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Investing for the Long View: ESG Looks to SDGs for Future Payoffs

johnhowell headshotWords by John Howell
Investment & Markets
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The socially responsible investment industry is exploding. By any measure, the growth is exponential, and increasing rapidly. The reasons are straightforward: Sustainable investing is increasingly seen as a superior methodology to manage risk and drive returns.

A few numbers tell the story. Socially responsible assets under management (AUM) are estimated at $8.7 trillion as of 2016—a 33% increase from 2014. That overall total is approaching 25% of all U.S. AUM. Here’s another key figure: 75% of investors are interested in what is often referred to as socially responsible investing (SRI), according to a report by the Morgan Stanley Institute for Sustainable Investing. That total includes these breakouts: 84% of women and 86% of millennials. The related, significant number is the estimated $50 trillion of wealth that will transfer to women and millennials over the next 30 years, as baby boomers pass on their assets to theirs spouses and offspring. As noted above, an overwhelming majority of these two groups are interested in SRI in its various forms, including sustainable, impact, and ESG investing. Here’s the good news for those brands taking stands on social issues: investors are now actively evaluating companies for the “S” factor in their ESG (environmental, social, governance) strategies. Historically, good corporate governance has marked a good company to invest in, and in recent years, environmental issues—from risk mitigation to profit opportunities—have become increasingly quantified and baked into balance sheets. Social purpose has been the hardest factor to define and evaluate relative to a company’s bottom line. That’s changing. A new investing approach aligns ESG factors with the UN’s Sustainable Business Goals to boost evaluations of the “S” factor at the bottom line. A poll of 118 asset owners—public and corporate pensions, endowments, foundations, sovereign wealth entities, insurance companies—found that 84% are pursuing ESG integration in their investment process while 78% are aligning that process with the UN SDGs. Potential profit is a strong driver: a recent report by the Business & Sustainable Development Commission estimates that achieving the United Nations’ Sustainable Development Goals could open up $12 trillion of market opportunities in food, agriculture, cities, energy, materials, health, and well-being, while creating 380 million new jobs by 2030. The latest evidence of this shift was on display at last week’s 2018 Sustainable Investing Conference held at the UN in New York. Nearly 600 financial professionals gathered to hear a Who’s Who of the financial community discuss the use of ESG as the “GPS” of investing and the SDGs as the destination. The event was sponsored by Gitterman Wealth Management, which has adopted the slogan, “ESG: The GPS of Investing.” It proposes using ESG guidance as risk mitigator and alpha return generator, and the SDGs as the defined, specific social purposes at which to aim investments. Comments from ESG research and analysis firms Sustainalytics, MSCI, Morningstar, and others summed up developments as 1) much progress has been made in quantifying ESG factors and 2) it’s complicated—individual methodologies abound, as do sustainable investing products (green bonds, impact investments, index funds). All cautioned that the design of rules and scoring systems makes a big difference to ESG evaluation, and that ESG scores are not “settled facts” but analysis that offers useful insights into the policies of each business. All were also certain that ESG-driven investing, especially that targeting social purpose as well as profit, is becoming widespread throughout the investment community. The case of Nike offers a textbook case study. The company’s pointed socio-political statement in its recent “Believe” ad campaign resulted in its rising share price (highest ever) were noted. While not explicit, links can be made between the purpose of that campaign and its support of diversity and inclusion: SDG 16 ("Promote peaceful and inclusive societies for sustainable development”). Linking ESG investment to SDG goals to drive financial support for companies taking positions on social issues is an exciting development in the unfolding brands taking stands story, and one that will undoubtedly create many more examples like the Nike case. Using principle to generate profits is becoming business-as-usual. Stay up to date on the latest in corporate activism by signing up for the weekly Brands Taking Stands newsletter.
John Howell headshotJohn Howell

John Howell, Chief of Thought Leadership and Editorial Director, is a co-founder of 3BL Media, the parent company of Triple Pundit, begun in 2009. Howell oversees original editorial content procurement and creation. He is also the author of the weekly Brands Taking Stands Newsletter. He has written and edited for Elle, Artforum, High Times, the New York Times Magazine, and the LA Times. Howell is based in Wonalancet, NH.

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