Sustainable investment is an investment management theme that is growing. Sustainable investment is investment that fully considers all risks and rewards of a given investment. After the global financial meltdown, Madoff and Copenhagen in the past two years, how much better is sustainable investment understood by investors in London, New York, Stockholm, Amsterdam or Tokyo today? Billions of dollars of new investment in new technologies is needed to de-carbonize the global economy. In January the “2010 Investor Statement on Catalyzing Investments in a Low Carbon Economy” - issued by four investor groups representing more than USD 13 trillion in assets including INCR - called on Governments from their podium at the UN in NYC to take immediate steps to catalyse the development of a low-carbon economy and attract the necessary private capital. Their call even reached the Sundance Channel.
Do most institutional investors still fail to understand sustainable investment? Pension funds and institutional investors – with their advisors at private banks and hedge funds in wealth management centres like Geneva or Melbourne – are fiduciaries who should efficiently and effectively allocate and manage their assets. Looking at macro sustainability trends such as natural resources, urbanization and demographics change, how well are these funds and their advisors giving appropriate consideration to any factor which may materially affect the sustainable long term risk-adjusted performance of the Fund's investments, including environmental, social and governance factors, across all asset classes? Sustainable investment is opposed to the concept of externalities, the economic term for costs pushed onto society, and the planet. Nobel Prize-winning columnist Paul Krugman this week surveyed the “economics of climate change or, more precisely, the economics of lessening climate change”. Krugman describes externalities this way: “What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window."
Some of that capital will come from High Net Worth [HNW] investors like those who manage their wealth through Switzerland’s established private banks and hedge funds. Returns are not guaranteed. In fact millions of Euros were thrown into the clean tech sector at companies that could never be competitive or commercially viable in the long term. But some high-risk, high return investors will be the first to back new technologies. We had a small but globally significant example in Vaud last week. The Solar Impulse first flight on 7 April in the commune of Payerne VD is a good example [see Wired video]: experimental technology co-funded by Swiss adventurer Bertrand Piccard with partners giving corporate funding for research and individuals providing project financing through subordinated loans. Seriously experimental - imagine sitting in that cockpit for an around-the-world flip? And of course, at the Geneve Auto Salon in February 2010, hybrids and electric cars were represented at most stands [seriously, a metallic green Ferrari 599 hybrid and I am meant to think it's green?!]. Actually the real pushing technology was in the dim and out-of-the-way green hall, away from all the flashy lighting and chick models. Credit Suisse posted a note on the "environmentally friendly stars was developed in Switzerland: The Lampo2 from the Protoscar think tank based in Ticino".
When we at SinCo design investment architecture for institutional investors, we design to integrate environmental, social and governance [ESG] factors. Major Swiss investor [and now Swiss big brother after UBS meltdown the past 2 years] Credit Suisse considers “Sustainable investment is no trend but a key sector for the future.” We disagree. Putting ESG into a bucket misses the innovation it offers. We prefer to describe sustainable investment as a theme – it is neither an asset class nor sector, but an approach to investment management that explicitly integrates all factors – including environmental, social and governance [ESG] factors – into the decisions.
Walking into Great Westerford this morning on a crisp sunny Cape winter morning I was surprised to find huddles of smokers grabbing a puff on the steps. A beautiful day, puffing away. But maybe not that much different than those who need their 'morning cup of Joe' to start their day. The human habit of smoking is a fascination: humans choosing to buy a product directly linked to disease - including my two sisters whose own grandparents died from lung cancer and cardiac failure linked to chain smoking. Help explain how this logic stacks up: tobacco is a non-nutritious agricultural industry product driving farmers to farm cash crops not nutritious foods for sale to multinationals to sell to humans as aspirational good living to smoke and will in time directly lead to negative health impacts. Any investor integrating ESG factors must be investing away from tobacco. One may make an investment case and an ethical case. Either way, it raises all the classic considerations in sustainable finance and responsible investment: 1. whose money is it, 2. what is best practice investment analysis, 3. are all the investment factors covered [including environmental, social and governance ESG factors] and 4. what time horizon is long term? The decision to invest in tobacco must be a litmus test for any work on ESG architecture. Is it being discussed by the large ICGN or smaller PRI at their annual meetings this week in Sydney? Bill Gates and Michael Bloomberg in January 2009 put some of their personal fortune [USD 50m] into combating smoking, but I wonder if their endowments have? Any investment practitioner who is tasked with integrating ESG factors sooner or later will be faced with a tobacco name in the portfolio holdings or investable universe. In South Africa this morning, longtime investment writer Ben Temkin, originally a stalwart at Financial Mail and now at Business Day, covered his position on BAT, British American Tobacco, cross-listed in London LON: BATS and on Johannesburg Stock Exchange. Check the BAT investor presentations here for their take on the contingent liabilities, or the lack thereof. Thank you for smoking.
