<br><h3> Chapter One </h3> <b>Welcome to the Sustainable Investment Revolution!</b> <p> <p> <i>It is becoming increasingly clear that sustainable development will be one of the major drivers of industrial change over the next 50 years, and that there is a growing demand from both companies and institutional investors to understand its financial impacts.</i> —COLIN MONKS, HEAD OF EUROPEAN EQUITY RESEARCH, HSBC <p> <p> <b>The Imperative—and the Opportunity—for Twenty-First Century Investors</b> <p> The world of international investment is now on the cusp of a revolution more profound than anything it has witnessed in literally decades. Hardnosed Wall Street investment bankers, not a species previously noted for excessive hand wringing about environmental quality, social justice, or the fate of the planet, are suddenly writing reports about climate change, water scarcity, human rights in China, and a host of other topics that they have been studiously avoiding for most of their careers. Large pension funds from Sacramento to Bangkok, under strict fiduciary obligations to focus only on issues directly material to investment performance, are now beginning to pay close attention to these same issues and to allocate money to "sustainability" funds for the first time. <p> In less than 18 months, the United Nations Principles for Responsible Investment have already attracted more than 380 signatories, with combined assets under management of over <i>$14 trillion</i>. Investment banks, such as Goldman Sachs and JP Morgan, are pouring billions of dollars into clean technology companies, carbon trading, and other investment opportunities driven by the Sustainable Investment Revolution. A global investor coalition focused on climate change, the Carbon Disclosure Project, has now attracted supporters with over 55 trillion dollars worth of assets in only its sixth year of existence. This represents well over half of all of the professionally managed financial assets in the world. What is more, over 20 major institutional investors from seven countries, with more than $2 trillion in combined assets under management, are already redirecting some of their research budgets toward sustainability issues through a collaborative initiative called the Enhanced Analytics Initiative. What on <i>earth</i> is going on here? What's going on here is, quite simply, the Sustainable Investment Revolution. I firmly believe that over time, this Revolution will have as great an economic impact and be viewed as being at least as transformational as the development of the Internet or, before that, the advent of the railroads and electricity. <p> Like its predecessors, the Sustainable Investment Revolution is driving a worldwide industrial restructuring, radically changing the very basis of competitive advantage for companies and, therefore, for their investors. Like any other global restructuring, this new one will create both new winners and new losers. This book is predicated on the premise that it will strongly behoove twenty-first century investors to try to figure out which companies are which! <p> But why are investors acting this way—at least <i>some</i> of them? Because it is now increasingly evident that the "tried-and-tested" approaches that have dominated the investment field for the past 20 years are simply inadequate to cope with the complexities, subtleties, and competitive turbulence of the early twenty-first century. Contrary to the popular and deeply held belief among investment "experts," sustainability or ES issues such as climate change, air and water pollution, and affordable access to medicines in emerging markets <i>do</i> indeed matter to companies. They are <i>already</i> directly affecting companies' competitiveness, profitability, and ultimately their share price performance. Think, for example, of the runaway commercial and reputational success of the Toyota Prius hybrid car and the frantic if fatally belated efforts of Detroit's "Big 3" automakers to catch up. Think too about GE's multibillion dollar Ecomagination initiative and its galvanizing impact on that industrial giant. Consider the worldwide attempt by Walmart's leadership to make quantum improvements in environmental efficiency—both within the company itself and across its enormous, worldwide supply chain. In the process, they are slowly but surely turning Walmart from global pariah into an exemplar of environmental leadership. <p> While sustainability is far from being a magic bullet or panacea for corporate competitiveness, for a growing number of top performers, it <i>has</i> allowed them to gain market share, create attractive new products and services, create and enhance customer loyalty, recruit, retain, and motivate top talent, reduce energy costs, and reduce the risk of both customer backlash and litigation. <p> All of these attributes are the hallmarks of better managed, more farsighted, agile, and adaptable companies. Today's—and especially <i>tomorrow's</i> —investors will increasingly need to learn how to find them, and the traditional investment tools and approaches, on which they have relied for decades, are becoming less and less helpful in doing so. <p> What may be even more remarkable than the velocity and extent of this revolution, however, is the fact that it has been so long in coming, despite all of the warning signs. Indeed, notwithstanding the pioneering efforts of a few brave "heretics" willing to challenge Wall Street and City of London