Investing in a Sustainable World
Why GREEN Is the New Color of Money on Wall Street
Author:
Matthew J. KIERNAN
ISBN:
9780814410929
Publication Date:
12/11/2008
Format:
Hardback
Price:
27.9500
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A wake-up call for investors and companies who don't yet realize the new
key to profitability.
For business and investors, there’s no doubt about it: The smart money
is going green...and the growing movement toward ecologically
forward-thinking companies is quickly becoming bigger and bigger. What
may be surprising to some is that socially responsible organizations
aren’t just doing the right thing for the environment, they are also
paying off financially, making their investors money and increasing the
bottom line.
Investing in a Sustainable World offers clear proof, through
facts, figures, and hard documentation, that “going green” leads
directly to better stock market performance...and that investors and
companies who ignore it will, in fact, lose money. The book reveals the
most powerful global megatrends—from the ongoing focus on emerging
markets to natural resource depletion—which are transforming the very
basis on which companies will compete, and offers an approach to
sustainability-enhanced investing beneficial to both investors and
companies.
Revolutionary and backed by undeniable statistics, this book shows the
clear link between sustainability initiatives and clear-cut
profitability.
About the Author
Matthew J. Kiernan, Ph.D. (Ontario, Canada) is Founder and Chief
Executive of Innovest Strategic Value Advisors, Inc., the #1 ranked
sustainability investment research firm in the world, with offices in
New York, Tokyo, London, Paris, Sydney, San Francisco, and Toronto. He
previously served as Director of the World Business Council for
Sustainable Development. In 2008, Dr. Kiernan spoke for the second time
at the prestigious World Economic Forum in Davos, Switzerland.
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Investing in a Sustainable World
Why Green Is the New Color of Money on Wall Street
"Matthew Kiernan has redefined global thinking around sustainable
finance and responsible investment. Without Kiernan's work since the
late 1980s, the battle to drag institutional investors to the
sustainability table would have been immeasurably harder. Kiernan's
magic, as this book gives fine witness to, is based on a deep intellect,
the confidence to continually challenge the investment status quo and
the ability to see fundamental changes in the markets well in advance of
the mainstream."
--- Paul Clements-Hunt, Head, United Nations Environment Programme
Finance Initiative (UNEP FI), Member of the Board, UN Principles for
Responsible Investment (PRI)
“Socially responsible investing” certainly sounds like an admirable way
to help fund the fights against global warming, poverty, and many other
issues threatening our planet. Still, few investors have the luxury of
losing money on low-performing do-gooders, especially in these times of
stock market volatility and a looming recession. However, what they may
not know is that: paying attention to formerly neglected
environmental and social risks – and opportunities – pays off in terms
of competitive advantage and shareholder returns, a fact which is backed
up by the track records of a wide range of both companies and investment
funds worldwide . The current global market meltdown actually
provides a trillion-dollar “advertorial” for sustainable investment –
and for this compelling new book. Using the same analytical approaches
and techniques espoused in the book, the author and his firm predicted
the sub-prime crisis six months ahead of Wall Street, and detected
potentially fatal flaws at Bear Stearns a full year before they became
widely evident.
In INVESTING IN A SUSTAINABLE WORLD: Why Green Is the New Color of
Money on Wall Street (AMACOM 2008), Matthew J. Kiernan provides the
rational arguments and empirical evidence to convince all investment
stakeholders that integrating environmental and social (ES) factors into
business practices is critical to the financial health and longevity of
both investors and the companies they’re evaluating, as well as to the
economies and societies in which they operate. A pioneer and
world-renowned authority on sustainability investment research, Kiernan
backs his compelling investment case with hard numbers and concrete
examples of organizations that are successfully combining
sustainability—that is, attention to ES issues with profound economic
implications—with commercial viability. As Kiernan makes clear, these
leading-edge companies have already launched the “Sustainable Investment
Revolution”—a mounting global movement promising to dramatically change
finance while financing change.
“ES issues need to be consciously, visibly, and systematically
integrated into the nuts and bolts of investing: asset allocation,
stock selection, and portfolio construction,” Kiernan contends. He
begins by explaining why this is imperative, citing the unprecedented
confluence of global megatrends—accelerating natural resource
degradation, rapid population growth in emerging markets, and higher
consumer expectations for corporate behavior, for starters. He
culminates by giving investors a conceptual framework and the practical
tools and tactics to make it happen.
