January 28, 2012
Book Review: Evolutions in Sustainable Investing: Strategies, Funds and Thought Leadership
by Robert Kropp
Trucost executive Cary Krosinsky edits a book of essays demonstrating that sustainable investment
in an era of growing resource scarcity yields significant opportunities for portfolio
In his introduction to the 38 chapters that comprise the new book Evolutions in Sustainable
Investing: Strategies, Funds and Thought Leadership, Cary Krosinsky writes, "This book in
effect charts the history of SRI (socially responsible investing)." It isn't, in reality, quite the
case; the book pays little attention to the earlier days of the SRI industry, which culminated with
the shareowner action that is widely considered to have been a major turning point in ending
apartheid in South Africa and in the formation of the Global Sullivan
Principles of Social Responsibility.
Furthermore, the book devotes relatively
little space to the traditional SRI pillars of shareowner activism and community investment. While
there is some discussion of the former in the chapters devoted to specific asset management firms,
neither subject earns a chapter of its own. In fact, neither is even listed as a subject in the
Addressing the negative screening practices of traditional SRI—the
"unsophisticated screens" which, he argues, accounts for 90% of the trillions of dollars invested
in "a socially responsible manner" in the US—Krosinsky writes, "Take a purely values-based
approach, and you risk missing the very same practical opportunities in eco-efficiency and
innovation, where the sustainability we require will come from."
Instead, the beginning of
the history compiled by Krosinsky and his associates can perhaps be located in the 1987 report by the Brundtland
Commission, which famously defined sustainability as "development that meets the needs of the
present without compromising the ability of future generations to meet their own needs."
The basic thesis of the book, and the overarching rationale for sustainable investing proposed
by it, is as straightforward as it is compelling: due to such factors as population growth and
climate change, the world is entering an era of resource scarcity. Companies that recognize the
risks associated with the realities of the new era, and exploit the opportunities for innovation
that adaptation to scarcity requires, will have positioned themselves to outperform their lagging
Likewise, investors who take into account the realities will benefit from a
sustainable investment strategy that, in the words of Nick Robins, Head of the Climate Change
Center of Excellence at HSBC, has as one of its features a "forward-looking, prospective
methodology which we argue will systematically add value over time."
In one of the book's
chapters, Krosinsky described the framework that is necessary "to judge companies that are looking
to succeed in a changing world while positioning themselves best from a risk standpoint." Expanding
upon the traditional environmental, social, and corporate governance (ESG) criteria, Krosinsky
instead proposes investment criteria that incorporate five factors: in addition to ESG, he includes
traditional financial criteria and quality of management.
"Investing and measuring without
the framework offered in this chapter," Krosinsky writes, "Inevitably ignores some or all the risks
that are critical to a company's success."
Of course, the approach to sustainable
investing espoused by Krosinsky depends upon effective measurement, which is not surprising; he is,
after all, a Senior Vice President at Trucost, a
leading environmental research firm that maintains the world's largest database of corporate
greenhouse gas (GHG) emissions.
The quality of ESG research has improved considerably
since Paul Hawken, the author of Natural Capitalism and a contributor to Evolutions
in Sustainable Investing, wrote in a 2004 paper on SRI, "Over
300 different criteria are employed today versus only five 20 years ago. But the granularity of the
screening misses the most important screen of all, the business model or intention."
improvement occurred thanks in large part to the efforts of firms such as Trucost. In a chapter of
the book devoted to the environmental metrics compiled by Trucost, Senior Vice President James Salo
describes the approach that sustainable investors must take. Focusing on the most important area of
environmental performance for each asset; understanding such drivers of value as operational
efficiency, capacity for innovation, and reputation; and the monetization or benchmarking of
environmental performance "have a strong potential to drive investment outperformance in the long
term," Salo writes.
The book's chapters provide informative commentaries on the histories
of several sustainable asset management firms, dating back to the early 1990s when Wall Street
dismissed sustainable funds as being insufficiently diversified. But once it establishes the
groundwork for a contemporary definition of effective sustainable investment, the book comes fully
to life as it investigates the nexus of investment opportunity in an era of resource scarcity:
No fewer than six of the book's chapters address sustainable investment
in Asia, Africa, and India. While challenges to the uptake of the practice in these regions remain
considerable—the prevalence of state-owned companies in Asia, widespread poverty in Africa and
India—efforts are underway to improve the ESG reporting of companies, and increasing investment by
institutional investors committed to sustainability should help improve the long-term performance
of companies located in these frontiers of investment.
In a chapter on sustainable stock
indexes, Graham Sinclair of AfricaSIF, the
African sustainable investment forum, describes how guidelines from the Johannesburg Stock Exchange (JSE) have led to increased ESG
disclosure by listed companies. In 2010, JSE began requiring its more than 450 companies to produce
integrated reports, which combine financial data with reporting on ESG issues.
BM&FBOVESPA, the Brazilian Stock
Exchange, launched a Corporate Sustainability Index that "reflects the real business sustainability
of listed companies and incorporates the evolution of sustainability practices and theoretical
benchmarks," Sinclair writes.
Earlier this year, after Evolutions in Sustainable
Investment went to press, BM&FBOVESPA announced that it will recommend that listed companies either
produce a sustainability report or explain why they do not.
This writer found it
enlightening that Krosinsky described Hawken's 2004 paper as "a landmark piece well worth reading."
It may be a sign of either a maturing industry or a growing global crisis, or both, but Krosinsky
envisions when rational investors in the mainstream will have to invest sustainably. Hawken, on the
other hand, set financial considerations aside for the most part, arguing that SRI research should
identify companies whose products and services "are helpful to the world we inhabit."
an era marked by corporate governance scandals and impending resource scarcity, the two approaches
no longer seem mutually exclusive. As sustainable investment research becomes more sophisticated,
the strategy's potential for long-term outperformance increases. The same research should help the
traditional values-based investor more accurately identify those companies whose operations
contribute to a more sustainable world.
Krosinsky may well disagree with the notion of a
potential convergence of traditional SRI with sustainable investing. After all, in a chapter
entitled "On Performance," he demonstrates that ESG funds outperform their benchmarks, while SRI
funds do not. But as Hawken argued in his 2004 paper, "What does it matter if one fast food company
is singled out as 'best in class'…if you are going the wrong way, it doesn't matter how you get