Is the wave breaking on ‘unsustainable investment’?


Look out on any expanse of water where waves form and you can have a fun guessing game as to which is going to be the next “big one”.  Many small waves form minor hillocks and roll almost unnoticed to land.  Others flatter to deceive, having height and froth but no weight, and fizzle back into the depths. Behind what will become the big waves, though, below the surface and often over some considerable time, many masses and currents and eddies seem to build, until a wall of water suddenly seems to have been established, containing within it an irreversible momentum to break and roll with vast energy towards the shore.  Such waves are unstoppable and carry all before them.

Though doubtless inaccurate in terms of the actual science of wave formation, the analogy as just posited seems an accurate one for the discourse over sustainable investment, where the wave that has now gathered  is formed of many different masses, all pulled by the same tide but nevertheless essentially unplanned in the way they have coalesced.  These include ‘push’ forces such as external advocacy pressure on financial actors, shareholder activism, and ‘popularisation’ of climate science into accessible formulations such as stranded assets; and ‘pull’ forces such as leadership ‘clubs’, pledge campaigns, the evident viability of alternatives such as solar and wind – and, as we note below, growing evidence that sustainability brings better financial rewards too. 

As the annual meeting “season” approaches for large companies in many major economies, we have a round-up of stories that seem to suggest that the wave has perhaps not just gathered but actually broken on investments that are one-dimensionally financial and take no account of the human and environmental effects of the activities they enable.  It may be time to start thinking of these a “legacy investments”, the flotsam of a previous way of doing things.[1]  

Alongside this roundup, this week’s ‘recommended read’ is Shareaction’s recent survey of the climate-related performance of Europe’s top 15 banks.

First up as a sign of the times is the recent annual letter from BlackRock founder Larry Fink to the CEOs of firms into which the investment management giant directs its funds. “To prosper over time,” Fink’s letter says, “every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” For many, such a missive  – from a firm that hasn’t to date been seen anywhere near the battlements (see the next story) – might look like spume and froth. And it’s true, say IMD Business School professors Paul Strebel and Knut Haanaes in an article for Eco-business, that “greenwashing is far too common”. But they detect in Blackrock’s apparent acquisition of a wetsuit and a surfboard, “a strong endorsement of the emergence of a serious approach to sustainability.”  “For fast growth companies in need of capital,” they explain, shareholders are value-critical. But, for slowly growing companies, shareholder pay-outs are not as value critical. If corporations distort markets to increase profits and distribute the proceeds as dividends and buybacks, the firm and its shareholders do well, but others do not benefit.”

While investment managers are starting to understand this, unfortunately it seems that company managers still don’t. Citing a 2016 report by MIT and BCG, the authors note that “75 percent of top executives in investment firms agree that a company’s good sustainability performance is materially important to their firm when making investment decisions. Yet, only 60 per cent of managers in publicly traded companies believe good sustainability performance matters to investors.” But the wave is breaking: “Investors are willing to divest for sustainability reasons. 57 per cent of investment firms’ board members state that they exclude or divest from companies with poor sustainability performance.

So slowly but surely there are signs that greenwashing is giving way to serious attempts at sustainability.”

Read more: The BlackRock letter: A turning point for real change? – Eco-Business

The changing behaviour of investors themselves isn’t accidental – they too have been under prolonged pressure from advocacy groups that have learned over time how to apply such pressure with an almost forensic precision. Ceres Director of Shareholder Engagement Rob Berridge noted in a recent blog that Blackrock was among four of the largest mutual fund companies that voted for the first time in favour a climate related proposal at the annual meeting of a company they invest in. Though Blackrock and the second largest mutual company, Vanguard, only voted “for” two out of the 90 climate-related proposals put to shareholder meetings in 2017, Berridge believes that “the sleeping giants of the mutual fund industry are waking up to climate risk …[,which] is now truly recognized as a mainstream issue impacting financial risk and return.”  One of the two proposals these managers voted for resulted in Exxon, following a 62% vote for the resolution, agreeing to publish a “2°C scenario” of climate change risks to its operations and finances.

As we noted in our comments on the recent draft report on blended finance [link to that], we need the kind of forensic attention to detail that Ceres and their advocacy peers bring to shareholder campaigns to a campaign to change the missions and risk appetite of the DFIs.