Setting the record straight on the relevance and the tangible rewards of
factoring ES factors into investment decisions, INVESTING IN A
SUSTAINABLE WORLD features:
• A persuasive “demolition job” on many of the pernicious investment
myths that continue to impede the Sustainable Investment Revolution.
• A hard-hitting look at the current state of major environmental and
social challenges— including climate change, water pollution, labor
rights, and access to affordable medicines in emerging market—and where
we’re likely to stand tomorrow.
• Insights into evaluating a company on its sustainability positioning,
risks, and performance, in conjunction with traditional, quantitative
investment analysis.
• Hallmarks of companies sustainability investors will want to consider,
with real-world examples of sustainability leaders—Mitsubishi Heavy
Industries, United Technologies Corporation, and Unilever among
them—from a wide variety of countries and industries.
• Spotlights on an array of “Game-Changers”—including pension funds,
endowments, foundations, and investment service providers—who are
helping redefine sustainability investment thinking and practice.
Complete with basic tenets, crucial caveats, and lists of
forward-thinking questions, INVESTING IN A SUSTAINABLE WORLD is
an invaluable guide for everyone with an investment stake, from
individual investors and their money managers to the executives, boards,
and staffs of pension funds, endowments and foundations, labour funds,
and both private and publicly traded companies. As Kiernan reveals,
sustainable investment is not only profitable, it may also be the
solution we’re seeking to many of the world’s environmental, social, and
financial problems.
ABOUT THE AUTHOR:
Matthew J. Kiernan, Ph.D. , is Founder and Chief Executive of
Innovest Strategic Value Advisors, Inc., an internationally respected
sustainability investment research firm, with offices in New York,
Tokyo, London, Paris, Sydney, San Francisco, and Toronto. He previously
served as Director of the World Business Council for Sustainable
Development. In 2009, Dr. Kiernan will speak for the fourth time at the
prestigious World Economic Forum in Davos, Switzerland. He lives in
Ontario, Canada.
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About Matthew J. Kiernan
Matthew J. Kiernan, Ph.D. , is Founder and Chief Executive of
Innovest Strategic Value Advisors, Inc., a global leader in
sustainability investment research. Ranked the #1 firm in its field by
major international surveys of investors in both 2006 and 2007, Innovest
has offices in New York, Tokyo, London, Paris, Sydney, San Francisco,
and Toronto, advising institutional investors in over 20 countries.
Before founding Innovest in 1995, Dr. Kiernan had served as Director of
the World Business Council for Sustainable Development, a Geneva-based
group of industrial titans, including the CEOs of Asea Brown Boveri, Dow
Chemical, DuPont, Mitsubishi, Royal/Dutch Shell, and Volkswagen. His
responsibilities included advising the Secretary General to the U.N.
Earth Summit in Rio de Janeiro in 1992 and heading a task force on
capital markets. Prior to that, Kiernan was a senior partner in the
strategy consulting practice of KPMG Peat Marwick, the global accounting
and consulting firm.
Over his more than 20 years of insider experience, Dr. Kiernan has come
to understand the truly transformational potential of the global
financial markets. He has also amassed hard numbers and unequivocal
evidence to support a widely, woefully overlooked fact: companies
with superior performance and positioning on environmental and social
issues achieve superior financial returns . In his new book, INVESTING
IN A SUSTAINABLE WORLD: Why GREEN Is the New Color of Money on Wall
Street (AMACOM), Dr. Kiernan makes a compelling investment case—not
necessarily an ethical one—to convince individual investors, money
managers, financial consultants, trustees and fiduciaries for pension
funds and endowments, and the executives, boards, and staffs of publicly
traded companies of the material, competitive, bottom-line value of
paying attention to environmental and social issues.