orthodoxy, a surprisingly—and disturbingly—large percentage of major investors continue even now to act as if this investment revolution had still not begun. But this is all beginning to change. <p> Global hypercompetition, accelerated by a "perfect storm" convergence of a number of powerful global megatrends, is creating both challenges and opportunities for investors that are quite literally without precedent. To confront those challenges and seize the opportunities, investors will need both a radically different mindset and an entirely new arsenal of analytical tools. This book is intended to contribute to both. <p> To date, however, the majority of large institutional investors have for the most part been sleepwalking through the early part of the twenty-first century—having already dozed through the latter part of the previous one as well. Hobbled by grossly obsolete mental models and a set of "conventional wisdoms" that turns out to be anything but, they have until very recently missed out almost entirely on what is arguably the most extraordinary economic and sociopolitical transformation of the past 30 years—the Sustainability Revolution. <p> The logic of "sustainability investment" is, in fact, disarmingly straightforward. Indeed, it should be obvious to any reasonably literate 10-year-old child: companies capable of managing ES challenges better than their competitors are quite likely to be better-managed companies, period. It therefore follows logically that they are likely to be superior <i>financial</i> performers as well. (The real tragedy here, of course —with due acknowledgment to Marx—Groucho, that is—is that we rarely if ever have the luxury of <i>having</i> a 10-year-old child <i>with</i> us in JP Morgan's or Goldman Sachs's boardroom when we desperately need one!). <p> Let me be clear from the outset: this book is emphatically <i>not</i> about traditional "ethical" or "socially responsible" investment (SRI). That approach, driven largely by investors' personal values, will always and deservedly have its place, and it has enjoyed a long and largely successful run, particularly in the retail (individual investor) marketplace, and especially in the United States and Britain. But traditional SRI's ability to penetrate the <i>mainstream</i>, institutional marketplace, where the <i>really</i> big money is, will always remain severely limited, in my view. Very few major institutional investors wish to step onto the rather slippery conceptual slope of values-based investing. Should they support—or oppose —contraception, genetically modified foods, animal testing, investing in Sudan, or any of the myriad value judgments that a traditional SRI not only demands but actually thrives on? Traditional SRI holds very little appeal for those unwilling or unable to make those kinds of value judgments, and since that describes well over 95 percent of the USD 60 trillion in professionally managed assets worldwide, I fear that traditional or "neoclassical" SRI will always be confined to a somewhat marginal role. <p> Since definitions of what is truly "ethical" or "socially responsible" behavior—and therefore investing—vary widely, getting a handle on the actual size of the conventional SRI market is a highly difficult and controversial task. While SRI partisans regularly advance much larger numbers, my own back-of-the-envelope calculations would put it at well under 5 percent of the total managed assets worldwide—at the very most. The focus of this book, by contrast, is on the <i>other</i> 95 percent of investors: those whose primary concern is maximizing their risk-adjusted financial returns and finding the best managed, most agile, and far-sighted companies they can lay their hands on in which to invest their retirement savings. <p> The potential benefits of sustainable investing are both considerable and growing: <p> It allows investors to gain a much fuller understanding of companies' true risk and opportunity profiles. <p> As a result, it allows them to identify better managed, more agile, "future-proof" companies. <p> As a direct result of <i>that</i>, it gives them superior odds of achieving better medium and long-term <i>financial</i> performance. <p> For some organizations (endowments, foundations, public sector and labor pension funds), it also allows investors to reinforce their program objectives and activities by better aligning their investment choices with their program priorities. <p> In virtually all cases, it will build "reputational capital" for the investors and their organizations. <p> Increasingly, fiduciary best-practice simply demands it. <p> <p> <b>What's Driving This Sustainable Investment Revolution Anyway?