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Financial Planning > Charitable Giving > SRI Impact Investing

The Right Mix: SRI Investing, Sustainability

By Ed McCarthy, CFP, RICP

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Sustainable investing offers investors the chance to earn profits, while also putting their personal values into action and making a positive impact on the world. It’s a straightforward idea: Companies that embrace sustainability are in a better position to create value for their shareholders, experts say.

Before seeking sustainable investments, investors need to understand the concept. According to the U.S. Environmental Protection Agency (EPA), sustainability is based on a simple principle: “Sustainability creates and maintains the conditions under which humans and nature can exist in productive harmony, that permit fulfilling the social, economic and other requirements of present and future generations. Sustainability is important to making sure that we have and will continue to have, the water, materials, and resources to protect human health and our environment.”

Sustainability in Action

Peter Graf, chief sustainability officer and executive vice-president with business-management software maker SAP in Palo Alto, Calif., explains how sustainability is implemented at his company. “Many companies have defined a sustainability strategy. That’s commendable, but—in our eyes—is only a first step towards moving to a sustainable business strategy for the company.”

There is “a profound difference” between that approach and the one taken by SAP, according to Graf. “A sustainable business strategy is one that is focused on creating long-term value for SAP, its customers and partners, as well as the environment and society. It is essentially about embedding holistic, long-term thinking into everything that we do,” he explained.

From SAP’s perspective, this work revolves around the company’s software, because that’s how the business creates value for its customers and how it can have the biggest impact worldwide. SAP embeds sustainability capabilities—financial, human, environmental, social, etc.—into its solutions. For example, SAP recently announced the development of a new version of its SAP Energy and Environmental Resource Management solution for manufacturers based on in-memory technology. It also means the company applies such solutions internally to improve its own sustainability performance, says Graf.

Sustainability also is integrated into Roche’s corporate strategy and core business activities. As a result, no single department is responsible for managing sustainability, according to Tamer Farhan, Ph.D., an investor relations officer with the Basel, Switzerland-based maker of medicines and diagnostics. Instead, Roche has a corporate sustainability committee comprised of professionals working in operations across the entire business, allowing involvement and engagement from the bottom up and on multiple levels.

The committee also reports directly to the corporate executive committee and board of directors’ corporate governance and sustainability committee. This integrated approach means all employees are encouraged to embed sustainability into their work, says Farhan. In addition, key performance indicators track employee performance in meeting corporate social responsibility goals and are a factor in compensation.

Investment Strategies

Sustainable investing is part of a long history of investment strategies that aim to align investors’ values and portfolios. In 1928, the Pioneer Fund, a mutual fund that avoided “sin stocks” associated with gambling, alcohol and tobacco, was launched. The Pax World Funds started operating in the 1970s as a group of “ethical mutual funds,” for instance, and the Sullivan Principles, which encouraged divestment of South African investments in an effort to pressure the South African government to end apartheid, also emerged in the ‘70s.

The movement for values-based and socially responsible investing continued to gain momentum in the 1980s and 1990s. Since 2000, there has been a broader focus on sustainability and environmental, social and governance (or ESG) factors among organizations and investors.

Stu Dalheim, vice-president of shareholder advocacy at Calvert Investments in Bethesda, Md., says that his firm’s approach to sustainable and responsible investing (SRI) takes a variety of factors into consideration. (SRI refers to an investment process that, along with traditional financial analysis, integrates analysis of a company’s social responsibility in pursuit of enhanced long-term returns, he explains.)

“What does that really mean?” Dalheim asks. “SRI provides a comprehensive way to assess a company’s real value by including both corporate responsibility and sustainability measures in a company’s valuation—factors Calvert believes to be as critical to long-term performance as traditional financial measures.”

The process involves screening for “red flags” that a traditional investor might overlook, he explains. Additionally, SRI-focused investment managers see the long-term cost savings and revenue-driving potential of sustainability innovation and leadership.

“SRI provides a comprehensive way to assess a company’s real value by including both corporate responsibility and sustainability measures in a company’s valuation—factors Calvert believes to be as critical to long-term performance as traditional financial measures,” he notes. “Additionally, they see the long-term cost savings and revenue-driving potential of sustainability innovation and leadership.”

Sustainability-based cost savings can be considerable. As an example, Graf points to the financial and environmental benefits resulting from SAP’s reduced consumption of energy, made possible by adjustments to its operations. In SAP’s case, more than 40% of its carbon footprint stems from staff traveling by airplane. Reducing the amount of travel provides the double benefit of cutting company-related emissions and saving money, he explains.

SAP has deployed more than 50 high-end telepresence rooms and more than 500 videoconferencing units, which allow its employees to transform how they communicate with each other and with customers. The financial impact of reduced travel and other sustainability measures is impressive: SAP has lowered costs by over $285 million in the last five years with energy- and carbon-related initiatives, according to Graf.

Growing Interest

Sustainable investment themes continue to attract funds. According to a 2012 report published by the Global Sustainable Investment Alliance, “… globally, at least $13.6 trillion worth of professionally managed assets incorporate environmental, social and governance concerns into their investment selection and management. This represents 21.8% of the total assets managed professionally in the regions covered by the report, conclusively showing that the sustainable investment industry has significant scale in the global arena.”

Of course, the key question for investors is how sustainable investing can financially benefit them, and research results to date generally have been positive. A 2009 study by asset managers Augustin Landier and Vinay B. Nair found that strong corporate ESG performance had a positive correlation to market-based financial outperformance.

RobecoSAM, an investment management firm in Zurich, Switzerland, specializing in sustainability investing, has examined whether publicly traded companies that score well on the firm’s sustainability measures outperform companies identified as sustainability laggards. From 2001 through 2010, the findings of its research provide “credible evidence that firms that adopt corporate sustainability best practices are not contradicting or neglecting their primary objective, which is to maximize the profits of their shareholders,” the firm says.

“On the contrary, it would appear that the puzzle of corporate financial performance broadly encompasses both financial and extra-financial considerations …” RobecoSAM explain. “Investing in sustainability leaders ultimately contributes to superior long-term investment results with improved risk-return profiles.”

Deutsche Bank’s review of academic studies supported those findings. All of the studies it looked at in 2012 supported the hypothesis that firms with high corporate social responsibility and ESG factors had lower costs of capital for debt and equity. Eighty-nine percent of the studies showed that companies with high ESG ratings provided market-based outperformance.

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