Well before ESG, Net-Zero and Diversity became the concepts they are today – we viewed “responsible investing” and ESG not merely as good governance, but strategic business practice. For years I heard the quip - " what did you say? 'responsible' investing'? - if you’re investing 'responsibly', does that mean I'm investing irresponsibly'?!" (perhaps…)
Today I still field concerns that actively integrating sustainability, climate solutions and even diversity, into the equation are at best, “nice to haves,” and at worst, impediments to profitability.
These comments make me smile because it means there’s still upside. I know we are simply being thoughtful and strategic in the way we invest. We invest with an eye toward creating competitive and durable market rate returns. Call it what you will - my experience is that incorporating a holistic lens drives alpha returns.
“Triple bottom line" or "people, planet, profit" is about being smart and intentional about our strategic decisions and investments. The first hurdle to overcome is the notion that investing with an environmental or social lens will naturally result in lower returns or performance. Data shows it is just the opposite. It’s imperative for growth, durability and longevity. To put in an economic context, it is not a zero sum game - “you give up economic profitability or returns if you integrate ESG factors.” In fact, this holistic lens is actually central to business strategy and driving growth.
This is how firm’s will scale, how they will gain new market opportunities, attract and retain the best quality human capital/talent. It weaves through everything, encompassing each facet of business operations and critical to every investment decision.
ESG and Diversity
As you build a diverse team, the data shows that not only do you open up new markets, you make better decisions. McKinsey’s most recent research from 15 countries and more than 1,000 large companies show there is positive correlation between diversity of the executive teams and likelihood of financial outperformance. Their 2019 analysis showed companies in the top quartile for gender diversity were 25% more likely to have above-average profitability than those in the fourth quartile, and 36% more likely with ethnic diversity.
However, progress on diversity in corporate board rooms continues to lag. Since 2016, the number of women on Russell 3000 boards has risen by by only 4.2%, rising to 22.6 percent as of September 2020. On the S&P 500, it’s still shy of 25%. And, almost 80% of the S&P 500 board members, where race is identified, are white.
Board and executive staff diversity are imperative. Why? Gender, race and ethnicity and age diversity improves board performance and overall governance. Diverse teams see new opportunities and understand risks from completely different perspectives. As companies face new strategic challenges, climate change risk, generational wealth transfer, digital transformation, pandemic response, cybersecurity exposure – it’s important to have a wide range of voices at the table.
Two years ago California mandated that any public company having its principal office in the state have at least one female board member. The state recently passed similar legislation for those considered “underrepresented” minorities. If approved by the SEC, which is expected to rule on this by August 2021, NASDAQ’s diversity rule proposal would require listed companies to publicly disclose board-level diversity data and require a diverse slate of directors - at least one who identifies as female and one who self-identifies as an underrepresented minority or LGBTQ+.
Triple Bottom Line Investing
We are investors first. Like anyone else, when we deploy capital, we want to get it back with a return - either in yield or appreciation. The TBL/PPP principles are about creating a strong and healthy foundation, be it in the context of a company, a building, neighborhood or city. By consciously using our natural resources, reinvesting in our people and our communities and recognizing that diversity results in better decision making and stronger ties, we putting firms on a trajectory for success and creating a higher quality asset. If we raise the standard of living for all, we will create jobs and healthy and safe places to work and live. In turn, raising the tax base, supporting investment in infrastructure and community programs, driving art, music, better education and individual agency and commitment. As you create vibrant, healthy, desirable neighborhoods you also raise asset values.
Climate Change and Environmental Equity
I’m currently tracking the overlay between climate change and populations which are disproportionately impacted. Frankly, if we don’t get our act together on this one, we will continue to see rising unrest as our resources are strained to capacity - water fights, food shortages, migration and dislocation; the typical sustainability issues - water, energy, waste, carbon; increasing income disparity. Let’s look at water (or lack thereof). If you invest in infrastructure that delivers clean and accessible water to communities in need you start to tackle gender inequality and economic returns. In many countries, women are the ones who collect water from far away places, often at great risk. By investing in water delivery, you reduce the amount of time and effort they must go to to provide for a basic need - thereby freeing up time for them to go to school, increasing the educated population, reducing health care costs and allowing them the opportunity to engage in commerce, providing a positive benefit into the local economy.
Investing for Impact and Long Term Growth
With every investment we make (money, time or capacity) we are making a clear statement of what we choose to impact. We can be far more intentional in how we develop and redevelop. Doing mixed-income, cross-generational development. Use responsible contracting to ensure living wages. Reduced resource use.
How can we motivate more investors, business leaders, and capital providers to take these concepts into account? Ultimately, I think it is a shift in focus. Change the questions that are being asked to make them more meaningful and so they are tracking a higher level of significance. Instead of focusing on whether or not returns have increased over the quarter (or some other short period of time), we need to be asking whether or not we are stronger companies, building adaptable and resilient buildings, cities and systems. Are we creating assets that can withstand and flourish given the future?
We are facing unprecedented change - we have narrowed our perspectives needlessly and frankly, to our own detriment. When we only look at investing as what shows up on the most recent P&L, we shrink our field of vision, limiting our opportunities, opening ourselves up to risk and excluding some of the most important factors and consequences. It provides an inadequate and incomplete view of investment returns. And it keeps us in a mode of extraction - which as we all know is unsustainable. (The healthiest plants and food grow in soil that has been tended and replenished.) By expanding our focus, it is easier to see the true cost and profit, which allows us to optimize our investment decisions. Ultimately the capital markets and our investments can be a positive force for change.