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By Emma Wall | 03-17-2017 08:00 AM

Sustainability Investors Need to Take the Long View

Global Challenges Foundation’s Mats Andersson thinks there is no tension between building a sustainable and a profitable portfolio, if you have a long enough time horizon.

Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Mats Andersson from the Global Challenges Foundation to talk about ESG.

Hello, Mats.

Mats Andersson: Hello.

Wall: So, why should we care about ESG, about environmental, social and governance issues?

Andersson: I think it's absolutely vital for an investor to have this on the agenda because my belief is that you cannot long-term be successful unless you have this on the agenda. And I know that there's a misconception that there's a conflict between sustainability and good returns. I think we get more and more proof it's the other way around. If you do this in a smart way, you will actually lower the risk and enhance your returns. And that's exactly what asset management is all about.

Wall: And I think there is a misconception there. I think a lot of people have an idea of ethical or hippie investing is about actually screening out some negative stocks which could be high-growth and therefore, you're having to choose between a profitable portfolio or a sustainable portfolio. But actually, your studies have shown that that's not the case at all.

Andersson: It's not the case at all. I think that what the problem is and the challenge today is that 95% of all pension capital and capital as a whole is evaluated on a yearly basis. We know that the mandate, we know that the savers will be there for 10, for 20 years and if you can prolong the time period where you evaluate this and actually give the mandate to the asset owners or the asset managers to really make sure that long-term you find the good companies, I'm sure they will understand this is the way to enhance returns because short-term it's an unknown factor, I agree. Long-term, it's absolutely essential that you have sustainability on your agenda.

Wall: What kind of time horizon are you talking about there, because you mentioned pension portfolios which can have multi-decade horizons?

Andersson: Yeah. And honestly, I mean, I was the CEO of AP4 and we had – by law we were supposed to invest on a 40-year horizon which could be a bit challenging. But I think that just by saying that, say, 5 to 10 years will make a huge difference to the way managers behave today and what they will in the future.

Wall: And are there any examples of best practice where you think, yes, those people are getting it right?

Andersson: I think there are many examples and I'm agnostic and I'm a believer in the let the 100 flowers bloom, find your own way to do it, but you have to understand that this is a mandate that I have and this is mandate that I will actually carry out. And once you do that, then there are so many good examples. You have the AP in Sweden; you have FRR in France; you have Hermes in U.S., you have PJM; in Holland, you have APG; you have New York Retirement Pension Fund. So, there are so many good examples now compared to five years ago. So, let's carry on on that route.

Wall: Mats, thank you very much.

Andersson: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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