Investing in Sustainable Development

Sustainability is a grand concept, aimed at improving living conditions and nursing our environmentally stressed planet back to health. Moving to where we ought to be, however, will not be easy. Huge investments in innovation will be necessary to develop sustainable products that satisfy consumer needs at reasonable prices. Equally necessary will be a massive mind-shift that integrates environmental, social and governance (ESG) criteria into a decision-making process that looks to the long-term rather than the short-term view.

The number of companies and investors embracing sustainability is growing – a recent PWC study found that 84% of recent IPOs contain sustainability driven disclosures. Yet some question whether in practice sustainability will prove to be too costly, reducing profitability and investor returns. The answer is that sustainability presents challenges but, for innovative companies and savvy investors, it also creates opportunities.

In August 2010, UN Secretary General Ban Ki-moon established a high level panel to address the global problems of environmental deterioration, energy security and poverty reduction, and produce a blueprint for a sustainable future. Eighteen months later, the panel issued its report, “Resilient People, Resilient Plant: a Future Worth Choosing.” A key point in the report is that most goods and services sold today fail to bear the full environmental and social cost of production and consumption. These unaccounted for costs - negative externalities - are borne by the environment and third parties, leading to environmental degradation as well as social and economic inequities. The panel concluded that integration of social and environmental costs in how the world prices and measures economic activity is essential to achieving sustainable development in the long run.

At the World Economic Forum in Davos this year, UN Secretary General Ban pressed on, challenging industrial leaders to step up and innovate.  He called for the deployment of cutting edge technology and the best that science and entrepreneurship have to offer, in order ”to build a safer, cleaner, greener and more prosperous world for all.”  

Al Gore, former US Vice President, and David Blood, a former partner at Goldman Sachs – both co-Founders of “green” fund firm Generation Investment Management, believe the private sector can meet this challenge and simultaneously enhance profitability. In “A Manifesto for Sustainable Capitalism,” Mr. Gore and Mr. Blood say that abandonment of short term economic thinking for a new decision-making framework – infused with ESG metrics - that seeks to maximize long-term economic value, can lead to enhanced profitability.

Innovative companies that develop sustainable products and services will benefit from enhanced brand image and improved competitive positioning, as consumers and investors increasingly reward companies that put this behavior into practice. These companies will also benefit from cost savings through reduction of waste and increasing energy efficiency, and better management of risk through holistic understanding of the material issues affecting their business.

A recent joint study of Harvard Business School and London Business School professors provides data supporting the position that sustainability policies can be adopted without sacrifice to shareholder wealth. The findings even suggest that when embedded in corporate culture over an extended period of time, sustainability policies can enhance the ability to generate long-term shareholder value. The researchers found that a $1 investment in 1993 in a value-weighted portfolio of High Sustainability firms would have grown to $22.6 by 2010.  In contrast, a similar investment in a value-weighted portfolio of Low Sustainability firms would have grown to only $15.4 during the same time period.

For investors seeking to identify and research companies that have put sustainability into practice, the Dow Jones Sustainability World Index (DJSI World) may be a good place to start looking, as it comprises the top 10% of the leading sustainability companies out of the biggest 2500 companies in the Dow Jones Global Total Stock Market Index in terms of their environmental, social and economic performance. Investors focusing on Asia Pacific might be interested to know that 4 of 19 “supersectors” tracked in Dow Jones Sustainability Indexes were led by companies from the region:  KT Corporation in telecommunications (NYSE: KT), Samsung Electronics in technology (not listed in US), and Hyundai Engineering & Construction in construction & materials (not listed in US), all from Korea; and Westpac Banking in banks (NYSE: WBK), from Australia. Notably, Westpac has been recognized in the DJSI World since 2002, including as the banking sector leader from 2002-07 and in 2011.  

In the Asia-specific Dow Jones Sustainability Asia Pacific Index, 6 of the top 10 components are listed in the US, all on NYSE:   #1 BHP Billiton (BHP), #2 Toyota Motor (TM), #5 Westpac Banking (WBK), #6  Taiwan Semiconductor Manufacturing (TSM), #7 Mitsubishi UFJ Financial Group (MTU), and #10 Sumitomo Mitsui Financial Group (SMFG).

In China, the world’s second largest economy, Premier Wen Jiabao has stated that China will continue on a green and sustainable development path. The Chinese government has identified seven “green” sectors it intends to nurture called “emerging strategic sectors.” The seven include:   clean energy, alternative energy vehicles, energy conservation and environmental protection, information technology, bio-technology, and advanced equipment manufacturing and new materials. Given the Chinese government’s track record for executing on plan, companies in the emerging strategic sectors will be interesting to watch.