BAT is considered a "blue chip" investment name for many years and a large part of the Rembrandt/Richemont/Remgro story that is now playing out again as the Rupert family heading the companies consider re-bundling what they unbundled. A Business Day reader who follows Ben's Private Investor column that offers some investment thinking and breaks down the investment opportunities of the day, challenged him on the "fundamentals" that a tobacco firm offers as an investment opportunity. The reader challenges Ben by saying he has a declared bias against investing in tobacco, that if the same numbers reflected the financials of say, a retailer, that Ben would be making different recommendations. In effect the reader is making an ethical case: investor should suspect looking behind the numbers. Perhaps Ben has had a tobacco-related illness cause personal tragedy, similar to a money manager of a multi-billion dollar shop just off Wall St leading a large fixed income team; who invited his staff to bring all investment ideas forward but never bother to bring forward a tobacco deal on account of losing a parent to tobacco-related illness. Knowing that the product of a firm is directly linked to ill health does create an ethical crisis for its business partners, including investors. How they choose to deal with the ethical dilema is their liberty to choose. The Independent's Warner stated it plainly in 2006 "Jeremy Warner's Outlook: Investing in tobacco may be unethical, but it sure is lucrative, as Gallaher bears witness". What was it about 2006, articles pitching the sector were also on MSN Up in smoke – should you invest in tobacco? By Richard Hunter, Head of UK Equities, Hargreaves Lansdown July 11 2006, Businessweek VIDEO "Investing in Tobacco Stocks: How to play it" and a real pearler from "Investment U" pitching why one should invest in tobacco despite the liability and regulation issues Tobacco Stocks: “Smoking” Out Investment Profits From A Blue Chip Titan November 2006. As you ponder what to invest your money in, enjoy some of the wry humour in Thank You for Smoking [2004]. And try not to grin at the catchphrase "Nick Naylor doesn't lie, he filters the truth"..!
The investment case is a lot closer to the ethical case than people think. If one invests, like Warren Buffett, in the firm for its business and long term prospects, how may one look past the product and its effects? Why invest in a sector or firm in a sector where the sector has a large negative exposure? Back in 1997 a public health professor at the top-tier University of Michigan in the USA pushed for major institutional investor TIAA-CREF to back away from tobacco "Vote on TIAA-CREF tobacco investment policy". Also at universities, activist students are a big headache for tobacco industry, being business types, future leaders, and able to see through pseudo-sophisticated arguments, illustrated by the 2004 article on Edinburgh students "Students stub out tobacco investment". A 2007 paper illustrated the irony for Australian pension funds in "Australian pension funds and tobacco investments: promoting ill health and out-of-step with their members", opening with some solid paragraphs:
Calls for institutional investors to divest tobacco shareholdings threaten the industry's share values, publicize its bad behaviour and label it as a politically unacceptable ally (Wander and Malone, 2006). In 1990, US tobacco control advocates began urging government investment and pension funds to divest tobacco stocks as a matter of responsible social policy (Wander and Malone, 2006). Tobacco companies fought hard to counter the divestment push and eventually only seven US states divested their tobacco stocks (Wander and Malone, 2006).
Since 2000, transnational tobacco companies have sought to regain the public's respect and investor confidence by embracing the principle of ‘corporate social responsibility (CSR)’ (Hirschhorn, 2004). The appearance of British American Tobacco in eighth place on a Corporate Responsibility Index for 2006 published by the St James Ethics Centre suggests the CSR strategy has been at least partially successful (Chapman, 2006). Investment analysts continue to describe tobacco shares as a good buy (Dubose Tomassi, 2006). Incredibly, as late as 2004, five leading US medical schools held shares in the tobacco industry (Wander and Malone, 2004). The scope of current pension fund investments in the tobacco industry is indicated by a 2006 estimate that smoke-free legislation in England could add up to £20 billion (US $35 billion) to UK pension deficits (Simpson, 2006).
