Sustainable investment suffers from ambiguity. As a term, it is too broad and subjective. The lack of a uniformed interpretation is unhelpful and goes some way to explaining the lack of mainstream engagement within financial services. By way of illustration, a UK based fund manager was recently quoted as saying, “I personally am somewhat of a sustainable investment sceptic. Does ‘better sustainability’ really lead to better performance? I’m afraid the evidence suggests otherwise.” His interpretation of sustainable investment is based on positive ethical investment i.e. not investing in sectors like tobacco or armaments. The logic is sound, but too narrow. You cannot fault an asset manager for focussing on performance, a basic tenet of investment, but surely the definition of sustainable investment needs examining.
Sustainix defines sustainable investment as, the action or process of purchasing assets that demonstrate consideration and commitment to viable long-term environmental, social and economic factors with the aim of creating wealth. Therefore before investing in a company, a buyer must be satisfied the management can demonstrate commitment to sustainability across all pillars of ESG.
Why does this matter? The more a company can show commitment to long-term progressive policies, be it better waste efficiency, more women in senior management or better employee pension provisions, the more likely they are to attract better talent to drive their business forward. Credit Suisse, by way of example, are committed to sustainability, as per Sustainix’s definition, because they understand the best way to attract the brightest talent from universities is to address the concerns most pertinent to them.
Does better sustainability impact performance? It is difficult to give a definitive answer given the infancy of sustainable disclosures. The UK Environment Agency carried out a study in 2015 and concluded that companies which disclose more information on sustainability measures perform better. This correlation is perhaps a little simplistic and ignores the fact that large companies (which disclose more information) have outperformed smaller companies (which disclose less) over the last 3-5 years. Nevertheless, if you strip out market capitalisation and analyse companies within the same size bracket, it is interesting to note those with greater sustainability disclosures outperform those with less, more often than not.
We are still in the infancy of sustainability disclosures, but to be sceptical of sustainable investing is to ignore the move away from post-industrial revolution business models of economies of scale, to models which better suit today’s population demographic and transient workforces. As business risks envelop sustainability considerations, it is erroneous to view sustainability as a niche consideration. Demonstrating consideration and commitment to viable long-term environmental, social and economic factors should now be part of the central investment process.