For those who are closest to the sustainable business movement, the US elections and referendum results in the UK would seem to portend more difficult terrain going forward. And while progress on climate action will be far more challenging with the US on the sidelines, there are reasons to believe that the political environment is just one of many factors influencing the sustainability trend.
Society leads politics -- Just not in a straight line
While certain government actions in prior years may have jumpstarted aspects of sustainability, it's arguable that they merely reflected already present societal views. For instance, when polled, most US citizens would like to see action on climate change. It stands to reason that their investment preferences wouldn't backtrack in response to election outcomes.
ESG -- The "S" stands for social
It's easy to mistake sustainable investing as solely about environmental issues, but the "S" in ESG stands for the social aspects of running a business. This includes concerns over workplace equity, safety, diversity, community engagement and philanthropy, among other topics. If part of the election outcomes in the US and UK have been about segments of the population that have been "left behind", perhaps the "S" in ESG will get more attention from managers and investors. It certainly should.
Admittedly, it's hard to see how this one plays out. But citizens and investors have the power to influence corporate behavior, and have been doing so. Already, companies such as McDonalds are recognizing that more humane work schedules and higher compensation lead to far lower employee turnover and lower costs. McDonalds is hardly the poster child for sustainability, but when business imperatives coincide with societal trends, anything can happen.
The "G" stands for governance -- especially important now
In a nutshell, our firm's scrutiny of governance factors looks for companies who value and encourage independent thought. Such analysis is an imperfect science, to be sure. But it's logical to assert that independent directors who reflect the diversity of the company's customers are better able to understand trends that affect the business. And it's been proven that companies who have a higher proportion of woman directors have generated higher returns on capital over time.
One can debate the "causality" of this relationship, but there is no denying that it exists and that these higher returns persist. Clearly governments must play a role in maintaining general fairness, but they need not always legislate action when fairness also makes good business sense.
The bottom line is this: When shareholders vote with their dollars, and customers and employees vote with their feet, companies who misjudge the importance of good governance will face a far more difficult future.
Inconsistency might become untenable
In this business, I have met plenty of progressively-minded people whose investments remain very conventional. That is a matter of personal choice, and I am not one to criticize that. Investments are just one aspect of life -- and sometimes far from the most important one.
Institutional investors aren't much different. Some colleges have very visible "sustainability programs" but run their endowments with little regard for the manner in which their investment returns are generated. This has always perplexed me, and I have chalked it up to inertia, "professional risk" aversion or to my own poor persuasive abilities.
Might the recent elections be the "wake up call" to us all, that the government ain't gonna do this for us?
I admit that I have not done everything in my power to make my life as sustainable as possible. I don't yet own a Prius. I don't capture rainwater. While I have offset some of my carbon footprint by funding some renewable power in a far off state, I don't yet have solar panels on my home. I have to re-examine my priorities (er, hypocrisy.)
You decide your impact
Investors need not solely focus on the equity markets for their impact. Quite the contrary. Sure, one can easily reduce their carbon footprint with the click of a mouse and the purchase of a fund or ETF. But one can also actively support the actions that they would like to see in their world and in their communities.
Organizations like RSF Social Finance and scores of "microfinance" entities help to funnel investor capital to true social impact uses. Banking locally enhances lending in one's own community. And certain fixed income funds (like one from Community Capital) target specific sectors such as affordable housing finance. These are just a few noteworthy options for investors.
Progress isn't made in a straight line
The image at the top of the page shows a jagged line, that while upwardly sloping, has the occasional downward lurch. The long term trend underlying SRI and sustainability in general is undeniably upward. Companies are responding to shareholders. Management teams recognize that ESG actions can drive profitability, stimulate innovation, attract the best talent and broaden their shareholder base.
Will they stop trying to achieve all of these things in a highly competitive business environment? Of course not. Competition leads to excellence, and I expect companies to use every tool at their disposal to advance their business objectives.
A challenge to each investor
Investors who care about these issues will have a clear choice. Do they continue with business as usual, or do they admit that the time for passivity has long since been exhausted?
It has been shown that sustainable investment funds have been competitive with conventional ones. There is no logical reason to remain on the sidelines.