclusion. This competition for conscious consumers has led corporations to make greater public declarations of their CSR credentials and increasing their supply chain transparency to prove it.
The other source of increased emphasis on sustainability ratings for investments is the growing acceptance of anthropogenic climate change. There is undeniable evidence at this point that fossil fuels are considerably detrimental to the local and global environment that we depend on for natural resources. And yes, consensus shows that human activity is speeding up this degradation.
While the cost of exploration, extraction, transportation and consumption are well known and built into the price of a gallon of gas or a ton of coal, the indirect costs are more difficult to measure and typically left for the rest of society to pay for. According to the Union of Concerned Scientists, “These include human health problems caused by air pollution from the burning of coal and oil; damage to land from coal mining and to miners from black lung disease; environmental degradation caused by global warming, acid rain, and water pollution; and national security costs, such as protecting foreign sources of oil.”
Were these costs taken into account, the cost savings to the entire economy would be considerable. As an example, a study in the journal Nature Climate Change found that if the United States were to adopt a “clean energy” path it could prevent up to 175,000 premature deaths nationally. The researchers also estimate that clean transportation could prevent 120,000 premature deaths in the overall population. And this is just the tip of the proverbial melting iceberg.
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Ben Gruitt works at the intersection of agriculture and industry as the Manager of Sustainability & Special Projects for the Corn Refiners Association. By helping to foster understanding and cooperation between farmers, industry, and government, he is helping to transform the current food supply chain into the sustainable model needed to feed a 21st century world. You can follow him on Twitter or LinkedIn or read previous blog posts at To Sustain Us.