New Metrics
#NewMetrics '15:
Everything You Need to Succeed at Sustainability Investing, Impact Reporting

The final morning’s plenaries at New Metrics ‘15 started with a warm welcome and call from MC Paul Herman of HIP Investor to be energized and ready to focus in on sustainability investing.

Herman started with a reminder that 84 percent of the market value of the S&P is intangible and completely missing from the balance sheet. Connecting returns to business efforts around sustainability efforts and performance is a door to finding this value. These absent “knowable but ignored factors” include people as an asset, natural resource efficiency; governance, board diversity and inclusion; and transparency.

Noting the latter, Herman said: “If we can’t see inside the company, how do we know what’s going on? In many or most rating systems, you’re invisible. And if you’re invisible, then impact-oriented investors aren’t going to invest in you.”

Herman ran through examples that show that how highly sustainable and transparent companies tend to outperform the S&P 500. He cited the Dec. 2015 Oxford roll-up study on materiality that showed how firms with good ratings on material sustainability issues significantly outperform firms with poor ratings.

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Audrey Choi, Managing Director and CEO for the Morgan Stanley Institute for Sustainable Investing, then took the stage to discuss new research on the ROI of both public and private sustainable investing, and pathways to accelerating adoption.

Reflecting on the “new” in “New Metrics,” she said, “Why do we need new things? Because it’s pretty clear that the future isn’t going to look like the past. It will be faster, more complex, and more interconnected.”

The future we face includes increased demands for food, energy and water as we head towards 9 billion people, and as Choi pointed out: “CEOs need to be concerned with demand curves and how we’re going to meet them.” She said the opportunities for healthcare, education, infrastructure, sustainable agriculture, energy, and water total a $10T opportunity equal to 4.5 percent of U.S GDP in 2050.

That’s why she thinks sustainability investing is an important strategy, as part of a common sense, profit-oriented conversation. When she hears that sustainability never comes up on investor calls, she suggests that companies add one sentence about sustainability, and then “see how many questions you get once people think this is actually an issue.”

Her firm’s poll of 800 individual active investors, oversampled with millennials, revealed that 71 percent of respondents said that they thought companies do better if they care about sustainability. Women are twice as likely as men to think about and care about sustainability issues. And millennials are three times more likely to think about sustainability before joining a company, and twice as likely to choose a stock if part of the value proposition is sustainability-oriented.

However, concerns remain about a performance trade-off between profitability & sustainability investments.

“Remember that sustainability funds can overperform or not, just like traditional firms,” she said. Thinking about ESG factors doesn’t mean you can take your eye off the ball. She closed by saying, “Sustainable investing is synonymous with quality investing.”

Continuing the investing theme, Michelle Edkins of BlackRock was up next to share guidance on corporate engagement about ESG issues for investors.

In partnership with Ceres earlier this year, BlackRock released a guide for U.S. institutional investors on sustainability issues. Rather than talking about sustainability or ESG, she said, “We talk about operational excellence and how the material ESG practices of a company affect how well it operates.” Whether or not conversations with CEOs explicitly mention sustainability issues, the conversation is there and companies need to be listening for it. She said the biggest gap she sees is that companies think they’re being clear but from the investor side, they’re not.

“It’s up to companies that report what’s material for them, to make it easy for investors to evaluate and value them properly,” she said. Investors want to know about a company’s key issues and material issues, what drives value and ROI, and the risk and opportunities.

As the Global Head of Sustainability for Bloomberg LP, Curtis Ravenel has a front-row seat for the real-time evolution of aggregation and reporting of ESG data, both for Bloomberg itself and for its clients. Like a lot of companies, Bloomberg’s sustainability engagement has changed, from being reactive to proactive, and from an interest in philanthropy to moving to investments in sustainable products. Ravenel corroborates a growing interest in sustainability with growth in ESG users and data consumption. “That’s a foretelling of what we hope is a much bigger story,” he said.

Despite all the market developments in the ESG space, he said many investors still feel dissatisfied with the current state of company disclosures. But for anyone hoping for a future with less reporting, Ravenel didn’t have good news: “There will never be less information asked of you, ever.”

The future is about a hyper-transparent world with asset level information emerging as a new frontier, and risk and opportunity evaluations going beyond the supply chain relationships.

If that’s the case, then there couldn’t be a better time to talk about SIFT, a new platform to help sustainability professionals navigate Sustainability Information, Frameworks and Tools. Introduced by Jason Jay, Senior Lecturer at the MIT Sloan School of Management and Director of the Sustainability Initiative at MIT Sloan, and Valutus founder Daniel Aronson, SIFT is a prototype to deal with the overwhelming deluge of sustainability information in a way that’s useful and easy to use for professionals and students at all levels and experience.

For example, Aronson said that there are about 1,000 carbon footprint tools available, coming from different sources, including NGOs, academics, tool developments, and corporates.

“We’ve been in the field for a long time, and we’ve had the same problem. It’s time to make the task of finding tools easy,” Jay said.

Last up was Jeff Mendelsohn, found of New Leaf Paper, with Life Cycle Analysis (LCA) news about a new standard protocol that improves accuracy and enables comparability for better decision-making.

Much current LCA analysis is uninformed, either intentionally or unintentionally, Mendelsohn said. Problems include self-referential standards; the exclusion of Scope 3 indirect emissions, which are a major contributor to climate change; and massive underestimations of global climate impacts.

“A 100-year time horizon for climate impacts is too long,” he said, noting that current climate science points to a 20-year window before irreversible catastrophic climate impacts take hold.

The new LCA framework announced today has the ability to let standards evolve with updated assumptions, and offers greater comparability, climate change metrics accuracy, and holistic integration of major impacts including Scope 3 emissions.

Today’s announcement included an analysis of New Leaf Paper’s new, 100 percent post-consumer recycled Reincarnation 100 paper, comparing its environmental sustainability performance to virgin paper sources.

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