Chris McKnett works at State Street Global Advisors, and believes that large institutional investors like pension funds, endowments, foundations and banks, can help make big strides in environmental progress and a sustainable future. At an engaging TED Conference, Chris explains why it is beneficial to develop sustainable-strategic products and to integrate sustainability thinking directly into the investment process.
To do so, investors need to look at company’s environmental, social and governance structure (termed ESG) as a measure of sustainability, and not just the financial data. Chris believes that doing this is “less complicated than you think, better-performing than you believe, and more important than we can imagine… it’s reckless to ignore the drivers of change because doing so can jeopardize future long-term returns.”
The companies that take sustainability into account also do well financially. The graph below shows in blue the performance of the 500 largest global companies, and in gold a subset of companies with best practice in climate change strategy and risk management. “Over almost eight years, they’ve outperformed by about two thirds… it does illustrate that environmental leadership is compatible with good returns.”
ESG: Environment, Social and Governance metrics
- Environmental factors include energy and water consumption, waste and pollution, and making efficient use of resources.
- Social factors include human capital, things like employee engagement and innovation capacity, as well as supply chain management, and labor rights and human rights.
- Governance relates to the oversight of companies by their boards and investors.
“Sustainable investing incorporates ESG factors with financial factors into the investment process. It means limiting future risk by minimizing harm to people and planet, and it means providing capital to users who deploy it towards productive and sustainable outcomes.”
Sustainability matters financially today, and even more so in the future. Most CEOs in the private sector area are already paying attention to this. “They started to see sustainability not just as important but crucial to business success. About 80 percent of global CEOs see sustainability as the root to growth in innovation and leading to competitive advantage in their industries. But 93 percent see ESG as the future, or as important to the future of their business. So the views of CEOs are clear. There’s tremendous opportunity in sustainability.”
Chris believes that “institutional investors are the x-factor in sustainability. … The global stock market is worth 55 trillion dollars. The global bond market, 78 trillion. That’s 133 trillion combined. … That’s the world’s largest economy. That’s some serious freaking firepower.”
Chris encourages us to ask why “if the returns are the same or better and the planet benefits, wouldn’t this be the norm? … What if institutional investors integrated ESG into investment? What if they used that firepower to allocate more of their capital to companies working the hardest at solving these challenges or at least not exacerbating them? … By investing sustainably we’re doing two things. We’re creating insurance, reducing the risk to our planet and to our economy, and at the same time, in the short term, we’re not sacrificing performance.”
Here you can watch Chris make his inspirational presentation at this TED Conference.
Chris sites Hesta and CalPERS as some of the larger organizations that are seeing prudent investing and finance as compatible with sustainability.
“Hesta is a retirement fund for health and community services employees in Australia, with assets of 22 billion [dollars]. They believe that ESG has the potential to impact risks and returns, so incorporating it into the investment process is core to their duty to act in the best interest of fund members, core to their duty.”
“CalPERS is the pension fund for public employees in California, and with assets of 244 billion [dollars], they are the second largest in the U.S. and the sixth largest in the world. Now, they’re moving toward 100 percent sustainable investmentby systematically integrated ESG across the entire fund. Why? They believe it’s critical to superior long-term returns, full stop. In their own words, “long-term value creation requires the effective management of three forms of capital: financial, human, and physical. This is why we are concerned with ESG.”
Chris concludes his talk with this comic picture, highlighting the major benefits of investing in a sustainable future.