Dr. Kiernan has lectured on sustainable finance in executive programs at
the Wharton School, Columbia Business School, Stanford Business School,
and Oxford University. He has also written numerous articles and papers
on the topic. He is the author of one previous book, The 11
Commandments of 21st Century Management (Prentice Hall/Simon &
Schuster 2006). Hailed as “a brilliant and prescient analysis by one of
the most original thinkers—and doers—I know” by Maurice F. Strong,
seven-time Under-Secretary General of the United Nations Senior Advisor
to the President of the World Bank, it has been translated into six
languages.
A frequent speaker at international investment conferences, Dr. Kiernan
will speak at the World Economic Forum in Davos, Switzerland for the
fourth time in 2009. He holds advanced degrees in political science and
environmental studies, in addition to a doctorate in strategic
management from the University of London. In 2007, he received a
special executive award from the U.N. Environment Program's Finance
Initiative for innovation and leadership in the emerging field of carbon
finance. He lives in Ontario, Canada.
INVESTING IN A SUSTAINABLE WORLD: Why GREEN Is the New Color of Money
on Wall Street by Matthew J. Kiernan, Ph.D. (AMACOM 2008).
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Advance Praise for Investing in a Sustainable World
by Matthew J. Kiernan, Ph.D.
"Matthew Kiernan has successfully scaled the Green Wall that often
separates those working in the financial and sustainability domains.
His latest book demystifies the concept of sustainable investment and
provides a compelling rationale for Wall Street to consider
environmental and social criteria, not as afterthoughts but rather as
core considerations in our investment decision-making framework."
--Abyd Karmali, Managing Director, Global Head of Carbon Markets,
Merrill Lynch
“If you’re a long-term investor, you have to care about sustainability,
because it also equates to the ultimate sustainability of corporate
earnings. As a Fund that invests across multiple generations, seeking
short term gains at the expense of our planet and mankind, will
ultimately prove too costly to long-term corporate earnings and
therefore reduce our overall return. We at CalSTRS take this book’s
messages very much to heart.”
--Christopher Ailman, Chief Investment Officer CalSTRS
“Why should savers watch passively as their nest eggs shrink? Matthew
Kiernan’s sparkling, breakthrough book explains why they don’t have to –
and how they can protect – and even expand – their investments.”
--Dr. Stephen Davis, Project Director and Fellow Millstein Center for
Corporate Governance & Performance Yale School of Management
“Matthew Kiernan has turned his considerable experience and energy on
the ES themes into this lucid but sophisticated narrative. This is
perfectly timed to inform investors of the early mover advantage that is
achievable in this field.”
--Roger Urwin, Watson Wyatt
“A colorful and personal analysis examining why the financial sector,
for the most part, has not understood that increasingly business success
will be shaped by both social and environmental challenges. Highly
recommended.”
--Bjorn Stigson, President, World Business Council for Sustainable
Development
“Investing in a Sustainable World explains the new
sustainability paradigm driving the way investors, companies, and indeed
society must now think about value creation. Kiernan masterfully
dissects the forces that are transforming the landscape of capitalism,
and he highlights trends that investors must take into account and that
corporate leaders simply cannot afford to ignore.”
--Dr. James C. Murphy, Director, International Institute for Strategic
Studies
"Climate change has the potential to be the dominant investment theme of
the 21st century. There are people who know about climate and change
and there are those who know about investing. In Matthew you have
someone who is passionately and effectively involved in both. That's
why this should be at the top of your reading pile."
--Alan Brown, Group Chief Investment Officer, Schroders Investment
Management
“Never boring, always provocative and challenging . . . mainstream
investment professionals who ignore Matthew Kiernan’s messages here will
do so at their peril.”
--Tim Gardener, Global Head of Investment Strategy, Mercer Investment
Consulting
“True to form, this book is both provocative and opinionated. In a
field where much that is put to paper is either mind-numbingly technical
or just bland, this book is a refreshing change!”
--Dr. Raj Thamotheram, Head of Responsible Investments, AXA Investment
Management
“Financial investment and sustainable development are allies, not
adversaries. With Matthew Kiernan’s expertise, talent, persuasion, and
sense of humor in Investing in a Sustainable World, you’ll see it’s a
simple idea.”
--Antoine de Salins, Member of the Board, French Pensions Reserve Fund
(FRR)
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A Few Vital Forward-Looking Questions
for Investors in Sustainable Companies
About Environmental Issues
- Which electric power producers will be most successful at
diversifying into wind, solar, and other renewable energy sources?
