Will Sustainable Investing Go Mainstream?
At the Morningstar Investment Conference, panelists see a growing role for sustainability factors in some investors' process.
This analyst blog is part of our coverage of the 2016 Morningstar Investment Conference.
By Sylvester Flood
Calvert Investments' Lynne Ford, who heads the firm's commercialization of its long-established socially conscious investing practice, sees a future when sustainability will be an accepted, normal aspect of every bottom-up researcher's investing process. She more boldly predicted that someday sustainability would stand on the same stage as CAPM in terms of its relevance to investing decisions.
Indeed, the panelists agreed that sustainability is poised to emerge from its niche to become a part of mainstream investing. Multiple factors have triggered its emergence, not least of which are demographical--the rise of millennials and the increasing level of control women have over investable assets. And environmental concerns are so obvious that they need hardly be mentioned.
Neuberger Berman's Ingrid Dyott believes mainstream portfolio managers would consider sustainability factors in their decisions if they were aware of the availability of the research. Moreover, because "what gets measured gets managed," Dyott posits that as transparency of sustainability policies increases due to the increasing ubiquity of measurement tools, traditional managers will be more amenable to considering these attributes in their due diligence processes.
Because ultimately all managers must deliver alpha, sustainable or not, Brown Advisory's BIAWX Karina Funk takes the adage that "saving money never goes out style" and finds companies that both save customers money and have strong sustainability attributes. For example, her fund owns Ecolab (ECL), which helps large facilities like conference centers to save money while making their operations more sustainable. While impressed by the sustainability practices of Facebook, Funk seeks out companies that gain competitive advantage because of their sustainability practices, not in spite of them, and Ecolab epitomizes this strategy.
One audience member observed that environmental and governance issues benefit from measurability and tangibility and questioned the panel about the missing “S”--social--and how that can be measured and managed. The panelists acknowledged that the social issues are the most challenging to decipher and measure, particularly as supply chains become longer as activities become increasingly outsourced and geographically dispersed.
Dyott pointed out the difficulty of understanding the sustainability of seafood supply chains with regard to labor practices, as exposed in The New York Times last summer. Most of the supply is provided by small, independent fishing firms. In some cases, these firms have been discovered to employ what are essentially slaves or indentured servants to deliver their catches.
Funk provided Nike as a prime example of the primacy that social issues have taken in the apparel industry due to the risk that social policies can have on the brand. Its brand was first stung by charges of child labor in its supply chain in the mid-1990s. It reacted to the news with a positive and long-term commitment, and today Nike's supply chain is governed by strict social policies from beginning to end. And because of Nike's commitment, much of the apparel industry has followed suit to a greater or lesser degree.
The increasing availability of sustainability data and research to buy-side and retail investors coupled with increasing interest among institutional and individual in investing with both their values and the long-term health of our environment in mind point to an increasing need for advisors to take notice and take sustainability into account in designing investing plans for clients.
Morningstar.com does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.