A Lesson in Pressure: Changing the Behaviors of Publicly Traded Companies
One of the most important of these characteristics is that, due to their sheer mass, glaciers have the ability to move under their own weight. Gravity slowly pulls them along, sometimes mere inches and sometimes up to miles a year. As they travel, they completely redefine the land — carving out valleys and peaks, leaving behind massive inland lakes and affecting the landscape for millennia to come.
Sustainability is the glacier that is currently carving its way through the financial services world.
Sustainable investing, ESG, impact investing, socially responsible investing, responsible investments — there are a lot of ways to categorize it, but the main goal is to change the way public firms act and behave in order to create a better society and better outcomes overall. Whether it’s ending child labor, sharpening resource management globally, or reaching true gender parity, key stakeholders including investors and the general public, have realized that the financial services industry has the capital, power and wherewithal to make dramatic change — it just needs the right incentives.
At a recent conference, my colleague John Arabadjis introduced a simple chart to explain the driving forces behind sustainability:
According to John, “There’s a wall of money moving into the ESG space driven by values-based demand from asset owners.” Pensioners are looking to preserve their retirement assets; board members are undergoing an evolving interpretation of corporate governance and fiduciary duty; shareholders are concerned about share price in an increasingly transparent world and millennials, who will be putting trillions of dollars into ESG investing solutions over the next 30 years, are looking to do good socially while also doing well financially.
Conformity is a powerful psychological influence.
College and university students, for instance, are pushing their schools to divest from fossil fuels to combat climate change. And while most haven’t dropped fossil fuel companies completely, the pressure is having an impact. Yale University sold close to $10 million in energy-related investments it said were “inconsistent with our principles.” Meanwhile, asset managers are also using their collective bargaining power to drive change. The world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global (GPFG), dropped 114 companies back in 2015 on climate grounds, as reported by The Guardian in “World's biggest sovereign wealth fund dumps dozens of coal companies.” Another article “Campaign against fossil fuels growing, says study,” reported that fossil fuel divestment as a whole is the fastest-growing divestment campaign in history, according to a study by Oxford University. Meanwhile, major capital is shifting toward sustainable and renewable energy, even when the parent company is based in fossil fuels. Lightsource BP, Europe's largest developer and operator of utility-scale solar projects, and Indian private equity fund Everstone Group, will jointly invest in a $715 million fund aimed at clean technology and renewable energy in India. India was the world’s sixth-largest market of clean energy investment in 2016.
As more and more capital shifts to sustainability, the pressure for everyone else to join in also increases. Conformity is a powerful influence psychologically, whether it is pushing us as individuals or as asset managers.
Globally, there are now $22.89 trillion of assets being professionally managed under responsible investment strategies, an increase of 25 percent since 2014. The number of United Nations-supported Principles for Responsible Investment UNPRI Signatories has increased from 1,500 in April 2016 ($62T AUM) to 1,704 in 2017 ($73.5T AUM). A look at the chart below show just how dramatic growth has been in just the last decade:
Sustainable investing isn’t necessarily a new phenomenon. Even back in 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the slave trade. But the modern era of socially responsible investing evolved during the political climate of the 1960s. Over the last 50+ years, investment strategies involving socially conscious funds (or divestments from those contributing to social problems), has slowly but surely been carving its way through financial systems. Thanks to modern data management systems, we now have the numbers to say that not only are these kinds of investments the right thing to do, they have the potential to also be the profitable thing to do. Research has found that high sustainability firms (those with an emphasis on ESG policies) outperformed low sustainability firms both in the stock market, as well as accounting performance.
And just like a glacier, the pressure will change the landscape forever.
1. Fabrikant, G. (2016, April 12). Yale Advances in Shaping Portfolio to Address Climate Change. The New York Times. Retrieved from https://www.nytimes.com/2016/04/13/business/energy-environment/yale-advances-in-shaping-portfolio-to-address-climate-change.html
2. Carrington, D. (2015, February 5). World's biggest sovereign wealth fund dumps dozens of coal companies. The Guardian. Retrieved from https://www.theguardian.com/environment/2015/feb/05/worlds-biggest-sovereign-wealth-fund-dumps-dozens-of-coal-companies
3. Carrington, D. (2013, October 7). Campaign against fossil fuels growing, says study. The Guardian. Retrieved from https://www.theguardian.com/environment/2013/oct/08/campaign-against-fossil-fuel-growing
4. Sharma, G. (2018, April 18). BP Venture Partner Leads India, U.K. Government Investment In $715M Renewable Energy Fund. Retrieved from https://www.forbes.com/sites/gauravsharma/2018/04/18/bp-venture-partner-spearheads-india-uk-government-investment-in-715m-renewable-energy-fund/#69bb22f26fa7
5. A path towards more sustainability and responsibility in asset management. (2017, December 6). Retrieved from https://www.cnbc.com/advertorial/2017/12/06/a-path-towards-more-sustainability-and-responsibility-in-asset-management.html
6. PRI Global Growth 2006-2018. (n.d.). Retrieved from https://www.unpri.org/Uploads/n/l/l/PRI-Global-growth-2006-2018.xlsx
Methodology Total AUM include reported AUM and AUM of new signatories provided in sign-up sheet that signed up by end of April of that year. Total AUM for the past three years exclude double counting resulting from subsidiaries of PRI signatories also reporting and external assets managed by PRI signatories. AUM for previous years include some element of double counting. Asset Owners' AUM for 2006 and 2014-2018 are based on reported information. AO AUM for 2007-2013 are estimates calculated using 2014 AO AUM data, growth rates for 2007-2013 from the OECD pension market focus report from 2015, and signing dates of signatories to the PRI. Asset Owners AUM for 2013-2018 include internally and externally managed assets and includes double counting. Number of AO and total signatories provided by GNO through salesforce and includes service providers.
7. Eccles, Robert G., Ioannis Ioannou, and George Serafeim. "The Impact of Corporate Sustainability on Organizational Processes and Performance." Management Science 60, no. 11 (November 2014): 2835–2857.
JR Lowry is the head of Innovation & Advisory for State Street Global Exchange, which provides data and analytics solutions for institutional investors. In this capacity, he is responsible for GX’s offerings that support State Street’s clients in their investment management activities, including investment research, advisory, indicators, indices, investable strategies, and interactive tools.