The irony of seeing nurses smoking by the hospital exit is analogous to the news in June 2009 from Canada that health insurer investment arms are investing in tobacco, which the tobacco industry proudly reported and were defended by the Candian Finance Minister as reported by CBC in June 2009. It appears Nigeria has banned future investment in tobacco. Personal habits are sometimes at odds with the societal good, or even one's personal good.
Ben's column title "Contingent Liabilities Take Shine of BAT" in Business Day 16 July 2009 offers a gentler version of the danger. As he summarizes in his conclusion: Before you are tempted to buy the shares, however, read [this is always a smart thing for investors to do!] the nine pages on contingent liabilities and financial commitments in Note 30 of the 2008 annual financial accounts [statements]. It is a terrifying horror story, and its possible financial implications on future earnings are not quantified.
Any investor must assess the opportunities for risk and reward from placing money in the ownership or lending of a going concern today, expecting to earn a higher rate of return than some base rate - say the rate of inflation or interest on a cash account. So any investor in a tobacco firm must take a view on the cash returns to the firm in the forthcoming period, or the market's opinion about that return, depending on whether they are basing on fundamentals or relative measures and technical market movements [if you're a trader, it's a matter of seconds, if you're a deep value investors, a matter of years]. That means assessing all the scenarios for the firm. Which include the huge public healthcare costs that are attached say, in the US. Part of the Bloomberg Initiative's purpose to fight tobacco in low and middle-income countries (focusing on 15 countries) is exactly to avoid the future healthcare burden in countries that cannot afford it, literally. The future "settlements" from the tobacco industry of course have created the conundrum where the state government has a vested interest in the tobacco firm thriving and earning cash returns, in order that the tobacco firm pays the settlement into the future. Federal and state legislators have a vested interest in keeping tobacco in business. These are the so-called "Tobacco Bonds", applied and rated by Moodys at state level. Government has a vested interest in cigarettes because of the large excise duties and taxes levied on them, effectively creating a chunk of reliable cash revenues that are hard for politicians to become un-addicted to [see The Red tape Chronicles spotlighting the taxpayers interest in smoking teenagers and made of US state securitization of tobacco settlements in "Ten years Later Tobacco Deal Going Up in Smoke from Nov 2008]. New York state Public Interest Research group [NYPIRG], one of the publicly funded think tanks, outlines the case for state-level divestment in the US [Tobacco Divestment in New York State] in fighting against NY funds invested still in tobacco. Many of these arguments apply in emerging and frontier markets like Brazil, Bangladesh, Malaysia, Sri Lanka or South Africa, which is why the Bloomberg Initiative targets such countries. NYCERS, the activist pension fund active in sustainability and ESG investment, remains invested despite stopping new investment some years ago. We have no view on the efficacy of the "black box warnings" that tobacco companies must slap onto the packaging. Pharmaceutical companies detest that stigma, and food companies have wriggled at the prospect that some of their marginally nutritious foodstuff could deserve the same. Some of the drive to capture the full costs of tobacco is reflected in the litigation and the global regulations to prevent marketing and sale [cigarettes are sold, not bought] that the World Health Organization Tobacco Free Initiative helped drive in the late 1990s under Gro Harlem Brundtland, the former head of the UN sustainable development commission that coined the sustainability definition in 1987: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:
- the concept of 'needs', in particular the essential needs of the world's poor, to which overriding priority should be given; and
- the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs."
It is hard to reconcile this thinking with investment decisions channeling cash today into tobacco, yes? Sustainable finance is about comprehensively assessing explicit and implicit risks and benefits of investments: not just the ones that firms choose to write about, legislators bother to regulate, and lawyers cannot slide past. The investment case is a lot closer to the ethical case than people think. Integrating ESG factors - what is the total lifetime lifecycle cost of tobacco production and sales to humans? - is part of the holistic investment playing field with no externalities that we think all investors should play on. No costs should pushed onto society, and hidden costs should be exposed. Once all the costs and benefits, risks and returns are fully priced in, go ahead, puff away: thank you for smoking.