(Iberdrola? Florida Light and Power?)
- Which coal-based U.S. electric utilities are most likely to weather
the inevitable transition to a carbon-constrained regulatory and
economic environment? (American Electric Power? FirstEnergy? Pinnacle
West? Dynegy?)
- Who will win the global race to commercialize carbon capture and
storage (CCS)—a potentially game-changing technology in the fight
against climate change? (Norway’s diversified oil and gas company,
Statoil Hydro? Italy’s major electric utility, Enel? Or BP?)
- Which major automaker will best solve the challenges of
low-pollution, next-generation power trains? (Toyota or Honda? Ford or
GM? Or India’s innovative Tata Motors?)
- Which forest products company will most successfully wrestle with
the demands of a global marketplace that is increasingly sensitized to
the imperatives of sustainable forestry? (Scandinavia’s Stora Enso or
its North American rivals Temple Inland or Great Southern?)
- Which beverage companies will best adapt to an emerging competitive
environment where, by 2025, water scarcity will leave an estimate
one-third of the world’s population without access to adequate drinking
water? (Coca Cola? Pepsico? Diageo?)
About Social Issues
- Which major pharmaceutical companies are best positioned to navigate
successfully through the sociopolitical and competitive challenges of
“solving” the thorny problem of access to medicines in emerging markets?
(Merck? GlaxoSmithKline? Novartis? Sanofi-Aventis?)
- Which companies active in Latin America and Asia are most likely to
succeed in figuring out how to create and access new customers
subsisting on incomes of less than 2 dollars a day? (CEMEX? Unilever?)
- Which global food companies will most rapidly, smoothly, and
effectively manage the necessary strategic transition to becoming
“health, science, and wellness” companies? (Nestle? Cargill?
Archer-Daniels? Danone?)
Adapted from INVESTING IN A SUSTAINABLE WORLD: Why GREEN Is the New
Color of Money on Wall Street by Matthew J. Kiernan, Ph.D. (AMACOM
2008).
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The 10 Commandments of Sustainable Investing
1. Make sure your money managers have access to top-quality,
company-specific research on sustainability risks and opportunities.
2. Make sure that they actually use it. If your money managers cannot
explain exactly how they are doing so, it’s almost certain that they aren’t .
3. Do not use sustainability research in isolation; always combine it
with traditional and quantitative investment research. Being a
sustainability leader does not mean that a company is worth investing in
at any price.
4. Do not expect perfection from your investee companies. A
multinational company with over 100,000 employees in nearly 100
countries is unlikely to have a sustainability track record that is
completely beyond reproach. Instead, look for companies with these two
attributes: best-in-class performance today, and a genuine ethos of
continuous improvement for tomorrow.
5. Do not presume that all sustainability factors—or even any
of them—are relevant to all investment decisions, in all industry
sectors, all of the time. Quite frankly, they’re not .
6. Do not assume that each of the “Four Pillars” of Corporate
Sustainability—Environment, Human Capital, Stakeholder Capital, and
Strategic Governance—is equally relevant to a particular company. They
probably aren’t.
7. Do not assume that the relative financial importance of each of the
Four Pillars will remain constant over time. It won’t.
8. Do not apply a double standard to the financial performance of your
“sustainability-enhanced” portfolios. No investment factor or style
“works” all the time in all market conditions. Remember, 80 percent of traditional
money managers underperform their benchmarks every year. (Fortunately
for investors, it’s not the same 80 percent every year!)
9. Do adopt a long-term investment horizon. Sustainability factors, by
their very nature, tend to be relatively slow to play themselves out in
stock prices. Be prepared to wait at least two to three years for
significant outperformance from your sustainability portfolios.
10. Do challenge your money managers. If they recommend an investment
in a coal company, for example, the onus should be on them to
make a convincing financial case for doing so, despite all the “big
picture” sustainability indicators pointing in the opposite direction.
Adapted from INVESTING IN A SUSTAINABLE WORLD: Why GREEN Is the New
Color of Money on Wall Street by Matthew J. Kiernan, Ph.D. (AMACOM
2008).
