In London, about 50% of the clean water leaks away because the infrastructure is so old. The cost of digging up all of the old pipes and replacing them would be astronomical. But let's say a company had a robot-like device that could enter the pipes and coat them, stopping the leaks. Wouldn't that company sound like a great investment?
That's the kind of story that is clear, appealing and easy to sell. And that's why funds focusing on themes like sustainable water, materials and energy will likely be the kind of sustainability funds that most distributors offer to retail investors for some time, according to Sander van Eijkern, CEO of Sustainable Asset Management (SAM), who spoke with me in a recent interview. In fact, many major fund companies now offer such clean energy, water and even climate change mutual funds and ETFs.
Of course, Sustainable Asset Management and other companies also offer all-cap global sustainability portfolios, primarily for institutional clients and overseas investors. A few retail global mutual funds with these sustainability goals have been introduced in the United States (including one in June by SAM), but investors and fund distributors don't understand the approach enough yet for such funds to proliferate, van Eijkern believes. Broker-dealers also have been slow to embrace model portfolios that incorporate sustainability criteria.
Advocates define sustainable companies as those that outperform on environmental, social and governance (ESG) criteria, and maintain that managers who routinely consider these factors in investment analysis will produce portfolios with higher long-term returns for shareholders. Unlike most traditional socially responsible investors, SAM and some other firms don't use negative screens to eliminate entire industries such as alcohol, tobacco, gambling or defense from their investing universe.
A recent white paper released by the company, Alpha From Sustainability, looked at whether companies it had rated as sustainability leaders outperformed those it identified as laggards. During the eight years from 2001 through 2008, SAM found that the leaders outperformed by an average of 148 basis points annually.
SAM, based in Zurich, Switzerland, is a subsidiary of Robeco with $12.4 billion in assets and is one of the world's most well-known sustainability managers. In addition to managing money for institutions, it manages clean tech private-equity assets and licenses indexes, including the 10-year-old Dow Jones Sustainability Indexes, the longest-running and best-known group of sustainability indexes.
Today, sustainability is one of the major topics in finance, and more major companies are embracing it as a way to mitigate risk and create a competitive advantage. Unfortunately, most mainstream financial analysts, fund companies and broker-dealers have not found ways to significantly incorporate this major trend into their products and services. While some financial professionals think that considering sustainability will hurt returns, most studies have shown this belief to be false. As a result of inaction by fund companies in particular, typical investors don't get any comprehensive investment choices based on sustainability in their main savings vehicles-their 401(k) plans-even though I suspect many would want these options once the concept was explained to them.
With the number of people and companies interested in sustainability continuing to grow, the financial services industry will undoubtedly catch up-eventually.