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Sustainable investment

January 22, 2007

Almost in every week’s the Economist, there is an article on sustainability. This week there is one on sustainable investment

Article I think…
Sustainable investment
Analyse this

Jan 18th 2007
From The Economist print edition
Investors broaden their horizons

WHAT do they know of money, who only money know? Some investors are deciding that successful stock-picking is about more than whether a company meets its next quarterly profits target.

The trend was exemplified on January 15th when AXA, the French insurance giant, became the latest big investor to sign up to the Enhanced Analytics Initiative (EAI). The idea behind this initiative, which is over two years old, is that members agree to use part of their budget to reward brokers that publish research on extra-financial issues such as climate change or brand management. With the recruitment of AXA, the initiative’s members control some $2.4 trillion of assets.

The EAI can be lumped in with lots of other movements under the heading of “sustainable investing”. The subject generates great cynicism, with critics suggesting investors are in thrall to political correctness and guilty of creating a “box-ticking” culture that stifles entrepreneurship.

One easy target for the cynics is the United Nations Principles for Responsible Investment, which contains such jargon-filled waffle as “we will be active owners and incorporate ESG issues into our ownership policies and practices.” Investors with some $5 trillion of assets, ranging from ABP, the Dutch pension fund, to Sumitomo Trust of Japan, have signed up.

The field is dogged by inconsistent terminology, with terms such as ethical and socially responsible investing also widely used. But broadly speaking, three forces are at work: corporate governance, which deals with matters such as shareholders’ rights and executive pay; ethics, which can cover boycotts of industries or countries and campaigns for better treatment of workers; and the environment.

Most subscribers genuinely believe that companies that behave in the “right” way will produce better long-term returns. Eric Borremans of BNP Paribas Asset Management says that making money and doing the right thing are not “mutually incompatible goals”.

Companies that take ethical or governance shortcuts risk being embroiled in scandals that damage their profitability and mar their brands. This means that sustainable companies need not be obviously green or worthy.

For example, David Blood, a Goldman Sachs veteran who founded Generation Investment Management (with the help of Al Gore, a former American vice-president), cites a previously successful investment in T. Rowe Price, an American fund-management group. He says the group’s ethical commitments and its success in motivating staff allowed it to avoid the mutual-fund scandals that hit the industry earlier this decade and so to increase its market share.

Similarly, Hermes, the British pension fund, points to its meetings with Premier Oil, the exploration group, which led to the company’s withdrawal from Myanmar and the restructuring of its shares. The company’s stock rose by 10% on the news.

Enthusiasts are convinced that just looking at the profit and loss account and the balance sheet is blinkered. Jean-Pierre Hellebuyck of AXA Investment Managers says: “it reduces the risk of an investment once you know a company better.” If they are right—and so far, there is little data to prove it—the research promoted by the EAI will be well worth the price. Its business model might even prove sustainable.

Managers only care about quarterly profits because they are compensated based on them. That’s why they never have “long term vision”.

It’s interesting that climate changed is linked to brand management… so it just helps them to “look” good.

It’s like “we all have to talk about sustainability in our business plan because it seems more politically correct”

Michael Porter in his recent HBR article also talked about this problem in the field of sustainability.

The author probably overlooked the definition of a sustainable business — to have the triple bottom line, social, financial and evironmental.

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