At the 23rd Morningstar Conference in Chicago, which took place earlier this month, Morningstar analyst Kathryn Young moderated a panel discussion on sustainable investing with Stu Dalheim of Calvert Investments, Ben Allen of Parnassus Investments, and Jack Robinson of Winslow Management. The sustainable investing strategy is one that is increasingly gaining ground as environmental and social issues become a real and growing concern among mainstream investors. How can our portfolios promote positive social and environmental changes without compromising on returns and risk management? Experts and managers of sustainable investing funds defined "sustainable investing," its benefits, and some of the challenges of investing in this arena. They also briefly discussed opportunities in the energy sector.
Sustainable Investing: What Does It Mean and What Does It Promote?
Moderator Kathryn Young set the stage for this discussion by asking our panel to define the term "sustainable investing." Ben Allen of Parnassus Investments began by highlighting key differences between sustainable investing and socially responsible investing. For one, the latter is value-based and akin to philanthropy. It's about excluding and avoiding companies with certain characteristics. Sustainable investing is different because it takes a more proactive approach by seeking companies that are positioned to outperform because they are able to overcome obstacles, such as energy challenges, for example.
Jack Robinson of Winslow Management echoed Allen by addressing the evolution of sustainable investing. He noted that sustainable investing was about screening out companies that were part of the problem--ones that created health risk or with a history of contributing to environmental issues. But he learned that he could invest proactively (and with good results) by taking a solution-investing approach--that is, investing in companies that were part of the solution (rather than a part of the problem). This approach allows management to select from a much larger universe of investments that fit into the requirements of sustainable investing: profitable and committed to social responsibility.
In his experience managing a fund that has a focus on the environment, Robinson has found that if a company is environmentally responsible, it's also socially responsible 99% of the time. This has to do with the culture of the company. Management looks at their safety record and asks the question: How important is safety to the CEO of this company? Usually, if they're paying attention to the environment, they're paying attention to other social matters.
What Are the Benefits?
All three panellists agreed that a significant benefit of sustainable investing is risk reduction while requiring that companies are able to generate sustainable profits. Robinson highlighted two risk-reducing factors of companies that embrace sustainability:
--If you don't create environmental problems, you don't create liabilities in the balance sheet
--It reduces cost (especially in a no-growth economy), and helps to grow the company's top line.
As more shareholders become increasingly active about promoting sustainable investing, more companies are pressured to clean up their act.
Stu Dalheim of Calvert Investments also spoke to the growing participation of mainstream investors in the sustainable investing arena. He commented on the fact that companies are being more transparent about sustainability issues in their SEC filings.
What Are Some Challenges?
Allen said that one challenge, especially in the small-cap space, is that a lot of companies don't have the resources to implement sustainability in their products, process, and so on.
Stu Dalheim of Calvert Investments said that it's a challenge to gather consistent data from companies. For example, management requires companies to disclose how much revenue oil and gas companies earn abroad. But there's usually a lack of consistent data from companies. He also noted the challenge of getting companies to be more forthcoming with disclosure in general. At Calvert, through its shareholder-advocacy programme, management is able to engage in dialogue with companies and promote standard-setting exercises.
Young mentioned the volatility that has been inherent in sustainable investing. Although Robinson agreed, he pointed out that sustainable investing is becoming much less volatile as investment options expand. Larger companies are becoming more focused and involved in sustainability which damps volatility. He also noted that there's a lot of wonderful growth within the sustainable investment space itself. According to research sponsored by Winslow Management, the average expected growth rate in sustainable investing is more than 20% during the next five years.
What About the Energy Sector?
Young also asked the panellists for their views on this high-risk but rapidly growing sector.
Allen said that management focuses on U.S.-based companies and prefers to home in on natural gas companies. Management has developed an extensive questionnaire that companies in the energy sector are required to answer. This helps management understand the variable potential risks and issues of each company. At Parnassus, it's crucial to understand a company's fundamentals and long-term values but historically, it's been difficult to understand the fundamentals of companies within the energy sector, which is why Parnassus has generally avoided investing in this space.
Robinson spoke about alternative energy, which is generally regarded as the number-one opportunity in sustainable investing. He highlighted two ways to look at alternative energy: production and consumption: "It's not just about producing solar energy," he said. "It's about what we do to reduce the consumption side."
Robinson also pointed to green technology, which is focused on conservation and efficiency with what we already have. He rhetorically asked, "What are these companies doing not only to produce, but to reduce and reserve?"