[SRI-Extra in 60secs > Snow falls on LDN and attracts some sustainability media thinking. Sort of. FA launches FAGreen in the US. Davos is WEF annual skiing vacation for politicos and financiers. Davos had better snow, and more hot air, but some pointed comments by Tutu and Putin. SA's Maasdorp covered impacts on Africa. Investment News suggests ESG is fast gaining acceptance in the US. Xshares launches Airshares. IFC-funded Who Cares Wins project closed with a summary report from OnValues, which included four recommendations for EM. IFC funded the project, and is active in ESG in investment in EM. Credit Agricole and Societe Generale merged asset management divisions. Obama says bank bonuses at this time are "shameful". MIT posts links to sustainability on campus, and at the B-school, MIT Sloan. GS]
Snow in London
Snow is dusting London and Paris this morning. It is enough snow to look beautiful, the sugar coating offering postcard photographers a once in decades opportunity. Fun at last for all those with Land Rovers. In Pennsylvania it's groundhog day [39% historical accuracy, 2009 predicts six more weeks of winter]. Funnily enough, a CNBC reporter jumped to make a climate change connection, CNBC Africa feed from Germany this morning's Business AM connecting a report on Lufthansa [Deutsche Lufthansa AG (ADR) (Public, OTC:DLAKY)] to the importance of sustainability in investment. I know aviation is a critical component, but that seems a bit of a reporter stretch, no? Maybe she could have connected to the Japan Airlines non-food biofuel-powered flight, that would have helped the segue a little [Japan Airlines Corporation (Public, TYO:9205)]. Here's hoping we will have smarter sustainability coverage from business journalists going forward, including a new on-line publication from Financial Advisor magazine, FA Green, launched by online editor Dorothy Hinchcliff. FA Green is targeted mostly at investment advisors in the US [see article on AirShares EU Carbon Allowances Fund (ASO) by Xshares, which rang the opening bell on 28 January]. The white snow will at least give our mates in the bleak City of London financial district something to look forward to, like building snowmen or a decent Calvin and Hobbes-quality snowball fight!
Lost in Davos
The snowfall may even help the bankers feel like they were part of the Davos circle for a few hours. Davos is the name of the town of Davos-Klosters in Switzerland and the abbreviated title for the annual World Economic Forum [WEF] gathering of politics and business. In 2009 SA's Maria Ramos was co-chair. It is a fun ride if you like schmoozing and skiing, and attracts attention of discontents. Davos is organized by the World Economic Forum, a Geneva-based organization set up by a millionaire Swiss businessman in the 1970's, with a fantastic view of Lac Leman over the UN Palais across to the Jura mountains in France. Davos offers much content at low cost for the major media, especially business media, so it received much coverage. As was widely reported, the role of finance and investment was supplanted by politicians. It is something of a lost year. Obama had no economic heavyweights there. Archbishop Emeritus Tutu [photo above] offered an interesting session on dignity as only he could, BBC reported Tutu said:
"we worshipped in the temple of cutthroat competition, and so some cooked the books, because the treasure is so great"
Bankers were no doubt an endangered species, with not a sorry in sight [see AP writer Brad Klapper report, note Forbes's comment and Schwarzman's pitch for less regulation]. The Bloomberg interview of Putin on 25 January by the female Bloomberg TV Moscow correspondent, Ellen Pinchuk, was gripping TV. Putin's slap down of Michael Dell was legendary. Bloomberg reported:
In the question-and-answer session after Putin’s speech, Dell Inc. Chief Executive Officer Michael Dell said he was surprised by the prime minister’s warning about excessive state interference and asked Putin how Dell could help Russia develop its information-technology industry. “You know, the trick is that we don’t need help,” Putin said. “We’re not handicapped. The people who really need help are the poor, the disabled, pensioners, developing countries.”
