You hear the word “sustainable” thrown around to describe everything these days: food, clothes, businesses. In the world of finance, sustainable investments are growing rapidly, with many of the major firms adding a “sustainable” investment option. As the field grows, we face the challenge of defining sustainability as it applies across many different industries and companies.
But what really is sustainability, how do we measure it, and who are we to define it?
While the number of sustainable investment options continue to proliferate, there remains no definitive, agreed upon standard for what is considered ‘sustainable’. Sustainable investing began with the core premise that investors could and should align their values with their investments. In its earliest form this often ran in parallel to religious ideals, and later addressed important international issues like Apartheid in South Africa. Now sustainability encompasses an entire universe of granular sustainability metrics and data-points on a diverse set of issues.
Thus, sustainability, in a corporate context, has evolved to address some of the defining issues facing humanity — climate change, human rights, gender & racial equality, corporate governance. This comes with challenges. Using such a broad term or definition allows for massive dilution of it’s potential impact, as groups that might benefit from a vague and ambiguous definition benefit from fitting sustainability to whatever criteria best serves their agenda. Much like the ‘natural’ food label that has become widespread in recent years, quickly losing any meaning at all, sustainability is at risk of losing it’s meaning. Sustainability has become a buzzword we use when we’re thinking broadly about what’s good for the world but aren’t quite sure what we mean.
So, at Ethic we try and keep it simple. The team considers tens of millions of data points to determine which companies meet our criteria and which do not. And at the core of our model is respect for resources, both natural and human.
Let’s look at an example: take Company A and Company B. Company A has factory workers working under tin roofs in 106 degree heat for 15 hours a day, they’re polluting the local water supply with poor waste management practices, and have corruption charges filed against them. But because they are working their workers overtime, saving on air conditioning and waste disposal they see great short term profits. Company B has invested in it’s factory, making it safer, providing on site meals and an in-house doctor, holds to rigorous environmental standards, and maintains transparent leadership and supply chain accountability practices. Their short term profits are lower because they are spending on improving quality, but over the long term they are seeing sustained growth. Which company would you invest in?
Well, you can make your own choice, but Company B demonstrates what we consider to be sustainable business practices. Company A is the obvious unsustainable choice — their poor business practices leave them prone to labor strikes, government fines, and regulation. Of course this is hyper-simplified, and it is never so black and white in real life. But research shows that Companies like Company B that are respecting their resources, both human and natural, are more likely to outperform.
In investing, the question of what is sustainable becomes increasingly complex as we try to quantify and standardize company performance in and across industries. At the center of this debate is data; how it’s being collected and processed into actionable recommendations. Many of the challenges stem from the lack of a standardized definition and therefore comparison between companies — how do you compare sustainability performance between companies who have dramatically different functions?
Turns out the outlook is pretty good, and there has been remarkable progress in developing standardized definitions and reporting. SASB (Sustainable Accounting Standards Board), backed by Michael Bloomberg, for example, is working towards mandatory sustainability reporting for public companies. There are also 17 stock exchanges in the world that recommend companies report on Environmental, social, and governance metrics in addition to financial reporting. Up to 21 stock exchanges could join their ranks in the upcoming months. This all adds up to one thing: an ever-expanding ocean of data.
So, in the messy world of sustainability data, how do we move forward? At this point, the winners in the sustainability space will be those who can apply complex data analytics and financial modeling and engineering in a scalable way, to allow for the consideration of millions of data points for the construction of a sustainable portfolio. Enter Ethic: we’re the first to admit that our approach today may not be perfect, but we are not letting perfection be the enemy of progress. We’re constantly refining our approach and using advanced data science strategies to create sustainable portfolios, employing the brightest minds in the industry to continuously improve.
If we want to move every dollar of investments globally to sustainable investments, investors must recognize that while we may all differ on specific values, we can all agree on one thing: respect for people and the planet.