Sustainability earns its way into the financial conversation

Prior to the RF|Binder-hosted panel, Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing, delivered a keynote in which she offered myriad pieces of proof that have helped investors and corporations alike see sustainability as not just a philanthropy play, but also as a key factor impacting their financial well-being.

Go here to read the whole CSR panel

I started at Morgan Stanley nine years ago – all the while advocating that we should grow out this competency around sustainable investing. In the beginning, people thought it was "cute." They considered it a "nice to have."

After a while, people started thinking about it a bit more seriously to the point where they wanted my team to join them at external meetings. We were a charismatic element.

Today, backed by strong data, our leadership now clearly views this as a commercial factor. Our journey has taken us from cute to charismatic to commercial. Of course now the pressure is really on for us to show proof.

About two years ago we launched the Morgan Stanley Institute for Sustainable Investing. The most common question we get: How does sustainable investing differ from sustainability or CSR. An equally asked query: Why would Morgan Stanley do it?

Sustainable investing is enhancing traditional best-in-class investing with additional information and data you get from thinking about the environment, society, and governance (ESG). I’ve never met an investor or risk manager who didn’t want more data, so this should be well received by the investment community.

The marketing and branding community was really the first to understand how intangibles can be incredibly real. Back in 1975, intangible value was considered to be only about 17% of corporate value. Today that number has skyrocketed. Something very similar is happening with sustainability issues. They are increasingly being seen as completely material. Even those who are not diehard environmentalists must think about ESG issues as material.

Think about what will happen to the global population by 2050, which is only 34 years away. It will rise from just above 7 billion today to 9.5 billion. How will the planet support everyone in terms of water and energy needs, as well as the carbon emissions associated with that? If that isn’t material to financials, what is?

This is actually a $10 trillion opportunity. In the year 2050, meeting all those demands will be about $10 trillion of services and goods for health and education, agriculture and food, water, forestry, power, and metals. That’s 4.5% of the projected global GDP in 2050. That’s 4.5% of the entire global economy. No investor could ignore that.

Let’s take metals as an example. There is only a finite amount of metal we can dig out of the planet. Today, almost none of the aluminum foil market is recycled – about 10% – which means there are billions of dollars in aluminum that can be recaptured, reused, recycled, and repurposed. And that’s just one sector. That is a clear financial case for sustainability.

Now look at consumers. Numerous studies show they are willing to pay more for sustainable products. However, they often don’t even need to.

In 2014, Intel CEO Brian Krzanich announced that within two years the company’s entire supply chain would be conflict mineral free with no added cost to the consumer. They’ve attained the goal of being conflict-free and committing to it with a label on every product.

You can look at any product manufacturer. If any of them simply start to think more about their water usage and disposal, they can find many ways to be more efficient and start saving costs. Even if they charge the same amount for their products, they’ll make more because they spend less. It’s common sense.

Another key to widespread adoption of sustainable corporate activity is Millennials, 84% of whom are interested in sustainable investing. This generation will be our salvation because they are fundamentally thinking about things in a different way. They bring their beliefs into their consuming and investment behavior. They are three times more likely to choose a job based on that employer’s sustainability focus. They are twice as likely to check their product packaging, which can be easily done on their iPhones.

But most of all, Millennials differ from other generations in this key way: Previous generations are all about sustainability on a personal level, but there is a divide when it comes to how they invest their money. Millennials have no such separation. One brain, one purpose. They will invest in companies that target specific environmental social outcomes. They will invest in companies that use ESG practices as part of the value equation.

Another matter that clearly links sustainable activity to financial performance is risk. At this year’s World Economic Forum, business leaders were surveyed about what they deem to be the biggest risks to the economy. At the very top of the list – failure of climate change mitigation and adoption. In addition, a SASB (Sustainability Accounting Standards Board) study found that 93% of the stock market has its value impacted by climate change.

Of course, humans are fight or flight creatures. We respond to clear and present dangers. Climate change is gradual. It’s invisible. It’s hard for people to wrap their heads around. And this is where communications can really help make the intangible material and quantifiable.

The Morgan Stanley Equity Research team did a study called "Embedding Sustainability Into Valuation." Looking at 29 different industry sectors, a mutlitude of different environmental and social factors were found that could be identified as ESG factors.

What’s been fascinating since those factors were identified is the way in which they have prompted analysts to change their calls. For example, one mining analyst, upon considering the above factors, downgraded a specific stock for two reasons, one environmental and one social. This company was using water very inefficiently. It got to the point where the government stepped in and mandated the company do a feasibility study that would very likely lead to a substantial unanticipated capital expenditure. Meanwhile, the community was protesting the water situation, which led to certain necessary permits being delayed, which in turn slowed down production.

So you might not prioritize concerns about the environment or the community, but you certainly will care about a massive cap-ex hit and a volume decrease. In this case, it’s clear that sustainability issues are material to financial matters.

I’ll close with one more tangible bit of data. According to a 2015 Harvard Business School study, if you invested $1 in 1993 in a portfolio of companies that focused narrowly on financial returns and didn’t factor social and environmental issues in a material way, if at all, your money would have grown from that $1 amount to $14.46 over 20 years. That’s pretty good.

However, if you put that same $1 in companies that focused on material sustainability issues – "high sustainability" investing – it would have grown to $28.36 in that same two-decade period. That’s a clear indicator of how sustainability equals profit. And it’s a story that in the hands of a good communicator can truly make people understand how sustainability is not just puppies and rainbows. It’s a clear path to financial growth.

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