</b> <p> The phenomenon that lies at the center of this book is the embryonic but rapidly accelerating penetration of the <i>mainstream</i> investment market by ES issues—in short, the Sustainable Investment Revolution. <p> A number of secular global megatrends are converging rapidly to create and accelerate that revolution, thereby giving birth to a radically changed and far more challenging environment for investors. As we shall see repeatedly throughout this book, however, that does <i>not</i> mean that the sustainability revolution is already fully formed and well established. Far from it; enormous obstacles and barriers remain. Having said that, however, I believe that the combined power of the secular trends and forces listed below, among others, will make that revolution both inevitable and irreversible: <p> Accelerating natural resource degradation, scarcity, and constraints, driven to a significant extent by the explosive pace of industrial development, population growth, and urbanization, especially in emerging market economies, such as those in Brazil, Russia, India, and China (the so-called "BRIC" countries); <p> Dramatically increased levels of public and consumer concern and expectations for companies' ES performances, turbocharged by unprecedented levels of information transparency with which to assess it; <p> Tightening national, regional, and global regulatory requirements for stronger company performance and disclosure of "nontraditional" business and investment risks; <p> Accelerating economic interdependence internationally, so that economic, social, and political shocks occurring in any single region are more likely to reverberate globally; <p> Major demographic and economic shifts, concentrating the most rapid population <i>and</i> economic growth in emerging markets, particularly the BRIC countries; <p> The expansion and intensification of both industrial competition and institutional investment into emerging markets, where ES risks tend to be most acute; <p> The growing economic, sociopolitical, and competitive impact of major public health issues, such as HIV/AIDS, malaria, and tuberculosis; <p> The ongoing revolution in information and communications technologies (the Internet, YouTube, Facebook, Web casts, bloggers, et al.), which has enabled and accelerated the emergence of a stakeholder-driven competitive environment for companies with unprecedented transparency and, therefore, business risk; <p> The growing pressures from international nongovernmental organizations (NGOs), armed with unprecedented financial and technical resources, credibility, access to company information, and global communications capabilities with which to disseminate their analyses and viewpoints; <p> "The retreat of government"—the erosion of national governments' financial, political, and managerial ability to solve major, global ES problems, with a concomitant <i>increase</i> in the burden (and the opportunities) for private sector corporations; <p> A substantial reinterpretation and broadening of the purview of legitimate fiduciary responsibility to include companies' performance on ES matters; <p> An institutional investor base that is increasingly sensitized to ES issues, newly equipped with better information, and both willing and able to act on its concerns; <p> A growing appreciation by senior corporate executives of the competitive and financial risks and benefits of ES factors; and <p> A growing body of both academic and empirical evidence illuminating the tightening nexus between companies' performance on ES issues and their competitiveness, profitability, and share price performance. <p> <p> Any one of these 14 megatrends should be powerful enough to attract attention from investors. Taken together, and mutually reinforcing, they create a set of virtually irresistible, tectonic forces that seem certain to transform the competitive and investment landscape for decades to come. Collectively, the megatrends are driving what amounts to a thoroughgoing, global industrial restructuring. Indeed, they have already begun to transform the very basis of international competitive advantage for both corporations and investors. Any corporate executive or investor myopic or complacent enough to disregard this radically changed competitive environment will do so at his or her peril. <p> <p> <b>The "Universal Owner" and the Rise of Fiduciary Capitalism</b> <p> One of the most subtle but powerful drivers of the Sustainable Investment Revolution has been the recent emergence of the concept of the "universal owner" and the concomitant rise of "fiduciary capitalism." The universal owner construct was first advanced by Robert Monks and Nell Minow, two innovative and insightful advocates of active share ownership and seminal figures in the corporate governance field. The concepts were later taken up and elaborated by two California academics, Jim Hawley and Andy Williams. <p> Briefly, the universal owner thesis is as follows: major institutional investors (notably pension funds, insurance companies, and some of the larger endowments and foundations) have now become so large and so broadly invested that they in essence collectively "own" a slice of the entire global economy. They hold investments in virtually every asset class, every industry sector, and every national and regional market in the world. The universal owner's interests therefore transcend those of any single country, industrial sector, or company; they have a vested economic interest in virtually <i>all</i> of them. As Hawley and Williams have aptly put it: <p> For a universal owner, and thus for its beneficiaries, the whole may well be greater than the sum of its parts, since long-term profit maximization for the portfolio of a universal owner involves enhancing not just returns on a firm-by-firm basis, but enhancing productivity in the economy as a whole. <p> <i>(Continues...)</i> <p> <!-- copyright notice --> <br></pre> <blockquote><hr noshade size='1'><font size='-2'> Excerpted from <b>INVESTING IN A SUSTAINABLE WORLD</b> by <b>MATTHEW J. KIERNAN</b> Copyright © 2009 by Matthew J. Kiernan. Excerpted by permission of AMACOM. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.<br>Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.