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Turning Sustainability into Competitive Advantage
Snapshots of Three Investment-Worthy Companies
Clean Coal Is Not an Oxymoron: Mitsubishi Heavy Industries.
Though rarely making the buy lists of traditional “socially
responsible” investment funds—it simply operates in the “wrong”
sector—Japan’s Mitsubishi Heavy Industries (MHI) is a major player in
developing both improvements to fossil fuel energy production and
emerging alternative energy sources. On the conventional side, MHI
specializes in integrated gasification combined-cycle (IGCC) coal
plants, which reduce CO2 emissions by roughly 20 percent over standard
coal power. More controversially, it is also one of the world’s leading
manufacturers of nuclear power plants. Spreading its bets widely and
wisely beyond “transition technologies,” MHI produces solar batteries,
fuel cells, and photovaltaics as well. What’s more, this
forward-thinking company is blazing trails in the geothermal energy
market. MHI has already constructed geothermal plants, tapping deep
underground heat reserves for steam-powered turbines, in 13 countries,
including Kenya, Iceland, Costa Rica, and the United States.
The Next Generation Carmakers: Honda. While the name
Toyota has become virtually synonymous with environmental excellence,
its Japanese-born, L.A.-based global competitor has been a leader in the
production of fuel-efficient vehicles for nearly three decades. It was
actually Honda—not Toyota—that launched the first hybrid vehicle in the
U.S. market: the 70 mpg Insight. Honda’s latest hybrid, the CR-Z (which
stands for Company Renaissance Zero), uses new high-tech materials to
push the lightweight/fuel efficiency envelope even further. Honda is
also investing more in fuel efficiency R&D than any other car maker on
the planet. One of the fruits of that effort is the next-generation FCX
Clarity, a zero-emission, hydro-powered fuel cell car, revving up to
make its on-road debut in southern California.
Tackling the “Access to Medicines” Challenge:
GlaxoSmithKline. Roughly two billion people in the world’s poorest
countries lack access to affordable medications and vaccines. Of all
the “Big Pharma” players, GlaxoSmithKline (GSK) stands out for its
strategic approach to solving this problem. Devoted to improving health
and quality of life while maintaining its commercial viability, GSK
believes that addressing access to medicine issues will help it not only
attract top research scientists and highly skilled employees, but also
secure credibility and long-term business opportunities in the
developing world. Private, public, international, and local
partnerships all play a critical role in GSK’s access to medicine
programs. A leader in R&D for the third world’s “neglected diseases,”
particularly malaria and tuberculosis, GSK also recently offered a price
cut on HIV/AIDS drugs in the developing world (already offered on a
not-for-profit basis). This generous gesture actually increases the
likelihood that GSK can sustain premium pricing in industrialized
countries.
Adapted from INVESTING IN A SUSTAINABLE WORLD: Why GREEN Is the New
Color of Money on Wall Street by Matthew J. Kiernan, Ph.D. (AMACOM
2008).
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Jacket Copy
Advance praise for Investing in a Sustainable World:
“If you’re a long-term investor, you have to care about sustainability,
because it also equates to the ultimate sustainability of corporate
earnings.... We at CalSTRS take this book’s message very much to heart.”
—
“Matthew Kiernan argues passionately—and convincingly—that the financial
markets can, and should, become an engine for improving environmental
and social conditions rather than undermining them!”
—
“Kiernan’s sparkling, breakthrough book explains . . .
how . . . [savers] can
protect—and even expand—their investments.”
—
Dr. Stephen Davis, Project Director and Fellow, Millstein Center for
Corporate Governance & Performance, Yale School of Management
“A compelling rationale for Wall Street to consider environmental and
social criteria, not as afterthoughts but rather as core considerations
in our investment decision-making framework.”
—
Abyd Karmali, Managing Director, Global Head of Carbon Markets, Merrill
Lynch/Bank of America
“Lucid but sophisticated . . . perfectly timed to inform investors of
the early mover advantage that is achievable in this field.”
—
“A colorful and personal analysis examining why the financial sector,
for the most part, has not understood that increasingly business success
will be shaped by both social and environmental challenges. Highly
recommended.”
