The world is changing in some really profound ways, and I worry that investors  aren't paying enough attention to some of the biggest drivers of change,  especially when it comes to sustainability. And by sustainability, I mean the really juicy things, like environmental and social issues and corporate governance. I  think it's reckless to ignore these things, because doing so can jeopardize  future long-term returns. And here's something that may surprise you: the  balance of power to really influence sustainability rests with institutional  investors, the large investors like pension funds, foundations and endowments.  I believe that sustainable investing is less complicated than you think, better performing than you believe, and more important than we can imagine. Let me  remind you what we already know. We have a population that's both growing  and aging; we have seven billion souls today heading to 10 billion at the end of  the century; we consume natural resources faster than they can be replenished;  and the emissions that are mainly responsible for climate change just keep  increasing. Now clearly, these are environmental and social issues, but that's  not all. They're economic issues, and that makes them relevant to risk and  return. And they are really complex and they can seem really far off, that the  temptation may be to do this: bury our heads in the sand and not think about it.  Resist this, if you can. Don't do this at home. But it makes me wonder if the  investment rules of today are fit for purpose tomorrow. We know that investors,  when they look at a company and decide whether to invest, they look at financial data, metrics like sales growth, cash flow, market share, valuation -- you know,  the really sexy stuff. And these things are fundamental, of course, but they're not enough. Investors should also look at performance metrics in what we call ESG: environment, social and governance. Environment includes energy  consumption, water availability, waste and pollution, just making efficient uses of resources. Social includes human capital, things like employee engagement and innovation capacity, as well as supply chain management and labor rights and  human rights. And governance relates to the oversight of companies by their  boards and investors. See, I told you this is the really juicy stuff. But ESG is the  measure of sustainability, and sustainable investing incorporates ESG factors  with financial factors into the investment process. It means limiting future risk  by minimizing harm to people and planet, and it means providing capital to users who deploy it towards productive and sustainable outcomes. So if sustainability  matters financially today, and all signs indicate more tomorrow, is the private  sector paying attention? Well, the really cool thing is that most CEOs are. They  started to see sustainability not just as important but crucial to business  success. About 80 percent of global CEOs see sustainability as the root to  growth in innovation and leading to competitive advantage in their industries.  But 93 percent see ESG as the future, or as important to the future of their  business. So the views of CEOs are clear. There's tremendous opportunity in  sustainability. So how are companies actually leveraging ESG to drive hard 

business results? One example is near and dear to our hearts. In 2012, State  Street migrated 54 applications to the cloud environment, and we retired another 85. We virtualized our operating system environments, and we completed  numerous automation projects. Now these initiatives create a more mobile  workplace, and they reduce our real estate footprint, and they yield savings of  $23 million in operating costs annually, and avoid the emissions of a 100,000  metric tons of carbon. That's the equivalent of taking 21,000 cars off the road.  So awesome, right? Another example is Pentair. Pentair is a U.S.industrial  conglomerate, and about a decade ago, they sold their core power tools  business and reinvested those proceeds in a water business. That's a really big  bet. Why did they do that? Well, with apologies to the Home Improvement fans,  there's more growth in water than in power tools, and this company has their  sights set on what they call "the new New World." That's four billion middle class people demanding food, energy and water. Now, you may be asking yourself,  are these just isolated cases? I mean, come on, really? Do companies that take  sustainability into account really do well financially? The answer that may  surprise you is yes. The data shows that stocks with better ESG performance  perform just as well as others. In blue, we see the MSCI World. It's an index of  large companies from developed markets across the world. And in gold, we see  a subset of companies rated as having the best ESG performance. Over three  plus years, no performance tradeoff. So that's okay, right? We want more. I want more. In some cases, there may be outperformance from ESG. In blue, we see  the performance of the 500 largest global companies, and in gold, we see a  subset of companies with best practice in climate change strategy and risk  management. Now over almost eight years, they've outperformed by about two  thirds. So yes, this is correlation. It's not causation. But it does illustrate that  environmental leadership is compatible with good returns. So if the returns are  the same or better and the planet benefits, wouldn't this be the norm? Are  investors, particularly institutional investors, engaged? Well, some are, and a  few are really at the vanguard. Hesta. Hesta is a retirement fund for health and  community services employees in Australia, with assets of $22 billion. They  believe that ESG has the potential to impact risks and returns, so incorporating it into the investment process is core to their duty to act in the best interest of fund members, core to their duty. You gotta love the Aussies, right? CalPERS is  another example. CalPERS is the pension fund for public employees in  California, and with assets of $244 billion, they are the second largest in the  U.S. and the sixth largest in the world. Now, they're moving toward 100 percent  sustainable investment by systematically integrated ESG across the entire fund.  Why? They believe it's critical to superior long-term returns, full stop. In their  own words, "long-term value creation requires the effective management of  three forms of capital: financial, human, and physical. This is why we are  concerned with ESG." Now, I do speak to a lot of investors as part of my job, 

and not all of them see it this way. Often I hear, "We are required to maximize  returns, so we don't do that here," or, "We don't want to use the portfolio to make policy statements." The one that just really gets under my skin is, "If you want to  do something about that, just make money, give the profits to charities." It's eyes rolling, eyes rolling. I mean, let me clarify something right here. Companies and  investors are not singularly responsible for the fate of the planet. They don't  have indefinite social obligations, and prudent investing and finance theory  aren't subordinate to sustainability. They're compatible. So I'm not talking about  tradeoffs here. But institutional investors are the x-factor in sustainability. Why  do they hold the key? The answer, quite simply, is, they have the money. A lot of  it. I mean, a really lot of it. The global stock market is worth $55 trillion. The  global bond market, $78 trillion. That's $133 trillion combined. That's eight and a  half times the GDP of the U.S. That's the world's largest economy. That's some  serious freaking firepower. So we can reconsider some of these pressing  challenges, like fresh water, clean air, feeding 10 billion mouths, if institutional  investors integrated ESG into investment. What if they used that firepower to  allocate more of their capital to companies working the hardest at solving these  challenges or at least not exacerbating them? What if we work and save and  invest, only to find that the world we retire into is more stressed and less secure  than it is now? What if there isn't enough clean air and fresh water? Now a fair  question might be, what if all this sustainability risk stuff is exaggerated,  overstated, it's not urgent, something for virtuous consumers or lifestyle choice?  Well, President John F. Kennedy said something about this that is just spot on:  "There are risks and costs to a program of action, but they are far less than the  long-range risks and costs of comfortable inaction." I can appreciate that there is estimation risk in this, but since this is based on widespread scientific  consensus, the odds that it's not completely wrong are better than the odds that  our house will burn down or we'll get in a car accident. Well, maybe not if you  live in Boston. But my point is that we buy insurance to protect ourselves  financially in case those things happen, right? So by investing sustainably we're  doing two things. We're creating insurance, reducing the risk to our planet and to our economy, and at the same time, in the short term, we're not sacrificing  performance. [Man in comic: "What if it's a big hoax and we create a better world for nothing?"] Good, you like it. I like it too. I like it because it pokes fun at both  sides of the climate change issue. I bet you can't guess which side I'm on. But  what I really like about it is that it reminds me of something Mark Twain said,  which is, "Plan for the future, because that's where you're going to spend the  rest of your life." Thank you. 



Last modified: Tuesday, April 15, 2025, 7:58 AM