The ruble dropped 3.5% after Prime Minister Putin's comments. Soon we will see the movie adaptation of the play Frost/Nixon, so maybe I am a little more attuned to the challenges of being the astute interviewer face-to-face with a powerful person in a powerful emerging market country. She did well to discover his favourite "guilty pleasure" is ice cream, ever since Prime Minister Putin was a kid. Lots of it, apparently, but no mention of Ben & Jerry's. So if I ever meet him in person, we have at least one thing in common! Of all the river of Davos reporting, I enjoyed the note in Business Times in South Africa by WEF Young Global Leader, Leslie Maasdorp, vice chair of Barclays Capital and ABSA Capital, who spoke on the impact of the global financial crisis on Africa. His comments on the importance of a multi-polar world was expected, and he makes the good point that no new architecture or scope has been sharply defined for a "new world order". January 2009 is the worst ever January on record for the Dow, and the "January barometer" [if January is down, the year is down] suggests this year will be pear-shaped. Financials are down 25% in the US for the year [that's just January, folks!]. While many may wish for a "fairer economy" just keeping economies going may overwhelm all other priorities. Questions about the limits of corporate governance still lurk, including this morning's FTfm. Investment News overstates the US paradigm, "Investing according to strict environmental, social and governance principles is fast gaining acceptance among U.S. investors" BUT the positive trend maps our experience and forecasts.
Who Cares Wins Signs Off
Most useful for sustainable finance was the 2008 report summarizing the work of "Who Cares Wins", which unfortunately we could not contribute to because of prior commitments. The series of WCW papers since 2004 funded by the IFC, the Swiss Federal Department of Foreign Affairs and hooked to the UN Global Compact, have been useful in raising the profile of sustainability. Some papers have been better than others but the wrapping of the WCW project with an explicit conclusion is excellent project management, and good governance in this sector. On the eve of Davos fellow ESG consulting shop OnValues, based in Zurich, published the report as "a significant component of the Initiative's sponsors' media strategy during and following the WEF Annual Meeting 2009 in Davos this week." See the IFC PR. Though the current turbulence in financial markets may tempt investors and companies to think of ESG issues as ‘tomorrow’s problem’, we believe that urgent and wholehearted action is warranted not in spite of, but precisely because of the market dynamics observed in the past months. ESG integration is about investors and companies taking a longer-term view, acknowledging the full spectrum of future risks and opportunities, and allocating capital as if they themselves were the beneficial owner.
The concluding paper offered some useful thinking for work in Africa and other emerging markets regions. The authors posit that in order to improve ESG integration in emerging markets investment, which was a special focus area of the WCW Initiative based on the direction of the IFC which has an EM ESG team [see IFC EM ESG projects] in Washington DC, four recommendations are important: - Include ESG issues in regular company meetings and engagement activities
- Perform a systematic review of the ESG exposure of investments in emerging markets
- Consider collaborating with other investors in requiring minimum ESG disclosure standards from local legislators and exchanges
- Consider the potential for small allocations to frontier markets not only to deliver attractive returns but also to establish basic investability conditions (such as custody, efficient settlement services, etc.) and management awareness of material ESG issues.
In discussions through February I hope for some reaction from colleagues in EM in the sustainability + investment space to the request for better information. There is much to reflect upon. Moving changes in institutional investment are reflected by Société Générale and Crédit Agricole merging their asset management businesses to form Europe’s fourth largest operator with EUR638bn [USD837bn] under management. CA Cheuvreux had some solid ESG research [see 22/12/2008 The Green Road Out of Red], as did SocGen. One hopes their research capabilities are strengthened, not seen as overhead to cut. The consortium of funders behind WCW reflects the costs involved in some of these initiatives, especially where they are global. WCW was more useful because it tapped into thinking on emerging markets [EM] although mainly from the perspective of investors into EM from Zurich, London or Paris than actual investors in EM. A good exception was having Investec's Hendrik du Toit covering frontier markets at the July 2007 event in Geneva at the Credit Suisse private bank, Rue de Lausanne 17. All these projects must be funded, in cash or in-kind. One often forgets that the multitude of organizations and initiatives around the world are competing for influence, for money to support their efforts, and private and public sector institutions to collaborate with them. It is competitive. But it is also much harder to figure out on a consistent basis which organizations are achieving what. There is no "marketplace" or "stock exchange" valuing the work of international organizations and NGOs.
