About the Author

When looking into business schools, I met with many a finance guru in investment and private wealth management to better understand the crossroads of sustainable impact and finance. My questions were met mostly with blank stares—and subsequent explanations that instead I should pursue finance and join a nonprofit board in my free time.

Now, fully engaged at the University of Michigan’s Erb Institute, I have found a community at the heart of impact and business. In my first few months at Erb, I was awash in experts and opportunities. Second- and third-year Erbers hosted casual career chats about their experience in a range of sustainable finance careers, from working at Sofi to creating energy project financing. I took Environmental Finance with one of the world’s experts on cleantech and finance, Professor Peter Adriaens. I then represented Erb at the Sustainable Responsible Impact (SRI) Investing Conference, where industry pioneers have been coming together for 26 years to pave the way for impact in finance.

This conference really opened my eyes to the power of environmental, social and governance (ESG) investing, and I want to share four things every sustainability professional should know and understand about ESG:

ESG is a rating system that consolidates data on a company’s operations regarding its environmental, social and governance practices.
  • Environmental performance criteria look at how a company performs as a steward of the natural environment with respect to energy use, waste, pollution, natural resource conservation and animal treatment. Environmental risks are also evaluated, because they might affect a company’s revenue stream. A few environmental risks companies might face: ownership of contaminated land, oil spills, hazardous waste disposal, toxic emissions and compliance with government environmental regulations.
  • Social performance criteria examine how a company manages business relationships. Does it work with suppliers that hold the same values that the company itself claims to hold? What is the company’s impact in the communities within which it works? Do the company’s working conditions show a high regard for its employees’ human rights and safety?
  • Governance performance deals with a company’s leadership, executive pay, audits and internal controls, and shareholder rights. Investors want to know that a company uses accurate and transparent accounting methods, and they want to see that shareholders are allowed to vote on important issues. They also want companies to avoid conflicts of interest in their choice of board members. Finally, they prefer not to invest in companies that engage in illegal behavior or use political contributions to obtain favorable treatment.
Sustainability is increasingly mainstream.
  • In a recent trends report by US SIF Foundation, between 2012 and 2014, sustainable, responsible and impact investing assets have soared 76 percent, reaching $6.57 trillion, up from $3.74 trillion. That’s the largest two-year increase in at least the last two decades.
  • Sustainable, responsible, impact Investing (SRI): U.S. SRI investing assets now account for 1 out of 6 dollars under professional management in the United States, and S&P 500 companies filing sustainability reports have increased from 20 percent in 2011 to 75 percent in 2014.
  • The ESG-based investing market includes 925 funds, up from 55 in 1995 and 260 in 2007.
  • Organizations such as the Global Reporting Initiative, Sustainability Standards Board and International Integrated Reporting Council have made substantial strides in setting standards for the quality and format for disclosing ESG data. ESG information is more widely available from mainstream data providers, including MSCI, Reuters, Sustainalytics and Bloomberg.
  • ESG factors are now fundamental data points that influence the idiosyncratic risk return profiles of stocks and equity portfolios.
ESG is increasingly viewed as “less stick, more carrot.”
  • The use of ESG factors in rating investments has gone from an “exclusionary approach” (such as “don’t buy” tobacco, gambling, alcohol) to a “best in class approach” that rates companies against other companies within their own sector on their ability to meet ESG criteria.
Invest actively with ESG in mind.
  • Active investors are trying to find stocks that will beat market, and ESG is a helpful tool in active management. What constitutes an acceptable set of ESG criteria is subjective, so investors will need to do the research to find investments that match their values.

With ESG’s rating system in place, as well as rapidly growing interest in sustainability, companies cannot ignore investor demand if they want to compete. The timeline for change within finance is slow and incremental, but big players like Morgan Stanley, BlackRock and Goldman are increasingly focused on investors’ long-term needs, including sustainability. Foundations, which are required to give at least 5 percent to philanthropic causes annually, invest the remaining money to earn returns and grow their endowments. Many are invested in fossil fuels, but a new trend is emerging as bold foundations begin to shift their funds to ESG or even impact investing, paying attention to not only the impact they make through philanthropy but also the effect of where their “money sleeps.” The conference attendees exuded a confidence that ESG analysis is bringing new shape to the market through new investment processes and products.

The SRI investing world has opportunities to use MBA/MS skills to lead this integration into the mainstream even further. More work needs to be done on challenges such as the standardization, verification and materiality of data. However, if this is not your career fancy, take a stand as an individual investor about where your money sleeps at night. Imagine the shift Erb-minded finance professionals and investors could make. In ten years, what if investors not only understood how companies affect environmental, social and governance issues for better or worse, but also how investors’ individual and collective investment practices cultivate demand that drives company decisions about sustainability?

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