Is ethical and responsible stock market investing compatible with making money? Until recently there was a view among many investors, especially those that oversee large pension plans, that imposing social views on investment decisions limited money-making potential.
Recently, however, this view has changed as investors have realized that it is possible for companies to be highly responsible, efficient and well-managed, and make money. Investing in these kinds of companies is called “sustainable investing” and is a modern outgrowth of past efforts to incorporate social views in “socially responsible investing.”
One of the most exciting developments in sustainable investing has been the upgrade in the quality of company data that identifies companies with strong strategies. Traditional financial information is governed by accounting rules. In the United States, the Financial Accounting Standards Board has the last word on how companies report their results.
A new, powerful body, called the Sustainability Accounting Standards Board is doing the same for sustainability data and disclosure. The SASB got a huge boost recently, attracting former New York Mayor Michael Bloomberg as chairman, and Mary Schapiro, former head of the SEC as vice-chairman. As the SASB moves forward in its work, investors can look forward to improved disclosure from companies, shedding light on environmental, social and governance (ESG) practices.
Investors and the SASB believe that disclosure of this kind of information will help the public identify companies that are good at reducing their energy costs, managing safe factories, attracting great employees and contributing to the world where they do business. Financial regulators in Europe and Japan have already moved to require reporting of sustainability data and many believe that the United States will do the same when the SASB concludes its work.
Good sustainability strategies appear to tie in with good business results. One of the most influential gurus of competitive strategy, Professor Michael Porter of the Harvard Business School, has been saying that sustainability is actually part of a successful company’s competitive tool kit.
Professor Porter calls this concept “shared value.” Here’s how it works: When a company reduces its use of energy, water and materials it becomes more efficient and more profitable and it improves the environment at the same time. A company that has a safe factory, good benefits and training attracts the best workers, creating better quality, more innovation and more profits. The workers and the community are valued and kept safe too. If the company outsources to well-supervised, high-quality suppliers, the brand name is protected and the workers at the subcontractor also benefit.
This view of sustainability connects the ethical and business components of a company together in a constructive way that makes for a positive impact on the world outside the company and at the same time yielding business success.
What excites investors about this viewpoint is that companies that are good at “shared value” tend to be strong competitors that innovate, grow and deliver profitable growth. This is exactly the kind of company that investors are looking for in the stock market.
Now pension funds, endowments and individual investors are beginning to turn their thinking process around 180 degrees. If well-managed, responsible and sustainable companies have more business success and lead to better investment results it makes sense to screen for these factors and include them in the investment analysis alongside traditional financial analysis.
How can Main Street take advantage of these developments? We think that investors should be asking whether their money managers are taking advantage of this new information and including it in their investment process. Wealth managers are beginning to integrate sustainability in their mutual fund line-up and professional portfolio managers are thinking of sustainability as they pick stocks.
The result should be a better environment for the world and a better environment for making good investment decisions.
Bruno Bertocci is managing director, head of sustainable investors at UBS Global Asset Management in Chicago. Bertocci was in Burlington last week to present a seminar on sustainable investing at Hotel Vermont.
Source: Burlington Free Press