Although many US states such as Florida and Texas have been recently passing legislation preventing their pension systems from considering environmental, social, and corporate governance (ESG) factors, active sustainable investors have been financially outperforming over the long term and earning higher returns for their clients while managing tens of billions more dollars on the back of such financial success. 

This article investigates the performance of active sustainable investing and the legitimate concerns regarding its future.

Cary

Sahil

Implications of the outperformance of active sustainable investing

At the recently concluded Climate Week in NYC, little real progress made on what it will take to lower global carbon emissions in time.  Hurricane Ian and Fort Myers Beach in Florida sadly serves as an important, current example of what happens when people don’t heed warnings and do what’s necessary even to protect themselves, and COP 27 approaches with little hope for meaningful action that will prevent future calamities of all kinds.  

So what do we really need to do now?


We just had Climate Week in NYC, with little real progress made on what it will take to lower global carbon emissions in time. Hurricane Ian and Fort Myers Beach in Florida sadly serves as an important, current example of what happens when people don’t heed warnings and do what’s necessary even to protect themselves, and COP 27 approaches with little hope for meaningful action that will prevent future calamities of all kinds.
So what do we really need to do now?
My suggestion is 3/5/7/10, and this would work. We need to get started at once.
Let’s take these in reverse order.
What do we mean by 10? We see 10 misunderstandings about ESG being put forward in the media here in 2022, here’s how to correct these misperceptions. This time last year, there wasn’t this mass confusion, but now that sustainable finance is finally important and mainstream, we have had a litany of miscommunications and confusion. What we need to keep in mind is that
<ol><li>ESG are issues, not one single thing, so let’s stop treating it that way</li></ol>
<ol><li>Sometimes data can help but we have to be more specific as to how (ESG data is a useful potential red flag indicator on corporate behavior)</li></ol>
<ol><li>However, ESG data also has a history of being oversold, and this needs to be recognized and accounted for (ESG data as it stands often does not identify what companies need to do differently)</li></ol>
<ol><li>Standards can help, but they need to be clear on what they are and are not, and what they can and cannot do</li></ol>
<ol><li>The same is true of the TCFD</li></ol>
<ol><li>That said, we welcome increased disclosure requirements, such as the SEC climate disclosure rule and the SFDR, even if they remain works in progress, as transparency encourages action</li></ol>
<ol><li>The same is true of Net Zero commitments as well</li></ol>
<ol><li>Sometimes investing can help when it comes to ESG issues, but not always (and please, pretty please, let’s all stop using the phrase ESG Investing)</li></ol>
<ol><li>Accusations of greenwashing are a good thing, not a bad thing, as it helps encourage authenticity, and</li></ol>
<ol><li>There are ways and methods that sustainable investing is effective and transformational, but we need to be honest about what works, and more focus is needed on scaling what is working for purpose.</li></ol>
This last bit is why we teach as much as we do at Brown, Concordia in Montreal and NYU. Legitimacy is an imperative here.
7 refers to the Seven Tribes of Sustainable Investing, something we have written extensively about before, and further to the above, call the entire field what you will: Sustainable Investing, ESG Investing or Impact Investing, it really isn’t one thing.
<ol><li>We have negative screening, or more recently calls for divestment. This tends to be a feel good option that tends not to lead to different real world outcomes, and financial performance can be poor. It is also where the field of what used to be called socially responsible investing started.</li></ol>
<ol><li>The reverse, positive/best in class approaches, often do lead to financial outperformance and success for investors who take this on. We have a lot of time for this category, where you seek companies inventing solutions while making more money. Climate Tech VC is in this category as well, so it isn’t just public equity.</li></ol>
<ol><li>Impact investing often is private investments helping the poor gain access to services and solve for poverty alleviation. Again, very different than the two strategies just above, so we have to examine these individually.</li></ol>
<ol><li>Thematic investing, often investments in water infrastructure or renewable energy project finance are again different and crucial. Check out our recent InvestNYC NYU paper for examples of how to solve the SDGs with specific tranches of finance.</li></ol>
<ol><li>ESG Integration has a lot of pushback on it now, but it is often the choice of the largest investors. Big questions here in 2022.</li></ol>
<ol><li>Shareholder engagement is a main concern of US corporations, given changes to board members at ExxonMobil in recent years, for example. A big focus for some time now, and some large pension funds do nothing more than this, as opposed to the other categories above.</li></ol>
<ol><li>Lastly, we have minimum standards, check out New York State or Norway’s climate focused plans for this sort of approach. If you visit a restaurant in Manhattan, there’s a letter on the window telling you whether you can trust the food, yet we don’t have that largely for investments.</li></ol>
This takes us to the 5.
Five things we need to push on at once include maximizing corporate sustainability action, 2) maximizing investment through the above 7 categories (goal: a majority of global investment takes up the categories above), 3) we also need ongoing innovation, such as Bill Gates often rightly suggests, and 4) often ignored, the missing building of a global consensus to act meaningfully on climate change, so that consumption and voting decisions are aligned and made to the point that a difference is experienced, only then can 5) policy help. Policy requires a global consensus, without which governments will switch away from what is necessary. Here is why we don’t understand the COP process, first we need to build a global consensus for necessary action.
But what is necessary action? We have a world of 200 or more countries each with different realities and challenges, which can seem very daunting in the face of looming climate change affects.
This leads us to the final 3.
More than anything, we need:
<ol><li>Country specific roadmaps for changes that need to occur around the world. What is needed in the West is different from countries such as Indonesia, India, China and Malaysia, let alone all of Africa and so on. Asia is already half of the world’s economy. We cannot solve climate change in the West alone, which will about 20 percent of energy demand in the decades to come as Asia continues to rise economically.</li></ol>
<ol><li>We also need to recognize that the money simply isn’t there for the transition in many countries. More on this in a future piece, and</li></ol>
<ol><li>Once again, we need a global coalition of the willing to rally around a common agenda, so that we actually make the changes we all require, so that we don’t all become Fort Myers Beach.</li></ol>
This is the only way out, let’s get going.
Illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability &amp; Energy writers, their opinions do not necessarily represent those of illuminem.

Cary Krosinsky

Cary Krosinsky

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