A Win-Win Approach

There’s a long list of challenges facing the world and the companies that do business in it: climate change, access to energy resources, adequate food supplies, clean air and water, health care—and the list goes on. These issues, though certainly complex, do create many investment opportunities for companies that can address them with sustainable solutions. Here’s how.

Sustainability practices address these challenges, according to the U.S. Environmental Protection Agency and other sources. “Sustainability is based on a simple principle: Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment,” the organization says. “Sustainability creates and maintains the conditions under which humans and nature can exist in productive harmony [and] that permit fulfilling the social, economic and other requirements of present and future generations.”

SAM Group Holding AG, an investment firm in Zurich, Switzerland, focusing exclusively on sustainability investing, identifies several global megatrends: long-term water, energy, climate, materials, agribusiness, and healthy living. Investors can potentially profit from focusing on companies that are meaningfully and financially associated with these themes.

Investors “continue to underestimate the impact of sustainability trends on companies’ competitive landscape,” the SAM Group notes on its website. “This leads to market inefficiencies that sustainability investors can exploit. SAM believes that sustainability is a company’s capacity to prosper in a competitive and changing global business environment by anticipating and managing current and future economic, environmental and social opportunities and risks. Companies that address these factors through innovation, quality and productivity enhance their ability to generate long-term shareholder value.”

Sustainable investing is sometimes confused with socially responsible investing, but they differ, says Joseph Keefe, president and chief executive officer of Pax World Management LLC, a sustainable investing management firm in Portsmouth, N.H. In 1971, Pax World launched the first U.S.-based socially responsible mutual fund, an approach that was generally defined as investing with your values, says Keefe. This approach required investors to screen out corporate activities or products to which they objected, such as weapons, tobacco, alcohol or gambling.

In contrast, sustainable investing defines itself more closely with what it invests in, says Keefe. Its aim is to focus on investments in companies that have stronger sustainability profiles, because those profiles are considered to be strong indicators of good management and more forward-looking corporate entities. In time, those companies should produce better financial returns, according to this approach.

Identifying Leaders

Identifying sustainability leaders follows a general and rigorous process, experts say: (1) Find companies with strong sustainability practices that are pursuing viable solutions, (2) analyze those companies for their growth potential and relative valuations, and (3) identify the best-of-class in their respective sectors. 

To compile its Dow Jones Sustainability Index (DJSI) World index, SAM invites the world’s 2,500 largest companies (in terms of free-float market capitalization) in all industry sectors to participate in its annual Corporate Sustainability Assessment (CSA). An additional 800 companies from emerging markets are also invited to participate. 

“The CSA focuses on a company’s long-term value creation with over 100 questions on financially material economic, environmental and social practices,” SAM explains online. “Over half of the questions are industry-specific, as SAM is convinced that sector-specific sustainability risks and opportunities play a key role in a firm’s long-term success. The other half includes questions on general sustainability issues, such as corporate governance, product stewardship, and talent attraction and retention.”