Although sustainable investing has increased from $12 billion in assets under management in 2005 to $1 trillion under management in 2012, it’s still not a front-burner issue with many financial advisors.
“Financial advisors don’t bring up these issues with their clients unless they’re asked,” said Lynne Ford, executive vice president with Calvert Investment Distributors. “We are trying to get the word out that investors no longer have to sacrifice yield for their values.”
Sustainable investing, which can be analogous to environmental, social and corporate governance (ESG) investing, has slowly evolved from being a squishy, feel-good notion to gaining credence as a sensible financial concept based on the idea that companies that use their resources more efficiently are better run—and generally more profitable—organizations. And that should make them better investments.
“If management teams are controlling their usage of these resources and demonstrating efficiency over time, then it’s an indicator of a well-run global company, outperformance and uncorrelated alpha due to these factors,” Ford said. “It’s a new way of looking at companies.”
Ford, who joined colleagues from Calvert Investments at a press breakfast on sustainable investing in New York City earlier this spring, said more companies have created sustainability divisions. “We’re seeing more conversations in the C-suite, which is important because it creates transparency and consistency,” she noted. “Risk has mushroomed, but governance is a key component of risk management because that’s where the intersect is with sustainability investing. It legitimizes corporate social responsibility.”
In the 1980s, very few companies had sustainability goals because the environment and social issues didn’t matter to most investors. But today, 95% of the 250 largest global companies are using global reporting initiatives. That rise is attributable to investors raising a bigger stink about sustainability issues.
“The danger of not considering environmental, social and corporate governance issues in credit analysis and investing is that social and environmental issues, such as labor practices and indigenous rights, can lead to litigation and protests that can cost money and even shut down product lines,” said Cathy Roy, Calvert’s chief investment officer of fixed income. “There’s an increasing interest in ESG issues out there as investors see these as a real risk.”
Bethesda, Md.-based Calvert has long been a leader in the sustainable investing movement. In October 2013, it launched the Calvert Green Bond Fund focused on securities related to climate change and other environmental issues. This actively managed fund has attracted roughly $18 million in assets, has an effective duration of 4.57 years and a 30-day SEC yield of 1.11%.
And in March, Calvert announced its collaboration with U.K.-based Osmosis Investment Management LLP to create the Calvert-Osmosis Model of Resource Efficiency World Strategy, which analyzes observed amounts of energy consumption, water usage and waste across a universe of large-cap companies. Companies are selected by comparing the efficient use of resources to revenues, and the strategy seeks to capture uncorrelated alpha by determining how much the market has fully priced in this resource efficiency advantage.
This method aims to address one of the downsides in the overall sustainability investing movement: namely, a dearth of metrics to measure its impact.
“The benefits aren’t measurable for anybody, including the World Bank and the International Finance Corporation,” Roy said. “We know that it’s at least more positive over time than doing nothing and that it can’t be bad, but we need better standardization down the road.”