The world is going green, but one of the biggest obstacles is the conventional wisdom that individual actions don’t matter. Of course, as anyone who’s willing to do some research discovers, when it comes to green matters, conventional wisdom is often wrong. (See my Investment Advisor column, “Who Knows?” in the August 2008 issue.)
The same is true for the conventional wisdom on green investing. Matthew Kiernan, chief executive of Innovest Strategic Value Advisors and author of Investing in a Sustainable World: Why Green Is the New Color of Money on Wall Street (Amacon Books, 2008), is not only challenging that conventional wisdom, but in his own words, is attempting to “re-engineer the DNA of Wall Street and of capitalism.”
Kiernan founded his research firm in 1995 after stints as the first director of the World Business Council for Sustainable Development, which at the time included the CEOs of about 40 global corporations (since increased fivefold), and which Kiernan says is intended to be “the big business voice on sustainability,” and as a senior partner with KPMG on the strategy consulting side. At KPMG he had seen a billion-dollar privatization deal nearly blow up because of environmental factors.
“All of that led me to a couple of conclusions that not only were the genesis for the company, but for the book,” he explains. “There are only two ways that I know of to turn a CEO into a ‘greenie.’ One would be to have his 16-year-old daughter harangue him at breakfast about his company dumping cyanide into a river in Spain and killing the fish, which is extremely effective, but tough to scale up.
“The other way is to send him a message through his financial oxygen supply,” Kiernan continues. “To me the task became bringing these considerations from where’d they’d been–which was totally at the margins, or off the radar screen entirely–into the center of the process.”
He saw the need for credible research on the sustainability aspect of companies. He felt that if he could show Wall Street that two companies that look to be almost identical, “but one of them was significantly better positioned on these over-the-horizon issues, then capital markets logic suggests that the ‘good guys’ would attract more capital and the bad guys would be incentivized to improve so they could, too, and they would pay a higher cost of capital until they did.”
Innovest, based in Toronto, follows about 2,000 companies around the world and rates them on more than 120 sustainability variables. The firm then provides research to clients that include pension funds or money managers like Goldman Sachs and JPMorgan.
Kiernan says it was frustration that ultimately led him to write a book on the subject. “The investment logic that we pursue at Innovest should be obvious to a 10-year-old child, but the tragedy is that you never have a 10-year-old with you in JPMorgan’s boardroom when you need one,” he says, with apologies to Groucho Marx. “Every piece of research that I’ve seen says that when you ask Wall Street analysts, management quality is the number one determinant of a company’s financial performance, yet it’s the very exceptional analyst that has a systematic template, that says if I saw these 20 things in a semiconductor company, I would know it’s a well-managed company….What we’ve tried to do is make it a lot more systematic and disciplined and robust.”
What seemed obvious to Kiernan and his proverbial 10-year-old proved counterintuitive for the chief investment officers and bankers that he was trying to convert. He says that he’s been in meetings with the chairmen of investment banks who will tell him that all the evidence runs against his argument, but when pushed can’t name a single study that actually provides such evidence. Kiernan, on the other hand, says he has a wide array of proof.
“We did a study for the British government a few years ago where we looked at 100 studies [on the results of green investing] and they ran 93% positive, 3% negative, and the rest neutral, but there’s this mythology out there that a) these considerations are either irrelevant or harmful and b) it follows logically therefore that it is absolutely incompatible with fiduciary responsibility,” Kiernan explains. “But the best practice thinking around the world from fiduciary lawyers says no, that’s exactly backwards.
“I’ll give you a concrete example, in the U.S. large-cap electric utilities sector in the S&P 500, if you just look at the issue of climate change and climate risk, the variation between the most and the least risky companies in that sector is a factor of 30 times. Explain to me please, somebody, how willfully refusing to find that out makes you a better, more cautious, more prudent, risk-averse fiduciary. I just do not get it. It’s this massive intellectual and institutional inertia that has retarded this idea for decades.”
In the end, it’s the numbers that tell the whole story and Kiernan’s numbers tell a pretty convincing one.