(From December 2018)
On October 23, 2018 the Financial Times published an article stating that Larry Fink, CEO of the world’s largest asset manager, BlackRock, had announced that “sustainable investing will be a core component for how everyone invests in the future.” He further explained that sustainable investing did not lead to lower returns and that in his own opinion such a strategy will lead to higher returns.
The news story was of particular interest to me for two reasons. First, there was the fact that my field, so long considered a tiny outlier in the field of finance, had survived to become the declared future of financial asset management by someone whose efforts to build my field were not notable a decade ago. Second, was the use of “Sustainable Investing” rather than “Environmental, Social and Governance (ESG),” which most big banks and asset managers are more comfortable using.
In my opinion, Mr. Fink’s statement means that we early advocates have convinced the world of the need for adding ‘people and the planet’ into our way of investing, and it means that the world’s most conventional asset manager doesn’t need an academic catch phrase to hide behind. Larry Fink is okay with saying the word sustainability. Simply acknowledging that making money at the cost of losing our planet is unsustainable is an extraordinary step forward for the masters of Wall Street.
He isn’t alone. My local CFA Society in Boston just invited me to register for the Sustainable Investing Seminar. It is being led by Jeremy Grantham, the co-founder of Grantham Mayo Van Oterloo, only one of the largest asset managers in the world. He is quoted on my invitation as saying, “We are racing to protect more than our portfolios from stranded assets and other climate change impact…But for those portfolio managers who happen to be human, we have a much more important job. We are racing to protect not just our portfolios, not just our grandchildren, but our species. So get to it.”
These men are the sort of advisors who used to say to me, “Look, I agree with you about all that important stuff, it’s just that I have to keep blinders on and look only for profit or I am letting my clients down.” It was an easy out, and it got dangerous. In October 2008 the Department of Labor (DOL) altered the language guiding fiduciaries. I underline the new words they used. “The named fiduciary must carry out this responsibility solely in the participants’ and beneficiaries’ interest in the economic value of the plan assets…” In other words, it is okay to kill off the beneficiaries if you protect the plan assets. Late in 2016 the DOL reverted to the prior language after eight years of efforts by my industry to keep people in the standards that fiduciaries consider.
The above example demonstrates what a small tweak in language can lead to – it can change the entire mission from protecting people to protecting money. It also demonstrates the importance of conventional investment managers shouldering responsibility for people. I say this because only when my industry was joined by many conventional asset managers – complaining that they were being locked out of tremendous clients demand for green venture capital – did the DOL reverse the language.
2018 is beginning to look as though it may be the year in which not just we, but the world, starts to appreciate the remarkable impact from the very existence of our field.
To be sure, the outcomes have been there all along, but now they are more clearly the direct result of our existence and of nothing else. In Domini Impact Investment’s Impact Report we name a few. We point out that in 2016 the sustainable Stock Exchanges Initiative found that 58 stock exchanges, representing over 70 percent of listed equity markets have made a public commitment to advancing sustainability. Would that have happened without investors asking for information about social and environmental impacts? We note that in 2017 the United Nations program, Principles for Responsible Investment, published a model tax policy that aligns the company’s business and sustainability strategies. Would the United Nations have noticed this intersection without our efforts to bring it forward? To download our full impact report, with many more examples, visit domini.com/impact
The large accounting firm, KPMG, in their survey of 2017 corporate responsibility reporting The Road Ahead evaluated sustainability reporting from 4,900 companies in 49 countries and regions. It is inconceivable that this type of reporting would have come into ordinary practice were it not for small investors, seeking to align their own values with the way they invest, who gathered together into a handful of mutual funds and managers that carried and championed the message.
KPMG found some major emerging trends within corporate responsibility reporting. They found that companies now agree that climate constructs a financial risk and are reporting on it. Even those that do not admit the risk increasingly report on carbon reduction targets. Companies report on progress towards meeting the United Nations’ Sustainable Development Goals. Companies report on their efforts regarding human rights. KPMG also notes that 78 percent of the largest companies now integrate financial and non-financial data into annual financial reports, suggesting that they view the information as relevant to the investment decision-making process.
This all matters because we know that data creates knowledge and that knowledge creates solutions. If we did not know that seatbelts save lives, we would not have legislated seatbelts into our automobiles. If we did not know that chewing on lead lowers a child’s IQ, we would still be making toy soldiers out of lead. Investors who care about universal human dignity and ecological sustainability understand that in order to construct a frame within which capitalism works with us, we must first have good data. There are other stakeholders who want good data, but only those who own the companies have demonstrated the clout to demand it. We demand it when we ask non-traditional questions of management and when we compile our results and display them to management, helping each company see in which areas they are stars and in which areas they are laggards.
The field has come of age. The question before us now is whether, in light of the many major investment firms embracing our message, we stay vigilant in the field’s purpose: using finance to save people and the planet. Our voice is needed, for without it, investing in people and the planet will become jargon, without impact.