Sustainable Investing: The Art of Long-Term Performance

  • Cary Krosinsky &
  • Nick Robins
Earthscan: 2008. 272 pp. £19.99, $38.95 9781844075485 | ISBN: 978-1-8440-7548-5

Money can't buy love. But can it buy a more sustainable world? Sustainable Investing suggests that it can, yet this book presents only half of the story.

Editors Cary Krosinsky and Nick Robins are industry people: Krosinsky is vice-president of a US environmental research organization and advised on the United Nations' Principles for Responsible Investment as part of its Environment Programme Finance Initiative, and Robins is head of the HSBC Climate Change Centre of Excellence. Together with co-authors from a range of financial organizations, they provide tips on the emerging market of sustainable investing, ranging from equities, bonds, carbon finance, private equity, sustainable real-estate and microfinance. With up to US$5 trillion in sustainable investment funds and a quarter of public equities and bonds incorporating sustainability criteria, the world has never had such green markets.

If you take this book at face value, it certainly pays to be green. Sustainable investing — investing in green technologies, clean-energy sectors or companies that have an integrated environmental approach — has “outperformed not only ethical funds, but mainstream indices as well over a one-, three- and five-year period”. Ethical funds, a separate category of responsible investing, are less profitable.

Green technologies, such as this reverse vending machine that refunds consumers who recycle, represent good investments. Credit: TOMRA SYSTEMS ASA

You may be relieved to hear that your clean-energy funds are good financial bets. But Krosinsky and Robins warn us against the 'materiality trap': the tendency of investors to incorporate environmental or social issues only when they are financially attractive. Many chapters focus on this point. Yet the book does not pay enough attention to another trillion-dollar question: how do we measure the effects of investment on the sustainability of our world?

To answer that, we need to know more about the systemic effects of specific investments on specific ecosystem services and societies, both over time and on a cumulative basis. This requires multidisciplinary research. For example, funds such as Jupiter Ecology, Winslow Green Growth, Orange SeNSe or the CalPERS emerging markets fund all invest in green activities and offer strong financial returns. It is less clear if they make measurable reductions in the degradation of various ecosystems. I am not saying they do not — it is just very difficult to tell.

In the financial districts of New York, Hong Kong and the City in London, market intelligence is not set up to convey this kind of knowledge. Research shows that capital markets have difficulty capturing environmental feedback. Most financial-investment decisions are decoupled from on-the-ground effects. The abstraction becomes clear only when there is a visible collapse.

In one chapter, investment managers from the investment banking group Société Générale concur: “In our experience, long-term analysis is almost always sacrificed in favour of short-term profits by both investors and brokers.” Sustainable investment can introduce new information, but there is significant bounded rationality. In regular financial investment, “a financial analyst covers a maximum of four to eight stocks and often has as much as 10 or 20 years' experience in doing so. In contrast, many SRI [socially responsible investment] analysts cover up to 50 stocks, with far less experience and an often limited financial background.” There is also the inherent danger of market spin in sustainability ratings: “best in class ... needs to be complemented by a searching analysis of the sustainability of the 'class' itself”. The authors warn that unless this is done, a situation can emerge in which everyone wins, and relative benchmarking ensures that there is always a sector leader, even if neither business model nor behaviour warrant such an outcome.

Sustainable Investing argues for a paradigm shift in financial markets, and suggests that better data and stronger networks will positively affect the effectiveness of managers of sustainable funds. However, this is not an academic book, and the chapters are of uneven quality. Notably absent is any mention of what role scientists could have in this shift — a serious omission.

From a scientific standpoint, managing complex nonlinear change requires flows of robust information that cross spatial and temporal scales, and adaptive governance arising from a mix of legislation and economic incentives. Sustainable investing is only one of many strategies that we can choose, and it should be more tightly coupled with actual impacts.

The recent financial collapse highlighted the need for new forms of financial governance. To take advantage of this opportunity, we need to ask questions that are more fundamental. For example, how can dynamic socio-ecological feedback loops become integrated within dynamic financial markets? How can we measure the effects of trillions of dollars of investment on natural capital stocks or ecosystem services? How can financial governance models make these interconnections possible? And we need to experiment with new organizations that better connect financial markets to science and societies.

One such example is the Resilience Alliance, an international research network of scientists and practitioners working on sustainability. Their Connectors Group is trying to establish more-explicit links with the business world — not an easy task given the differences in career focus, social norms and conventional meeting places. Yet scientists can be inspired by the chapter on civil society. Non-governmental organizations influence capital markets through active capital campaigns, including shareholder activism, partnerships with powerful institutional investors and formal investor briefings.

Sustainable Investing is a good read for managing your portfolio. But it remains to be seen if Nature will be read by investment analysts.