Across finance, investment, regulatory, and marketing sectors alike, significant efforts are made to clarify the meaning of “sustainable investing.” Such a label as applied to companies, issuers, or investment managers has led to the creation of products and services that cater to our cognitive frameworks. However, this often diverts investors and their clients towards mere semantics and lowest common denominators. We recognize that our goal is not to settle for the minimum, but to strive for higher standards.
It is all too easy to concede capital to situations that destroy value by compromising a livable climate, stable economies, and thriving societies. Efforts to do better are still rare. Investors cannot reverse global warming or prevent planetary tipping points, but we can build the skills to navigate these new challenges and drive investment performance.
Fortunately, there are straightforward efforts that we can demand from all investors (after all, these are systemic risks, relevant to all stakeholders): to meet ambiguity with creativity, to be humble and flexible, and to be confident enough to act on the understanding that business-as-usual is no longer sustainable.
MEET AMBIGUITY WITH CREATIVITY
It has been 20 years since a United Nations report coined the term ESG. “Better consideration of environmental, social, and governance factors,” the report states, can help to develop “stronger and more resilient markets.” What those ESG factors exactly are, however, is ambiguous to this day, a vulnerability seized upon by partisan politics.1
What tends to be forgotten is the thoughtful advice in the report that destines ESG to perennial ambiguity. Financial institutions and analysts are called upon to incorporate ESG “in a creative and thoughtful way,” supported by “high-level research and thinking” - not supported by ideology, nor rules tied to third-party data sets, nor check-boxes, nor rigid definitions. Creative processes are inherently fluid, ever-evolving, and unpredictable - a good match for today’s increasingly volatile and complex operating environments.
We expect management teams to navigate these challenging conditions in creative ways given that there is no playbook from yesteryear for dealing with the complexities of climate and inter-related social and economic impacts. We should expect the same from investment managers. Investing is ultimately a dynamic effort shaped by the skill and expertise of the people behind it - people who should be able to articulate the skills they have or are developing to understand how to consider sustainability risks and the corresponding opportunities for investments.
HUMBLE FLEXIBILITY
While investing benefits from years of experience that builds and refines muscle memory, we must also humbly acknowledge the need for new skills. We can start by checking our behavioural biases. One such bias is called “anchoring” - the tendency to hold on to previously established ideas or opinions. Our muscle memory may hold on to notions that our supply chains are relatively stable; that physical infrastructure can be depreciated over 30 years; and that employees can continue to commute to work safely. Today, we need to understand if those in charge of our investments have stale assumptions about operating environments. Are they asking the right questions to understand if the management teams they are betting on can manage through increased weather severity, heat, or rising sea levels that may disrupt supply chains, sink infrastructure, or endanger workers’ health? It is humbling to reflect on how little we know about what it will take for businesses to thrive in a world that is much warmer than it is today. We must remain flexible to update our assumptions as new information becomes available.
CONFIDENT ACTION
We all invest for a variety of reasons, and we likely agree that it is possible to achieve attractive returns from investing in situations that build a more sustainable future – and that this is preferable to investing in situations that directly tear that future down. This appreciation will help in challenging times. In the short term, businesses that have laid the foundation to be resilient in a rapidly changing world may be volatile. Yet despite this, there is something we know with a very high degree of confidence: that the risk of climate disruption is increasing.
“Some changes (such as droughts, wildfires, and extreme rainfall) are happening faster than scientists previously assessed ... modern humans have never before seen the observed changes in our global climate, and some of these changes are irreversible over the next hundreds to thousands of years.” 2
Even for those of us who are not scientists, we know this will stress and surprise businesses, their customers, colleagues, supply chains, and operational stability. We know there will be winners and losers. This is where confidence in an up-skilled, flexible, and experienced investment process needs to shine – assuming investors themselves have laid the same foundation for resilience. Adding complementary skill sets to an investment team brings benefits from diversity of thought - for example, teams that include former industry operators, and people with expertise not only in finance but in governance, accounting, auditing, risk, shareholder engagement, and investigative research - these diverse points of view can add confidence that we can get to the bottom of business models, projects, and their associated fundamental and sustainability risks and opportunities.
Broadly, we seek investment solutions - run by people and not rules - that are thoughtful. For our part at Brown Advisory, thoughtful investing includes a sustainability lens that pushes us to consider any factor, data, tactic, strategy, or other information that could pose a challenge or present an opportunity for investment.
Meaningfully participating in profitable sustainability strategies and opportunities is not just about scaling products or services; it’s about bringing the entire ecosystem along to navigate capital allocation in the midst of increasing climate and related risks, and to participate in new opportunities that are more profitable, and more sustainable. Being creative, flexible, and confident to invest capital in a better way does not require any technological breakthroughs nor financial innovation. Holding all investors to these standards will elevate the expectations and results of our collective endeavours.
This article was originally published for the Tortoise Media Responsible Investment Forum, which took place on October 17, 2024, and of which Brown Advisory is a proud partner. For further information about the Forum, please click here.
Sources
1Source: As evidenced by the 161 bills considered in 44 U.S. states in 2023, and 76 bills considered in 26 states in 2024. (35 passed into law in 2023, and 7 passed into law as of mid-June, 2024.) https://www.ropesgray.com/en/insights/ alerts/2024/06/the-state-of-state-esg-activity-as-an-election-looms-a-mid-year-review
2Source: the Intergovernmental Panel on Climate Change, the UN body tasked with assessing the scientific aspects of climate change
Photos courtesy of Tom Pilston
Disclosures
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Brown Advisory. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. The information provided in this article is not intended to be and should not be considered a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned.