In a series of previous articles, myLIFE highlighted the idea that thematic investment is a way to encompass forward looking convictions, focusing on secular shifts. Starting from the view that disruptive ideas, innovation, economic forces and natural events continuously reshape the world we live in, thematic investing is all about identifying these shifts and investing in companies strategically aligned to benefit from them. From there, it seems obvious to us that SRI is the mother of all thematic investments. We believe it is our duty to strongly advocate the prioritization of the UN’s sustainable development goals, viewing climate change as the most pressing issue of our time.
Previously coined as Socially Responsible Investment (SRI), our preferred terminology is Sustainable & Responsible investment. What is more crucial is to understand that SRI is not an attempt to interpret the meaning of life. Neither is SRI cosmetic or a marketing gimmick, nor a desperate attempt at empathy. It’s simply the junction of goodwill, common sense and best practices in investment, at which we can align different fundamental values (economic, financial, societal, …). SRI means acting in stewardship, as agents of change to uphold those principles and thereby, our future viability.
SRI through the lens of economics
We start from an understanding of what economic models do – they help us make choices when it comes to allocating scarce resources efficiently, to understand why resources were allocated that way and the consequences of those decisions. From the perspective that finance and economics are interrelated and influential to each other, it is difficult to figure out why it is taking us so much time to realize that climate change is a market failure. Greenhouse gas emissions are a side-effect of economic activities, with the impact falling on future generations – something economists would define as ‘externalities’. The current wake-up call for our society in front of different drivers (from climate-strikes to alarms of weather events becoming biblical1) simply highlights the clear signal as to what should guide investment decisions.
“Businesses will do better in the end if they concentrate on meeting customer demands instead of pigeon-holing themselves into a narrowly-defined product category.” (Theodore Levitt)
Theodore Levitt, the American economist and Harvard Business School professor, not only popularized the term globalization, he is also famous for the “Marketing Myopia”. According to Levitt’s paper published in 1960, businesses will do better in the end if they concentrate on meeting customer demands instead of pigeon-holing themselves into a narrowly-defined product category. Levitt intended “Marketing Myopia” to be a challenge to businesses as a whole, not just to their marketing departments2. A great example presented by Levitt pertains to oil and gas companies. He observed that what customers actually need is energy. However, energy companies equated this to needing gasoline (when in fact there are various other energy sources). The oil industry has continued to focus its efforts into improving the ability of digging and producing the product (gasoline) alone, believing that its product is pretty much indispensable in front of an expanding population. The reason they defined their industry incorrectly was that they were oil-oriented instead of being energy-oriented; they were product oriented instead of customer oriented. People actually do not buy gasoline, what they buy is the right to continue driving their cars. Not only has climate science denial been at play for too long, the picture is even more murky when you look into the scientific research funded by certain US bellwether oil companies in the early 70s which ended up being thrown away.
Nowadays, it is becoming more and more evident that businesses and their leaders have a role to play when addressing societal challenges. It is not a coincidence that the ‘modernized’ statement on the purpose of corporations elevated customers, suppliers and communities to the same level as shareholders. Even Alfred Rappaport, the famous economist behind the idea of shareholder value in the 80s3 twisted his perspective in 2011 in a new book that focused on saving capitalism from short-termism, pointing out that the current economic model incentivizes the liquidation of natural capital for immediate profit4.
ESG integration is increasingly seen as an essential part of complete fundamental investment analysis, supplementing the traditional analysis of financial information.
SRI: From the theory to practice
A common framework on SRI investment is related to environmental, social and governance (ESG) integration. This is generally defined as embedding (explicitly and systematically) ESG considerations in investment analysis and investment decisions. ESG integration is increasingly seen as an essential part of complete fundamental investment analysis, supplementing the traditional analysis of financial information. ESG doesn’t presuppose any exclusion, neither does it predefine what’s good and what’s bad. ESG information can come from multiple sources, most commonly from company reports and from specialized ESG research and data providers.
Information, data and research are the fuel of investment decisions. Forward-looking ESG analysis and the integration of ESG criteria, provides additional perspectives, complementing more traditional research efforts. It helps to manage risk comprehensively and serves as a tool in taking a broader, more holistic approach to risk management. In addition, it means that the opportunities offered by sustainable perspectives are not neglected. Megatrends like clean water, clean energy and energy efficiency simply have to be the next great global industries.
If you believe that non-financial reporting of companies is an esoteric trend, we would like to invite you to embark on a brief journey through time, back to the early 1900s. In precisely 1903, when U.S. Steel published the first ever audited annual report. It is the earliest known version of the modern, annual report issued by corporates today. What was perceived at the time as a landmark in stewardship, has become a model of corporate reporting and a prerequisite for investors eager to get more details than dividend, quote price, unaudited earnings and sales. As diagnosed by Morgan Housel5, “we’ve gone from an age where investors didn’t know how much profit a company earned to being able to look up a company’s employees on LinkedIn to see where they went to college”. In today’s world, there are virtually no barriers to accessing information. Companies and leaders will definitively need to act in accordance.
1 “The weather had become almost Biblical… Given the long-term threat and the short-term nature of politics, the failure of policy makers to address climate change is an existential threat” – Evan Greenberg, Chubb CEO (Chubb being the world’s largest publicly traded property and casualty insurer)
3 Alfred Rappaport – 1986 book “Creating shareholder value”
4 Alfred Rappaport – 2011 book “Saving Capitalism from short-termism: how to build long-term value and take back our financial future”
5 « You can see where this is going » by Morgan Housel and the Collaborative Fund Team