It's the 21st Century: Do you know where your investments are?

By: Meirav Even-Har, Toronto

Dr. Matthew Kiernan, Founder and Chief Executive of Inflection Point Capital Management spoke to a keen audience at an October 9th session of Toronto Sustainability Speaker Series (TSSS). Dr. Kiernan's presentations are always informative and include a realistic, "tell it like it is" disposition with both humour and poignant examples. While investors may not like the message, Dr. Kiernan is asked to speak internationally and often. The founder of Innovest Strategic Value Advisors and former Director of the World Business Council for Sustainable Development (WBCSD) speaks from experience. Titled Wall Street: The New Driver for a Sustainable World? his presentation included three slides and a colourful assessment of the status quo of global investments. The conclusion? Investors must remove the cloak of "business as usual" that supports a way of thinking that hasn't changed in an ever-changing world.

In his presentation, Dr. Kiernan observed that investment processes need to shift to the 21st century. Why? Megatrends such as increased population, urbanization, climate change, resource depletion and continuous growth in emerging markets, all lead to "a radically transformed, competitive environment." Unfortunately, those trends have yet to cause Bay Street or Wall Street to reconsider its Modus Operandi.

While there is no data that suggests widely practiced investment choices are risk averse or can deliver consistently high returns, there are, however, compelling results that show Environmental, Social and Governance (ESG) factors "...are correlated with superior risk-adjusted returns at a securities level." [1] This, according to a recent study by DB Climate Change Advisors of Deutsche Bank Group titled: Sustainable Investing: Establishing Long-Term Value and Performance (see links to executive summary and full report below).

Powerful but neglected levers for change
"Markets can be a positive force of change to transform corporate priorities towards social and environmental sustainability," says Dr. Kiernan. He explains that priorities often set by investors and the financial markets. Priorities and the processes by which priorities are identified must change to better reflect today's world. There is resistance to transform how current investment decisions are made, even though it is based mostly on perception.

Giving to good causes, investing in bad ones
Dr. Kiernan gave various examples of disconnect that presently prevails institutional investors on behalf of pension funds, as well as foundations. For example, foundations that donate respectable amounts toward environmental and social causes, often invest in companies responsible for degradation of those values. This contradiction between "what you do versus what you invest in" can be remedied. Investment decisions should be based on deploying capital to reinforce environmental and social work done by foundations, not the opposite.

Perceptions vs. facts
Claims that Socially Responsible Investment (SRI) does not result in good financial returns are mostly based on perception, not the facts. Dr. Kiernan cited the Sustainable Investing report as a good reference for finally putting the concerns over SRI to rest. "100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity," [2] writes Mark Fulton, Managing Director at DB Climate Change Advisors in the report's Editorial Letter. He continues by noting that 89% of the studies examined show that "companies with high ratings for ESG factors exhibit market-based outperformance." [3]
"Companies that understand sustainability are much more profitable"-this according to Timothy Nash, President of Strategic Sustainable Investments (SSI). Nash spoke at a Centre for Social Innovation event earlier this year alongside Sustainalytics and Meritas SRI Funds. It is up to people who invest their money to ask for SRI products. Nash explained that personal investment could avoid systematic risks inherent with current global markets through impact investments, which are locally based. The money is invested into solar bonds, community bonds and other solutions that have a strong impact in the community.

Whether personal or institutional goals for investing are strictly about making money or a more altruistic purpose, incorporating the full spectrum of social, environmental and governance indicators is key to reduce risk and drive better performance. Global megatrends that Dr. Kiernan spoke of in his presentation affect the markets and will continue to do so in the future. The 21st century includes challenges and opportunities for businesses, as we have not seen before. Shouldn't our investment choices and due diligence reflect it? 100 academic studies, 56 research papers and four Meta studies, the answer seems to be an unequivocal "yes."

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To download Sustainable Investing: Establishing Long-Term Value and Performance click HERE

To learn more about Inflection Point Capital Management visit http://www.inflectionpointcm.com/

To learn more about Toronto Sustainability Speaker Series visit http://ecoopportunity.net/

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NOTES

[1] DB Climate Change Advisors of Deutsche Bank Group: Sustainable Investing: Establishing Long-Term Value and Performance, June 2012 Executive Summary http://www.dbcca.com/dbcca/EN/_media/Sustainable_Investing_2012-Exec_Summ.pdf

[2] Ibid

[3] Ibid


Image credit: Old Toronto Stock Exchange Building, by Richard Winchell (Creative Commons via Flickr)