Pay for Performance
Scoreboards may be tough to read. Scores change in seconds, like market prices. We struggled to watch from 1am central African time [CAT] this morning the biggest one day sports event in the world, the NFL Superbowl in the US. A great game, but none of the famous Superbowl TV adverts. Wrong zone. Markets are like sports fans in that they like clarity, like knowing which is the champion. The increase in fantasy leagues, the recruiting of traders using poker games, and HSBC sponsoring the Lions rugby tour to South Africa in 2009, are just some of the examples of the metaphor and parallels. Boston-based online paper CSMonitor had a good item connecting pay-for-performance of businessmen and the NFL athletes, many of whom are superbly overpaid. All market players are not rational however: all the money in the world could not buy superstar Brazilian footballer Kaka from Intern Milan to Manchester City [GBP107m, USD147m - yes, million!]. The efficient market hypothesisticans must have been spinning...
Pay guidelines are a key request of pitches to the Obama administration as they reconfigure the rules of the financial game for Wall St. Apparently President Obama was pretty pissed about the bonuses, calling them "shameful" on this Huffington Post video. I wonder what President Obama may achieve if he were to invite to a frank airing of views behind closed [oak] doors a bunch of bankers pulling bonuses while firing employees.
In closing, an anecdote from another fine dinner in CPT on Friday. An architect was speaking about how climate impact is 70% caused by the built environment, and that developers will only look at economic cost/benefit-positive sustainability items. Apparently developers do not even care about longer term trade-offs, just the math until the sale to the property owner/manager. More reality from the frontlines on the challenges of getting longer term thinking into investment decisions. Seems like the Green Building Council has many yards to go in the industry. The conversation had me reflecting on my last lecture at MIT Sloan, their business school, back in December 2008 as well as meeting with a cross-disciplinary team at MIT focused on making sustainability happen on campus in Cambridge MA. Even when the thinking is advanced, and smart people are moving, putting basics together across different silos is a change management challenge of note. But MIT is making some good progress. See multimedia links were made available this week including Sustainability: Greening MIT's Campus and Beyond and the Professor heading up the B-school's efforts, Prof Sarah Slaughter, who has an engineering background, here speaking on sustainability. MIT Sloan are moving forward with some case studies for teaching sustainability + investment with Sinclair & Company in 2009. The title of Prof Sterman's lecture on the Sloan Review is about right: A Sober Optimist's Guide to Sustainability.
SRIX.GS
***
Who Cares Wins [WCW] events and milestones include reports for download at http://www.ifc.org/ifcext/enviro.nsf/Content/Publications_SustFinance:
- 2004 Annual Event; 'Who Cares Wins: Connecting Financial Markets to a Changing World'
- 2005 Annual Event; 'Investing for Long-Term Value'
- 2006 Annual Event; 'Communicating ESG Value Drivers at the Company-Investor Interface'
- 2007 Annual Event; 'New Frontiers in Emerging Markets Investment'
Sustainable Finance
Investment is about the price you buy, the price you sell, and how long one holds in that position. You may be very smart, but the market may make a fool of you. And as investors from Benjamin Graham to Peter Lynch to Sir John Templeton to Warren Buffet have opined, there must be times when you have to be confident enough to be contrarian. Stand when the herd rampages off, and step away discretely when the thundering herd comes running back. So perhaps the smartest move is obvious for the smartest US president in a few years: either walk on water up to the Lincoln Memorial, or call a first presidential media conference to announce:
“Thank you fellow Americans, for believing in me, and voting for me to be here today. Knowing you expect everything of me is a wonderfully challenging, and not being one to disappoint you all, I quit. Now believe in yourself. I’m off to bodysurf in Hawaii…”
It is an understatement that expectations are high on the Potomac, and on planet earth. Obama must feel like Brazil come football World Cup time, Steve Jobs at Macworld or Ferrari at Monza. Friends and colleagues are trekking to Washington, DC for the inauguration, or to local celebrations like the African Celebration, and even heading up to Kenya to be live through the African American connection. It is mind-boggling to think his grandmother and aunt were packing for the flight from Nairobi. The epoch-changing event is building in intensity. One newspaper referred to Obama as the biggest celebrity in the world, the world’s best-known human. Symbolism is high ahead of the basic realities like administration. No pressure then, ‘ey?!
