Investment & Pensions Europe's Nina Röhrbein has presented some highlights from last week's TBLI conference in Amsterdam. She quotes RiskMetrics Group's Ran Fuchs, who asked why, historically, environmental, social and governance (ESG) research has primarily focused on equities, rather than fixed-income assets.
Mr. Fuchs' question is about investment horizon, as ESG investment is long-term investment. In considering extra-financial metrics of corporate value, ESG investors act on their skepticism about short-term indicators, like share prices or quarterly returns. As ESG research can uncover longer-term risks and opportunities, Mr. Fuchs believes, its practitioners should apply its lessons to assets with longer time horizons.
"Debt is Vital to the Survival of a Company"
His comments, from the IPE report:
"Fixed income investments last for 10 to 15 years or even longer, so any type of long-term ESG investments should be going straight to debt." …
"The short-term performance of such investments should easily convince investors that there is value in this. But the impact on the industry can also be much stronger through fixed income because, while the price of the equities is relevant, the cost of debt and financing is absolutely vital to the survival of the company."
In citing a desire for "impact on the industry," Mr. Fuchs affirms that engagement – or "lobbying the corporation" – remains a priority for the ESG sector. As bondholders, he suggests, investors could help reorient corporate thinking in a more sustainable direction.
Moving Minds with Markets
"Sustainability" is a buzzword that can obscure as much as it explains. A company that sustains a healthy balance sheet may use resources – natural and human – in an unsustainable way.
The ambiguity of "sustainability" hints at why the ESG sector – of which KLD was an early member, and to which RiskMetrics has made a strong commitment – describes its work as "integration."
Within the financial services community, we seek to integrate extra-financial factors into mainstream analysis. For the economy as a whole, we work towards the integration of environmental, social and governance concerns into mainstream corporate management.
From this perspective, financial instruments are only means to an end. We argue that business can only create as much value as the community and environment can sustain. This perspective demands a philosophical shift – a change in managers, not just markets.
Thinking 'Round the Bend
This change has already begun. Tom Konrad at Seeking Alpha recently posted a revealing exchange with Ray Anderson, head of carpet maker Interface:
"Q: In your experience, how does the financial community view corporate sustainability? Does anyone outside of the Socially Responsible Investment community care? Have you encountered much skepticism?
Ray Anderson: In the early days of our journey, we definitely experienced skepticism from the financial community. In fact, our former CFO Dan Hendrix (who is now the Interface CEO) was asked on more than one occasion if I had "gone 'round the bend." I explained that as a leader, that was my job, because 'round the bend is where our future lies. …
Q: How does sustainability help returns for investors and over what time horizon?
Ray Anderson: As with any new thinking there's a time lag between early adoption and mainstream acceptance, and that naturally influences the return horizon for investment in new products, processes and technologies. I believe there are new fortunes to be made as we define this, the next industrial revolution.
I also believe that part of what needs to change is our focus on short time horizons, i.e., the focus on the next quarter, for both companies and for their investors. Sustainability by its very nature requires a long view on the future as we consider the impact of our decisions today on future generations."