—
“Kiernan masterfully dissects the forces that are transforming the
landscape of capitalism. He highlights trends that
investors must take into account and that corporate leaders simply
cannot afford to ignore.”
—
“There are people who know about climate and change and there are those
who know about investing. In Matthew, you have someone who is
passionately and effectively involved in both.”
—
“Provocative and opinionated.”
—
“Financial investment and sustainable development are allies, not
adversaries. . . . In Investing in a Sustainable World, you’ll see it’s
a simple idea.”
—
“Professionals who ignore Matthew Kiernan’s messages here will do so at
their peril.”
—
Tim Gardener, Global Head of Investment Strategy, Mercer Investment
Consulting
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Cover Copy
Welcome to the Sustainable Investment Revolution! The investment world
today is on the cusp of a transformation literally of unprecedented
proportions. A series of powerful and converging global mega trends from
emerging markets to climate change are making the ability of companies
to manage environmental and social (ES) issues increasingly critical to
their competitiveness, financial performance, and even to their very
survival. And precisely the same holds true for their investors. For at
least the next 20 years, ES considerations will be redefining the
contours and competitive dynamics of the entire, $70 trillion-plus
global investment universe.
Unfortunately, most investors aren’t adequately equipped to deal with
this brave new world. Paralyzed by increasingly obsolete mindsets,
analytical tools, and research, they seem largely oblivious to both the
enormous risks and the opportunities, which not only lie ahead but are
already here today. Successful 21st-century investors will need to learn
how to cope with this radically changed new environment; this insightful
new book will be invaluable in showing them how to do so.
Investing in a Sustainable World explains why institutional
investors have been so reluctant, even antagonistic, about making ES a
central strategic element in their decision making processes. More
important, the book details how several leading-edge investors are
getting ahead of the curve, and how you can and must too.
This new revolution is not your grandmother’s “socially responsible
investing” (SRI); instead, it is a resolutely mainstream phenomenon,
focused on achieving superior financial returns. What’s more, its
impacts will likely be far more positive and transformational than those
achieved by the SRI niche approaches with which it is so frequently
confused.
Investing in a Sustainable World provides readers with:
—
—
—
—
—
From energy to real estate and banking to automobiles, the competitive
landscape for business is changing in unprecedented ways and at a
furious pace. Featuring compelling examples, real numbers, and
incontrovertible evidence, Investing in a Sustainable World shows
you why and how the smart money is now on green—and will be for at least
the next few decades.
Matthew J. Kiernan, Ph.D., is founder and Chief Executive of
Innovest Strategic Value Advisors, Inc., the top-ranked sustainability
investment research firm in the world. He had previously served as
Director of the World Business Council for Sustainable
Development, and has spoken several times at the prestigious World
Economic Forum in Davos, Switzerland. Dr. Kiernan divides his time
among Toronto, New York, and London.
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Excerpt
[Kiernan – Genesis – 092208]
The Genesis of This Book
In one sense, this book has taken more than 20 years to write; it is the
product of three different sets of experiences, dating back at least
until 1987. At that time, I was a senior partner in the strategy
consulting practice of KPMG, the global accounting and consulting firm.
I was part of a team working on a billion-dollar privatization project
in the forest products sector. (This was so long ago that a billion
dollars was actually a reasonably significant amount of money!) The
transaction came very, very close to collapsing, primarily because of
community and governmental concerns about the project’s potentially
adverse environmental and social impacts. Although I had completed a
Master’s degree in environmental studies 15 years previously, this was
actually my first practical, real-world indication that environmental
and social issues could readily become critical business and financial
issues as well.
The second set of experiences that directly catalyzed this book occurred
several years later. I had left KPMG and had the unique opportunity to
become a director with what is now the World Business Council for
Sustainable Development (WBCSD) in Geneva, Switzerland. Founded in 1989
and led by Swiss industrialist and billionaire Stephan Schmidheiny, the
WBCSD had been given the somewhat daunting task of representing “the
private sector” and advising the Secretary General of the UN Earth
Summit in Rio de Janeiro in 1992. In short order, Schmidheiny had
managed to assemble a “dream team” of global industry titans: the
chairmen or CEOs of leading companies, such as DuPont, Royal
Dutch/Shell, Mitsubishi, Volkswagen, and Dow Chemical.
