We have passed a tipping point and the business community is embracing sustainability. But we won't make the shift to sustainable growth on a large scale unless the investor community decides to pivot away from its focus on short-term profits - squeezing financial gain out of companies on a quarterly basis - at the expense of longer term, sustainable prosperity.
Shareholders, including investors who speculate on the stock market, are the owners of a company and thus have the right to determine its strategic direction. So if they push management towards long-term planning for sustainable growth, the company can move in that direction, but if they demand cost-cutting and profit-maximizing, company management has little choice but to deliver just that.
There is currently a great deal of tension between pressure for short-term profits and the push for more sustainable and socially responsible corporate strategies. The stakes are high, because business has the wealth and power to change the world: to improve the environment, to fight human rights violations, and to attack poverty by providing jobs and economic development.
There are many reasons to believe this will be the year investors pivot to a longer-term, more sustainable view in their investment decisions, including these:
1. Big investment firms, asset managers and banks are embracing corporate social responsibility and outdoing each other in more sustainable practices, both in their own organization and in their investing. The United Nations-supported Principles for Responsible Investment (PRI) Initiative, an international network of investors working together to practice responsible investing, is growing fast and now counts 1380 signatories representing 59 trillion dollars in assets under management. Even Goldman Sachs recently agreed to acquire Imprint Capital, a leading impact investing firm, creating a buzz about who might be the next Wall Street firm to dive into the small but growing impact investment space.
2. Clients, especially millennials, are demanding more from their investments. They want to make money, but they also want to use their wallets to make a difference in the world. This can be through screening out companies or industries they believe have a negative impact, picking sustainable, local or impact investing projects, influencing corporate strategy through shareholder activism, or investing in social entrepreneurship. They are increasingly demanding that their retirement funds be managed in a socially responsible way, and a growing number of internet platforms are facilitating these transactions.
3. There is more data available to allow investors to evaluate environmental, social and governance (ESG) factors in their investments. John Streur, President and CEO of Calvert Investments, an ESG investing firm, writes on GreenMoney.com that "Calvert has overhauled our research process, shifting from binary decision-making to a data-focused, quantitative system for rating and ranking corporate ESG performance." He adds "We are working to ensure that new tools are developed to help identify and incorporate the value of natural capital, such as forests, biodiversity, and water, into financial models.... We must continue to innovate and lead, understanding that one day, all investing may be 'responsible' investing."
4. There are exciting new startups and high-impact projects in which to invest, including a whole new generation of clean technology, renewable energy, water-saving technology, and "circular economy" projects that ensure waste becomes a new resource, and so much more. As divestment from fossil fuels invariably picks up speed following the Paris climate change agreement, and more and more leaders call for carbon pricing to facilitate a transition to renewable energy, these enterprises will attract more attention from investors.
5. This past year has witnessed a startling transformation of securities laws by the federal government (with the SEC finally approving rules to implement crowdfunding from the 2012 JOBS Act) and by a majority of the states (governing intrastate investing). The result this coming year should be a huge increase in local investing, much of which will be in companies with strong local sustainability agendas.
6. Investors are beginning to call for responsible long-term decision-making by corporate executives, including environmental stewardship and human rights risk management, not only for the greater good but also to ensure the financial health of the companies themselves. Corporate executives who put short-term profits ahead of environmental and social responsibility are increasingly regarded as putting their companies in danger of financial loss by ignoring regulatory and reputational risk.
7. There are more instruments available to invest in a socially responsible way. "ESG and green investment products such as ETFs and green bonds will continue to be introduced as investors look more closely at low-cost and fixed income asset classes," says Gregg Sgambati, Managing Director of S-Network ESG Solutions. "However, the market for these types of investments will remain smaller than other types." At the same time, there is a need for more impact investing funds to meet growing demand from millennials.
8. ESG performance has been proven to match or exceed non-socially responsible investing. A study by Morgan Stanley's Institute for Sustainable Investing published in April 2015 showed that "investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments." Morgan Stanley noted a common misconception apparent from the study and a correlated survey: "nearly three quarters (72%) of those surveyed believe that companies with good ESG practices can achieve higher profitability and are better long-term investments. At the same time, 54% believe that sustainable investing involved a financial trade-off."
9. New business models are emerging in philanthropy. Years of studying the impacts of philanthropy have refined our understanding of what works and doesn't work. And the combination of the internet connecting people all over the world, new technologies for social and environmental impact, and more billionaires in their 30s will deliver far more tools in areas like enterprise finance. In the open letter to their daughter that Mark Zuckerberg and his wife posted on Facebook December 1, they wrote: "Our society has an obligation to invest now to improve the lives of all those coming into this world, not just those already here. But right now, we don't always collectively direct our resources at the biggest opportunities and problems your generation will face."
Here's hoping 2016 is the year investors pivot to a longer-term, more sustainable view of the world.