In the age of pandemics we need to build an economy based upon well-being, not capitalism.
With Wall Street experiencing the largest losses in the shortest period of time due to the coronavirus, some are asking, 'is this the end of Capitalism in its present form?
Equally, some fear that ESG and Impact Investing (Sustainable Investing) will fall out of favour during this period of hunkering down. But now more than ever, creating an economy based upon well-being is absolutely critical. Investing in companies that integrate social and environmental risks and work for stakeholders, and not just short-term shareholders, will prosper.
We need a society that is resilient and provides a support mechanism for the entire population. This will allow the economy to weather these storms and prevent outbreaks of pandemics and societal collapse.
But one of the greatest challenges in trying to integrate sustainability into the investment mindset is the issue of proof. Investors unfamiliar with a specific strategy want proof. But the issue is not proof, but belief. If one looks at how much research was done on CDO (collateral debt obligations) as a risk, there was little. But how much money went into CDOs, despite the lack of proof? Too much. Those investors believed, without proof, that CDOs linked to mortgages would churn out returns forever.
The reason for ESG and impact investing’s rapid growth is because it describes a form of investing that has multiple beneficiaries, and not only the investor. It looks at all risk factors: social, environmental (climate change) and governance, as well as financial. If a company has extraordinary social performance, it often spends less on hiring the best and the brightest, and it retains them for longer. Most employees are looking for some purpose. Additionally, companies that have excellent environmental performance, often waste less, pay fewer fines, user fewer raw materials and energy. All of this leads to higher returns and lower risk.
Most importantly, ESG and impact investing has inherent within it the concept of values or principles, which are rooted in how most of us were raised. There is a face added to the investment and not only a number. It is not particularly tied to one set of religious beliefs or another.
Various reports and agreements have been instrumental in growing the market. But the big driver of ESG and impact investing is resource depletion from emerging markets’ economic growth.
Lester Brown, of Earth Policy Institute, has highlighted the stresses coming from China’s growth. At 8 percent growth, China would reach US consumption levels in 2030. This would translate to an oil consumption of 60 million barrels per day for China (present consumption is about 84 million worldwide). This massive commodity requirement is even worse if we look at grain, iron ore, paper, coal, steel, and meat. If we then add India to the mix, and then the other three billion in emerging markets and the developed world, one can see that linear growth is not possible at this level of inefficient use of resources. We won’t have enough.
“The Western economic model — the fossil-fuel-based, automobile-centred, throwaway economy — will not work for China,” says Brown.
To avoid conflict for resources, the real opportunity for the financial sector is a massive drive for resource effectiveness or efficiency, which is what sustainability is about. Doing more with less. This also translates into more profitability.
Many like to consider ESG or impact investing as a niche. Let’s look at it as a big party and we got there early. What are the barriers to the growth of ESG and impact investing?
- The financial sector (asset owners and managers) know what they already know, and it is challenging to get new thoughts through.
- The media gives little attention to the issue of sustainability.
- Few incentives exist for analysts or fund managers to truly embrace ESG and impact investing.
- Product prices don’t reflect their true cost. If you buy a bicycle in Europe there will be nearly 21 percent in sales tax. If you buy an aircraft ticket, there is no sales tax or taxes on kerosene.
- Many wealth advisors and gatekeepers have not been educating their clients about ESG and impact investing.
- MBA schools have been teaching traditional courses and few were offering a fully integrated teaching programme on sustainable finance. This is slowly changing.
- A key challenge is management isolation. There is always a barrier to new information getting through, and a network of management also thinks along the same lines. Getting new information is very hard.
- Most importantly, the financial sector was not convinced about ESG and impact investing. That is changing, slowly.
At present, certain wealth holders are re-examining the traditional 19th century approach to philanthropy. Take the assets, create an endowment or trust or foundation, invest that money and then you give away 5 percent of the interest. This 5 percent is subsidised by taxpayers. Many of the very large foundations, Rockefeller, Ford, Gates, don’t invest their principal in line with their values. In fact, many of these institutions invest in companies and projects that negate the good work of the foundation. The difference is the sums of the principal are 20 times larger than the foundation grants.
What if we took the principal and invested in a risk-adjusted portfolio that clearly aligns the values of the asset owner with the investments? We would be using 100 percent of the principal versus 5 percent of the returns. If we gave 5 percent of the returns, we would be using 105 percent of the money. That is impact.
With current low interest rates, the conversation between wealth holders and wealth managers is rather poor and not very inspiring. The wealth managers will say “sorry your portfolio is down 3 percent because interest rates are low”. That liquid side of the portfolio represents the vast majority of the portfolio. If one engaged a client with Investing 2.0 in illiquid investments, that conversation would be much more engaging and passionate, despite it being very small. Impact investing instils passion and excitement.
If one looks at the anticipated transfer of wealth (US$30 trillion) in the coming 20 to 30 years to ‘Gen Z’ and millennials, this is a massive opportunity. Gen Z values are not only financial. They are more willing to align their values with their investments.
It seems only true ESG and Impact Investors understand the big picture and the need to look at all risks and returns. This will only grow. Let's face it - a society where businesses' main focus is profit maximisation at the costs of society, is a strategy doomed to fail.
Robert Rubinstein is CEO and founder of TBLI Group. He has worked on creating consciousness for sustainable values and has led money flows in ESG and impact investments over the past 20 years.