Despite having this “who’s who” of global business luminaries in tow,
however, Schmidheiny could not in the early days recruit a single banker
or financier to join the group! Normally, in my limited experience,
invitations from multibillionaires are reasonably well received by bank
chairmen. This is particularly true when the invitation also includes an
18-month opportunity to rub shoulders with more than two dozen heads of
the world’s leading industrial companies (i.e., mouth-wateringly
attractive potential banking clients!) Notwithstanding these commercial
inducements—not to mention a fascinating, worthwhile, and totally
unprecedented group challenge—Schmidheiny was turned down by the
chairmen of several of the largest banks in the world. The reason? At
that point, the bankers literally could not see the connection between
what they did for a living and the future of the planet. As one bank
chairman put it at the time: “But we don’t cut down any trees here at
the bank; your mission has nothing to do with us.” Well, there you have
it, then! Silly us for even asking!
Lacking a proper global bank chairman, it initially fell to me to
coordinate the work of the WBCSD’s task force on capital markets. It was
a galvanizing, breakthrough experience for me. For the first time, I
began to understand the truly transformational potential of the global
financial markets. They were, after all, the providers of the financial
“oxygen supply” for most of the world’s largest companies.
I reasoned that even if major corporations had not in fact created 75
percent of the world’s environmental and social problems, they certainly
represented at least 75 percent of the potential solutions. But in order
for this to happen, their behavior simply had to change. I know of only
two sure-fire ways to turn an industrial CEO into a sustainability
advocate and practitioner. One is to ensure that his 16-year-old
daughter consistently hectors him at breakfast about the deplorable
environmental and social track record of his company. This is highly
effective, but very difficult to pull off on any kind of a large scale!
The other way would be to send him a clear message through the financial
markets. If his company’s share price suffered or desired bank loans
became more expensive or even unavailable altogether because of
significant environmentally or socially driven risks or poor
performance, that would get his attention—and quickly! Now that could
achieve a large-scale systematic impact!
First, however, there were two major obstacles to overcome:
• Investors first needed to be convinced that environmental and social
(ES) risk, performance, and strategic positioning could actually be
financially and competitively material; and
• Investors would need access to credible, financially oriented company
research, so that they could begin to distinguish corporate leaders from
laggards and then act on that information.
If the tepid response to Schmidheiny’s overtures to the global bank
chairmen was anything to go by, it promised to be a long, uphill
struggle indeed! Neither key precondition could be achieved quickly or
easily, but someone had to start somewhere. I decided that the
“somebody” might as well be me and that the “somewhere” needed to be the
creation of a totally different kind of investment research company.
That new research vehicle turned out to be Innovest Strategic Value
Advisors, about which we will hear more in Chapter 10.1 The 15-plus
years that my colleagues and I have spent since then helping build
Innovest’s global business have provided the third set of experiences
that directly catalyzed this book. Over that time, my colleagues and I
researched both the sustainability and financial performance of
thousands of companies from all over the world. In some cases, we
tracked them for a full decade; in virtually all cases, it was for a
period of at least 5 years. The results of that research were
unequivocal: companies with superior performance and positioning on
“sustainability” (i.e., environmental and social) issues achieved, on
average, superior financial returns. In the course of that 15-year
period, I have personally “pitched” the sustainable investment thesis to
hundreds of trustees at pension funds and foundations, to chief
investment officers and senior investment bankers, and to pension fund
consultants all over the world. The results of all of these interactions
have convinced me of six fundamental “truths”:
1. Environmental and social issues and problems are not “just” problems
on those levels alone; they are also absolutely—and
increasingly—critical to the competitiveness and financial performance
of both individual companies and the broader economies and societies in
which they operate.
2. Any serious attempt to make a systematic impact on global
environmental and social problems will absolutely require the
fundamental reengineering of the very “DNA” of the capital markets.
Those issues must be brought from the periphery of the investment
decision-making process—at best—into its very center. Nothing less
comprehensive could possibly suffice.
3. At present, most of the major players in the financial markets remain
blissfully, if not determinedly, unaware of the close connection between
companies’ ES performances and their financial results.2 And the vast
majority of those few who have even considered such a connection are
highly skeptical about it.