U2 and US
Sunday’s pre-inauguration concert at Lincoln Memorial introduced some of the celebrity. U2 singing for MLK made a strong picture. U2’s set of “Pride” written for MLK [today is Martin Luther King Day in the US] and sung with gusto during U2’s Rattle & Hum tour in the US in 1988, and the U2 theme song adopted by the Obama/Biden campaign, “City of Blinding Lights” with its sweet electric guitar hook. To have the greatest band in history playing on the steps where their icon MLK spoke for peace, and singing “Pride, In the Name of Love” was culture intersecting history. Live, and imperfect [like lead-singer Bono getting his math wrong!]. Being Bono, he went straight for the jugular of the issue of the day, dedicating “pride” and the reconciliation message also to Israel, and to Palestine. You can imagine the prime-time US producers holding their breath and fingering the tape-delay button. Maybe that is why Obama was not quite singing along [or maybe as a former nerd he does not quite have U2 cred?]. I expected that with the opportunity for a gospel choir, “I Still Haven’t Found What I’m Looking For” would have been selected, but perhaps that would not be sufficiently victorious. In true U2 style, in homage to America, they tweaked the lyrics just like they did at the NFL Superbowl concert after 9/11 in 2002. U2 has been as good to the USA, as the US has been to U2. Check Youtube for U2 Obama Inauguration and U2 NFL Superbowl 2002.
Cold, Flat and Crowded
What is the sustainable finance angle here? With a nod to Mr Friedman’s “Hot, Flat and Crowded” I suggest that the inauguration offers a “Cold, Flat, and Crowded” moment for sustainable finance and sustainability + investment. Expectations are high, but the grit of real details – like gravity – always will decide.
i. Cold
Firstly, cold. Cold because, like in many inaugurations before, DC is known for the odd cold snap: it should be around... Nothing like Woodstock, VT where the president would need a Subaru not a Cadillac as presidential limo, but worthy of spectators bundled up like Eskimos and letting loose those ugly Uggs. Maybe this will help curb the length of speeches. The Northeast in winter is a grim place to be. The choice events have money managers in the Caribbean, or at least Florida. Hard-working and budget-tight responsible investment types were warm but local in New York City for the Institutional Investor/SIF 3rd Responsible Investment Forum. Word is that the mood was grim with cut-backs and retrenchments all round, although the headline presentation from John Ruggie was important, and attendance was down. The venue [Union League Club in midtown] does help allow the creative mind to drift to higher thoughts for a while. Last year between conference calls with Credit Suisse I flipped though Walt Whitman’s “Leaves of Grass”. Somehow conferences always seem a little long though, but II/SIF in NYC is doable because the iconic Apple store and Trump Tower are both walking distance, depending on how you prefer your inspiration.
Cold because it is a grim time to consider yourself a professional focused on ESG as the cuts in research and analysis budgets cut loose whole skilled teams [Merril Lynch cut their SRI sales person in London this week]. Cold because having the oil price around USD40 removes the urgency that prices of USD125 brought to switching to cars like the one driven by CIA director Wolmsley, Republican and climate change advocate in the US, with the sticker “Osama Bin Laden Hates This Car”. Nice. Cold because in the steps to get the US economy breathing again and the frozen banks lending, cold, hard calculations will trump ambition, and investment as usual does not value the environment correctly. In investment calculations between 7 am and 7pm in London, Stockholm, Tokyo or Sao Paolo today, what price will fresh air be priced at, or West Virginian mountaintops, or rules that minimize the opportunity for oil tanker hulls being ruptured? What price for the environment? Ignoring externalities creates false economy. The trickle of mutual fund investment reported by Responsible Investor Monday in Europe is a helpful sign, but dwarfed by the investment as usual money. Investment data group Lipper Feri and Responsible Investor calculated total sales for the SRI sector in Europe for November were €784.2m ($1bn) to take the overall value of the sector to €35.3bn. Sales of non-SRI equity funds totalled €588.7m.
ii. Flat
Secondly, flat. The roads to DC policy makers and federal dollars to invest seem relatively flat and easy to travel. A good few friends have submitted their CVs online to the change.gov. Many in the sustainability+ investment space see in Obama the administration to ramp up the pressure for federal level action, beyond what in the US has been happening at State or institutional level. The Democrats, “progressives” and independents who voted Obama/Biden into office will have their list of wishes to be fulfilled. At least we hope they will be transparent, and welcome counter-points. Competing factions will arrive with their policy and investment demands. While the financial meltdown has swept away some of the more driven options for the new administration, it seems the prospect of infrastructure and “green jobs” means that some aspects of the climate change agenda and broader sustainable investment will happen. But perhaps in the first 1,000 days and not 100, days. An relevant sidenote is the similar pressure in 1992 when the first Clinton administration opened the door to “economically targeted investment” [ETI]. The results were apparently underwhelming, in the same way social and economic investments elsewhere around the world that have been overburdened in socio-economic-political expectations have under-performed, with exceptions as Tessa Hebb has written.
