At the IPE Conference in Prague last week, Al Gore declared the world was experiencing a global sustainability revolution with the magnitude of the agricultural and industrial revolutions, but the speed of the digital revolution.
He declared it as the single largest investment opportunity in history, emanating from developing and developed countries alike.
For both fund managers and corporations, there are both opportunities and pitfalls. Michael Porter, in a 2011 Harvard Business Review article titled Creating Shared Value, argues that the concept of shared value – i.e. the idea that there are links between societal and economic progress – has the power to unleash the next wave of global growth.
Yet, as he points out, the capitalist system is under siege as business has increasingly been viewed as a major source of societal, environmental and economic problems. President Trump’s retreat from globalism with a focus on “America first” is just another manifestation of a diminished trust in the ability of businesses to deliver societal good.
Porter says a big part of the problem lies with companies that see value creation in a very narrow sense, focusing on optimising short-term financial performance. This overlooks many factors, such as the wellbeing of their customers and the depletion of natural resources vital to their businesses.
The growth in acceptance of environmental, social and governance issues is causing a change in attitudes. Sustainable investment is now being accepted both by investors and by corporations.
However, as Porter points out, our understanding of the potential of shared value is just beginning.
Corporations are struggling to determine how best to measure their impact in terms of “externalities”. Fund managers are faced with the issue of how best to apply a consistent framework in assessing companies across diverse sectors and geographies.
Yet progress is being made. Firms such as Trucost are providing independent assessments of the positive impact of investments. Companies such as Olam have taken a lead in trying to incorporate natural and social capital within a company’s balance sheet. Olam’s Chris Brown and Ravi Abeywardana argue that a natural and social balance sheet would be analogous to a financial balance sheet. The latter provides stakeholders with an understanding of what the company owns (assets) and owes (liabilities), and whether it is solvent and can meet short-term debts.
A natural and social balance sheet would highlight whether a company’s operations were sustainable or unsustainable when assessed against predefined boundaries.
A group of Oxford University economists recently released a report entitled The Wealth of Nature, exploring the linkages between natural capital and human prosperity. They argue that the erosion of natural capital poses threats to continued national and global prosperity, yet political and economic systems are unprepared for that risk for three reasons.
First, natural capital is not being accurately measured or valued in the context of ecological tipping points and thresholds. Second, aggregate economic models are ill-equipped for identifying the dependencies between ‘capitals’. The problem with most cost-benefit analyses and economic methodologies used is that they assume natural capital is akin to man-made capital. But how does one value a tiger when they may no longer exist?
Thirdly, the economists argue that society currently lacks appropriate political and economic institutions to manage natural capital effectively. National wealth accounts still provide an incomplete picture of the value of natural capital.
The Oxford report makes a couple of important recommendations. Firstly, all natural capital – including minerals, resources, fossil fuels, but also valuable ecosystem assets and natural infrastructure – could support greater prosperity if it were more appropriately valued and hence more efficiently used. The Economics of Ecosystems and Biodiversity (TEEB) global initiative was an attempt to remedy this, but there is still a long way to go.
Secondly, critical natural capital – such as a stable climate and well-functioning ecosystems – should be protected with governance regimes based on scientifically informed political decisions. That is, however, looking more difficult with the Trump administration’s stance. The EU, China and India seem more likely to take the lead in this respect.
Al Gore’s own fund management company, Generation Investment Management, has built a substantial business from the idea of investing in sustainable companies. These companies do not borrow from future earnings to support current earnings; their sustainability practices, products and services drive revenues, profitability and competitive positioning; and they provide goods and services consistent with a low-carbon, prosperous, equitable, healthy and safe society.
The real measure of the success of sustainable investment, however, would be when all investment managers can claim the same.
For investors, if Al Gore’s optimism holds true, there is plenty to be excited by.