Something very important is happening in global finance: the $70 trillion in institutional investment pools is turning a little greener.
A working paper from WRI, Navigating the Sustainable Investment Landscape, has found that the prospects for sustainable investing are strong, and by overcoming the remaining obstacles the market can indeed reach a tipping point. Many portfolio managers used to believe – and some still do – that allocating funds towards more sustainable companies and investments would require sacrificing yield. But empirical evidence shows that, on average, this is not the case. In some instances, taking sustainability into account can actually enhance corporate financial performance, while investment funds oriented to sustainability are likely to perform as well or better than traditional funds.
Sustainable Reality, a recent study of more than 10,000 mutual funds by the Morgan Stanley Institute for Sustainable Investing, found that sustainable equity funds usually had equal or higher median returns and equal or lower volatility than traditional funds. An analysis by Oxford University and Arabesque Partners, From the Stockholder to the Stakeholder, found a positive relationship between sustainability and financial performance of stock prices for 80 percent of the 41 studies reviewed.
Asset owners – the pension funds, endowments, foundations and people who own the capital invested in corporations – are in it for the long haul, which gives them a different perspective from investment managers aimed at short-term profit. Long-term investors are eager to ensure their capital can weather a range of environmental, social and governance (ESG) risks, especially climate change.
Back-to-back billion-dollar natural disasters from South Asia to south Texas, from hurricanes in the Caribbean to wildfires in the Rocky Mountains, show a clear pattern of high cost.
Chief investment officers and individual investors are taking note. Mainstream financial players including former New York Mayor Michael Bloomberg are calling for corporations to take more action. A global task force set up by the G20 top industrialized nations – the Task Force on Climate-Related Disasters (TFCD) – has developed a voluntary framework for companies to disclose the financial impact of climate-related risks and opportunities. The TFCD has drawn support from more than 100 companies with $11 trillion in assets.
Trending in the Right Direction
And yet the battle is far from won: most fund managers still chase the short money. But the trend is in the right direction, especially when asset owners apply pressure, as they have in 2017. A case in point: 62 percent of ExxonMobil’s shareholders voted to instruct the oil giant to report on the business impact of global measures to limit warming to 2 degrees C (3.6 degrees F) above pre-industrial levels. This followed similarly successful shareholder votes at Occidental and PPL, a large utility holding company.
Investment heavyweights Blackrock, Vanguard and State Street – which collectively own about 18 percent of ExxonMobil – all reportedly voted for the resolution, which was a vote for long-term protection for investors’ capital. The vote was also in line with Blackrock CEO Larry Fink’s 2016 demand that company CEOs manage for the long term, even though Blackrock and other firms had been reluctant to vote against company management, especially on issues related to climate change.
These investment houses are not alone, and WRI is part of this transition. More than 300 companies around the world have committed to setting targets to reduce climate-warming emissions in their value chains consistent with the best climate science as part of the Science Based Targets initiative. The Institute’s Sustainable Investing Initiative offers tailored data, research and peer-to-peer learning to accelerate the shift toward investment that integrates ESG factors from the start.
Ultimately, we should settle for nothing less than 100 percent of investors taking ESG into account when making investment decisions. We are not there yet, but by sharing knowledge about the consequences of failing to act now to deal with projected climate impacts, there is a better chance of persuading portfolio managers to think for the long term – just as many investors already do.