Flat because investors expect a small “Obama bounce” in the markets before the grim reality of America, Europe and Japan in depression comes back. The banks are still not right, Citi is now two mini-me’s, and RBS just got beaten up by Gordon Brown for “irresponsible risk-taking”. But there is hope that some of the clean tech and green collar jobs will yet come through. With a powerful funding mechanism and political will, and with so much infrastructure to build, green concepts have to form a part of the answer.
iii. Crowded
Thirdly, crowded. Crowded with people, and crowded with demands. People who come to spectate and people who come to be energized to work. The inauguration is an event for this age, especially the Y generation that helped elect Obama. Children will ask “Did you go? Were you there?” Raised on celebrity, and the celebrity of previous icons like JFK, this is their chance to be there and post their Youtube perspective of history. I wonder if anyone will track the number of Obama inauguration vlogs? The tone in the US is like an open air World Cup final, the Tour de France all in one day, and the global audience of an American Idol finale into one small location in America. The rock concert and speeches yesterday had around 600,000 live and millions watching on TV globally. The unique Obama CNN/Facebook hookup is a seminal moment for social media and means that the virtual world will have online community watching and interacting. Its crowded with colleagues from the international investment and policy space, including those who like the phrase “responsible investment”, not a favourite of mine [along with ‘ethical investment”] because for the professional practitioner, it raises issues of whose responsibility, for what, and for how long; as well as the implication that all other investors are “irresponsible” which mainly just generates a negative dynamic. Sustainability + investment, ESG factors or sustainable finance work better.
Crowded with interested people and potential players. Whether they voted last November or could not vote, many professionals and people with thoughts of a new context or with stars in their eyes want to be in DC in the moment. The image of the president-elect and his family onstage for the election victory in Chicago - not white but black, and successful and representing a fresh image of America - will be set down in collages beside images from Tuesday of the first black president raising his hand to accept the role of president. In the US where much of the sustainability/ESG/socially responsible investment space is covered by voters who are probably Democrats, the appeal is obvious. At last, one of their own. Or so it seems. Obama is closer to U2 than people appreciate. As Obama himself reflected, and like U2’s songs, he is in many ways just a plain canvas that the people use to tell their own stories on, and through. A plain canvas, whether U2’s striving lyrics or Obama’s open-ended rhetoric. World citizens too from the US, UK and elsewhere are in Washington DC, seeing something to shout about, including at least one of President Mandela’s children, Zindzi Mandela. If only Madiba were a little younger, to be able to fly there and appreciate another historical moment. Many of the sustainability and policy shops have people on the ground in DC, like The Nature Conservancy [TNC], WWF, World Resources Institute [WRI], and niche investors like Albright Capital or the IFC, although Al Gore’s Generation Investment Management acknowledged that DC is a backwater for investors when they re-located to New York last year to be closer to capital rather than policy. But perhaps the US government spending a trillion dollars changes the rules of the asset-gathering thinking?
Ignoring externalities creates false economy. As false as the rubbish mortgage lending and investment ratings that melted markets in Q3 2008. If Obama’s Nobel-prize winning energy minister can make that case to coal-rich US, the case for externalities globally will take a major step forward. Maybe, just maybe, it will be time to watch out for that walk on water.
SRIX.GS
Sustainable investment is an investment management theme that is growing. Sustainable investment is investment that fully considers all risks and rewards of a given investment. After the global financial meltdown, Madoff and Copenhagen in the past two years, how much better is sustainable investment understood by investors in London, New York, Stockholm, Amsterdam or Tokyo today? Billions of dollars of new investment in new technologies is needed to de-carbonize the global economy. In January the “2010 Investor Statement on Catalyzing Investments in a Low Carbon Economy” - issued by four investor groups representing more than USD 13 trillion in assets including INCR - called on Governments from their podium at the UN in NYC to take immediate steps to catalyse the development of a low-carbon economy and attract the necessary private capital. Their call even reached the Sundance Channel. 
