It's All About the Green

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.