4. This lack of awareness—or even hostility—could be costing a lot of
people a lot of money. Contrary to widespread belief among
“professional” investors, the failure to systematically consider ES
risks and opportunities in investment decisions is very likely
impoverishing, not improving, their financial results.
5. This, in turn, means that ordinary investors and savers are
essentially being short changed. There is a better than even chance that
the managers of their pension plans and mutual funds are not performing
as well as they could be. In brief, people’s money is being left on the
table.
6. For this situation to improve significantly, all of the key actors in
the investment “food chain” will need to be convinced of the potential
materiality of ES factors to companies’ financial performances. This
includes the asset owners and their trustees and fiduciaries, the asset
managers, and the researchers, analysts, and consultants who advise them
all.
Providing the arguments and evidence necessary to do that convincing is
the primary purpose of this book. It is designed to accomplish at least
four major objectives:
*To provide a compelling investment case—not necessarily an ethical
one—for integrating environmental and social considerations directly
into the investment process;
*To attempt to explain why, despite the powerful logic for doing so,
this practice remains overwhelmingly the exception rather than the rule;
*To provide concrete examples of some leading-edge organizations that
are pioneering new approaches—and several that should be but are not; and
*To provide both the conceptual and practical tools necessary to equip
investors—both institutional and individual—to “future-proof” their
portfolios by integrating environmental and social factors.
It will, of course, be for the reader to decide how well or poorly those
objectives have been met. I, for one, have become absolutely convinced
of at least one thing, however: that the systematic integration—or at
least consideration—of ES factors has now become an absolute imperative.
Both financial returns and the fate of the planet depend on it.
The book’s intended audience is necessarily a broad one: ordinary savers
and investors (“Main Street”), professional money managers and
investment banks (“Wall Street”), the trustees, fiduciaries, and
investment consultants for pension funds, endowments, and foundations,
and their professional staffs. It is also hoped that the book will be of
interest and value to the executives, boards, and staffs of the
companies that investors are evaluating and considering. At this stage
of the game, the corporations are, on the whole, far ahead of their
investors in this regard, but I hope that even they will find some new
insights and ideas in this book that will help them do their jobs even
better.
There is one additional—and powerful—motivation for writing this book. I
hope that it will help to fill a critically important void that I
believe still exists in the burgeoning literature about sustainability.
In addition to a constant barrage of information in the daily media and
popular press, a number of excellent books have been written on the
subject over the past few years. At least two of them are being
published virtually contemporaneously with this one. They are by
world-class writers and thinkers Tom Friedman and Peter Senge.3 Those
books focus on a number of the key elements in the “value chain of
change”—government, private sector corporations, nongovernmental
organizations, and civil society. While each of these sets of actors
undeniably has a major role to play in the Sustainability Revolution,
none, in my view, has anything close to the overwhelming,
transformational power of investors and the capital markets. The
financial markets constitute the “financial oxygen supply” for the major
corporations that determine so many of the actual sustainability impacts
and outcomes on the ground. Despite this, however, the sustainability
literature has remained curiously silent on both the current and
potential role of finance and investors. Since I firmly believe them to
be the single most critical variable in the equation, this book is
intended to focus attention there, where I believe it is long overdue.
Back to Top
Table of Contents
Contents
Changing Finance and Financing Change:
The Genesis of This
Book
Acknowledgments
1
Welcome to the Sustainable Investment Revolution!
2
What’s Taken Us So Long?: The Power of Intellectual and Organizational
Inertia
3
Perverse Outcomes and Lost Opportunities
4
But What Does the Evidence Really Say?
5
Toward a New Postmodern,Sustainable Portfolio Theory
6
Why Does it All Matter,Anyway?: The State of the World
7
Sustainability and Competitive Advantage: The New
Corporate Imperative—and Some Success Stories
8
The Game-Changers. Part I: Collective Initiatives
9
The Game-Changers. Part II: The Individual
Owners of
Capital
10 The Game-Changers. Part III: The Service
Providers
11 Making It
Happen
12 Some Final Thoughts
Appendices: How It’s Actually Done
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