Read more: Four Mutual Fund Giants Begin to Address Climate Change Risks in Proxy Votes: How About Your Funds? – Ceres

How the presence or absence of publicity and advocacy can make a critical difference is exemplified by the contrasting tales of the vast Thar coalfield in Pakistan and the proposed Carmichael coalmine in Australia.  The Thar region of Pakistan is, as Climate Home put it [link: ], “besieged by drought and blessed with solar potential,” but has still become a hot ticket for Chinese investment in new coal mines. “The driving force behind coal development in Thar is the China-Pakistan Economic Corridor (CPEC),” the Climate Home report says.  “A spokesperson from CPEC told [us] that “the coal sector in Pakistan is working very fast; mining is approved and we are expecting big changes in Pakistan.” In a region where water is so scarce that it has to be pumped from 100 metres underground, the first result of Chinese investment will be a highly water-intensive 6.5 million metric tonne open pit mine expected to start operation this year and supply a nearby power station.  Ironically, of course, the Thar region enjoys a solar intensity equivalent to that of the Arabian gulf states, and could thus be a magnet for solar investment.

In contrast to the single NGO attempting to combat coal developments in Pakistan, publicity and pressure have come close to killing off the Australian mega-mine in Queensland’s Galilee Basin, promoted by Indian coal giant Adani, with the support of the Australian national government, and intended to export its output to supposedly coal-abjuring India.  First pressure from activists and shareholders caused US, European and even Chinese banks to pull out of financing the controversial development. Next, the company’s project finance advisers Commonwealth Bank and Australia’s four largest commercial banks withdrew support, citing concerns over economic viability as well as advocacy. Following this, the proposed mine construction company Downer Group relinquished its contract.  And, possibly terminally, federal subsidy to a rail line vital to the development of the mine was vetoed by the Queensland government, leading to the Australian freight giant Aurizon pulling out of constructing the export link.  Australian commentator ReNew Economy concluded that “the building momentum of the Paris Climate Agreement combines with the unprecedented rate of renewable energy deflation evident globally in the last two years to make increasingly clear stranded asset risks for greenfield thermal coal export proposals.”  That may be true in developed countries such as Australia, but, as a recent Eco-business event heard, Asia Pacific banks continue to lend away in developing countries, where some 350 coal-fired power plants are under construction.

Read more: The further unravelling of Adani’s Carmichael coal project – RenewEconomy

On the ‘pull’ side of changing investor and corporate behaviour, evidence of how a multi-dimensional approach to investment – taking account of sustainability as well as financial considerations – can match or even exceed cash returns from a one-dimensional/finance only approach, while delivering social and environmental ‘goods’, has long been available in the impact investing sector – see for example the Global Impact Investing Network’s 2017 report.  Evidence of how this phenomenon is now manifesting itself in the ‘mainstream’ investment universe comes in various guises.  One is the success of investment managers built on sustainability, for example the acquisition of the US-based Pax World mutual by London-based Impax Asset Management, which itself had been growing at a very fast rate in recent years. The assets under management of the combined firms will be over £10 billion.

Much of the Impax portfolio is of course invested in clean energy, and why that might be a good idea is emphasised by the just-published most recent update to the “Clean 200”, a group of cleantech companies tracked by research firm Corporate Knights and NGO As You Sow. According to Business Green against an index of companies reliant on fossil fuel revenues.  “In the year and a half up to September 2017,” Business Green notes, “Clean 200 companies recorded total returns of 32.1 per cent [while] … the fossil fuel benchmark, the S&P 1200 Global Energy Index, delivered a 15.7 per cent return – less than half the performance delivered by clean energy specialists.”

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A perhaps even more striking example, because of the nature of the portfolio involved and the length of the time-series, is the decade-long outperformance of its ‘benchmark’ peers by Texas-based fund Dimensional’s International Sustainability Core 1 Portfolio. The fund manager has developed a sustainability scoring mechanism for investing in small-cap companies that allows it to spot companies with lower GHG emissions and better records on environmental behaviour.  Not only has the portfolio, with close to 4,000 investments, outperformed its benchmark on financial returns by an average of some 1.27x since 2008, it has also seen a 70% improvement in emissions intensity.

Read more: Best performing funds of 2017: Dimensional’s International Sustainability Core 1 Portfolio – Environmental Finance ($$)

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[1] Interestingly, but entirely coincidentally, here in the UK what finally seems to have woken the great British public up to the trashing of the global environment is the issue of plastic flotsam in the oceans, recently and unignorably highlighted in a new BBC series, Blue Planet.

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