The overwhelming feedback item from last year's Sustainable Investing seminar was a demand for a 2014 session to continue coverage of this evolving area. Since the announcement of last year's session, over 200 additional asset owners and managers signed the UN Principles for Responsible Investment. The 1,200 PRI Signatories are now responsible for $45 trillion of assets, a 32% increase in just one year.
Sustainable Investing offers risk reduction, opportunities to outperform by addressing major societal and economic challenges, and the alignment of investments with investor values and goals.
Sustainable investing is also responding to the growing concern among investors and corporate leaders that short-termism is damaging long-term wealth creation and the economy.
A 2013 McKinsey survey of 1,000 global C-suite executives and board members revealed that 79% feel strong pressure to deliver financial results in less than two years but 86% of those same executives believed that a planning horizon of three years or greater is needed to generate better financial returns and increase innovation.
Investment professionals understand this reality. Discounted cash flow valuation models typically ascribe 70-80% of an organization's value to the period beyond the first three years of the projection.
A very successful corporate leader and investor - Google co-founder Larry Page - put it this way in his company's 2004 prospectus, "A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour".
Sustainable Investing directly addresses this challenge by incorporating environmental, social and governance considerations into investment decisions to achieve competitive long-term financial returns and positive societal impact. It is investing with purpose.
Headlines may focus attention on environmental, social or governance issues at a few of the largest US corporations, but the impact of sustainable investing for long-term investors goes far deeper than that.
Investors with large investments in index-linked instruments are increasingly turning to active engagement to improve the performance of companies they are obligated to remain invested in.
6,000 companies in Europe will be required to disclose information about ESG policies, risks and outcomes as the result of a 2014 directive from the European Parliament.
88% of fixed income managers responsible for $8.3 trillion in assets surveyed by the Australian firm JANA Investment Advisors believe that ESG factors affect the risk and return of fixed income investments. 85% of those managers incorporate ESG into their investment process for credit and 68% incorporate ESG for sovereign debt.
Private equity firm KKR's program to evaluate the impact of environmental has generated $917 million in cost savings and added revenue for nineteen of its portfolio companies.
This growth in the size and scope of sustainable investing presents a challenge and an opportunity for the mainstream investment professional serving long-term investors. A sustainable investing lens can be applied within and across asset classes in a portfolio.
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