2 Important Reasons Why Sustainability Investing Should Matter to Every Investor in 2020
How many of you consider what is actually held inside your investment portfolio and family savings? Are the companies in which you invest fundamentally behaving with social responsibility and sustainability at top of mind? Would you prefer to invest more in companies that do the right thing and less in poorly behaved companies? What if the future expected returns were the same?
There is a large-scale reallocation of capital taking place globally right now away from companies that exhibit negative environmental, governance, and social characteristics and towards companies that focus on more sustainable behavior such as conservation/protection of the natural environment, relationships with employees, suppliers, clients, and local communities and that have set standards for company leadership, risk controls, and shareholders rights.
So why should you care about sustainability investing as an individual or institutional investor today? Here are 2 important reasons why companies that do the right thing should matter to every investor in 2020:
1: Risk and Return | Climate Risk = Investment Risk
The most basic balance in any investment decision is between risk and return. In 2020, we are reaching a tipping point in the risks associated with companies behaving in non-sustainable and unethical behaviors. These risks are becoming more and more visibly transparent. Both local and global economies and companies are financially hurt by fires, rising temperatures, fresh water shortages, lower crop yields, and/or corporate corruption. Understanding how these risks could impact future company stock and bond returns is important to determine if they should even be held within your portfolio and at what allocation percentage.
Purely from a return perspective, there is an under-appreciated positive financial impact from a transition to a low carbon world. Parts of the market focused on providing low carbon services and products are seeing strong demand and stock returns such as electric vehicles and increased investment into green energy. On the contrary, there has been a negative financial impact across the carbon-intensive industries. Industry investment firms are recognizing these dramatic shifts including the $6.96 trillion AUM behemoth BlackRock who has committed to exiting all investments associated with thermal coal by mid-year 2020.
With the establishment of improved and accessible company reporting standards such as the SASB principles (Sustainability Accounting Standards Board) and the TCFD standards (Task Force on Climate-Related Financial Disclosures), investors can now better quantitatively determine how to allocate capital across companies based on corporate behavior. In addition to the time-tested standard measures of growth, competitive advantages, revenue and profitability, company valuations (how much they are worth) are now being evaluated based on their level of sustainability.
2: Your Money Should Reflect What Matters to You
Investment objectives and personal values are not mutually exclusive. The freedom of choice is a fundamental right and investors should have the ability to decide how their hard-earned investment savings are allocated. Today’s investors want both the best returns and for their portfolios to reflect their values.
Highly publicized (and criticized) research around global warming and the impact of a 1.5-degree temperature rise shows that at today’s emissions levels, the remaining CO2 budget to avoid catastrophic impacts will be entirely gone within less than 8.5 years. Whether or not you personally believe in these risks (despite strong scientific evidence to support them), investment capital is being reallocated globally towards sustainability which will have an impact both positively and negatively on individual stock returns.
Is it important to you as an investor to invest in companies that are helping minimize CO2 emissions and avoid those that increase CO2?
Outside of climate change, there are many other personal topics such as the ongoing debate of gun control in America today. Would you prefer to not invest in gun manufacturers such as American Outdoor Brands (owner of Smith & Wesson) or Sturm, Ruger, & Co.? You may also not want to financially support the manufacturing of cigarettes, animal testing done by pharmaceutical companies, or in companies who utilize emerging market sweatshops while paying low US employee wages yet provide high executive compensation. Others may want to avoid investment in companies with CEOs who engage in risky behavior that is ethically questionable and which could risk your returns. These are all choices to you as an investor.
Investment time horizons vary drastically for individuals, but the average investor today is looking out at the next 30 to 50+ years to save, retire, and pass on a financial legacy to their heirs. Companies that behave with social responsibility and sustainability at their core are likely to be better financially poised for the long-term than those that do not.
Through my experience in the asset management industry and in working with clients at Old Vine Capital, I believe individual and institutional investors should have the option to build investment strategies that reflect their personal beliefs and to manage those strategies to account for the ever-changing investment landscape. Keep an eye on the benefits of investing in socially responsible and sustainable companies.