Current Obstacles to Investing in Sustainability

The astonishing maturation of sustainability investments in recent years raises a number of key questions. First, to what degree does sustainable investing actually contribute to the achievement of true sustainability? Take the examples of carbon offsetting and biofuels, which on first blush seem like positive investments for sustainability but which have led to significant debate over whether they actually undermine sustainable development.

Companies and individuals flocked to carbon offsetting, which allocates investment in renewable energy projects or tree planting in proportion to carbon emissions calculations. (See Chapter 7.) Supporters acknowledge the importance of radically reducing emissions first and only then injecting capital into carbon-offsetting projects that would not otherwise receive such infusions—a concept known as additionality. Critics liken offsets to medieval "indulgences," whereby consumer payments assuage people's guilt, thereby reducing their incentive to actually shift from carbon-generating habits. Instead of focusing on additionality, the focus should be on "sub-tractionality"—in other words, deducting carbon emission from personal, organizational, and broader economic equations.45

The biofuel debate injects social considerations into the mix. Biofuel supporters point to the carbon neutrality of the process— renewable biomass absorbs carbon during growth that is then emitted during burning. Opponents point out that the atmosphere does not care where the carbon comes from: a ton of carbon emitted from biofuel warms the planet just as much as a ton of carbon emitted from petroleum. Furthermore, diverting land from food to fuel crops will raise food prices and exacerbate world hunger, opponents argue. Debates such as these push any investments in sustainability to adopt sufficient degrees of sophistication to increase the likelihood of bringing about positive progress instead of fueling regression.46

A second key question is raised by the upward trajectory of sustainable investing: What obstacles stand in the way of maximizing the momentum? Unfortunately, significant structural impediments stand in the way. For example, in December 2005 U.K. Chancellor of the Exchequer Gordon Brown suddenly and unexpectedly killed the Operating and Financial Review, a March 2005 regulation requiring companies to disclose environmental, social, and governance information. Brown inexplicably cited "gold-plating" (blindly adopting European Union regulations), confounding members of the U.K. Department of Trade and Industry who had worked for years developing the regulation in-country through transparent consultation with business and the public.47

Investing for Sustainability

In the United States, the Corporate Sunshine Working Group (consisting of social investors, environmental organizations, unions, and public interest groups) has since 1998 been urging the SEC to enforce regulations requiring companies to disclose data on potentially material financial impacts from environmental and social risks, such as the estimated $10-billion liability Chevron faces if it loses a lawsuit in Ecuadorian courts over its subsidiary Texaco's dumping of toxic wastes into the Amazonian rainforest over two decades. The SEC's response: silence.48

Investors, activists, and government watchdogs alike served notice to the SEC that disclosure of environmental and social risks was not optional but mandatory.

Fed up, a coalition of state treasurers, pension funds, institutional investors, and environmental organizations confronted the SEC in September 2007 by filing a petition demanding that companies be required to disclose the financial risks associated with climate change. The coalition cited the scientific consensus and extensive business community action recognizing that the risks and opportunities associated with climate change are material to investment decisions and must be disclosed under existing law. They also noted that Exxon-Mobil, one of the most profitable and largest companies in the world operating in a sector intimately connected to climate change, mentioned the phenomenon only once in its 2006 filings.49

This petition followed closely on the heels of New York State Attorney General Andrew Cuomo's issuance of subpoenas to five energy companies to question whether they withheld information on the financial risks associated with plans to build coal-fired power plants. In short, investors, activists, and govern ment watchdogs alike served notice to the SEC and the business community that disclosure of environmental and social risks was not optional but mandatory, as markets thrive only in the presence of complete and accurate information.50

Such regulatory and corporate hostility to mere disclosure on sustainability makes it difficult to maintain optimism that regulation will help foster sustainable investing. Those interested in this new approach to investment long ago abandoned hope that regulation would be a primary driver of progress, and instead have created their own mechanisms for fostering corporate disclosure of sustainability information—trusting that transparency will inspire companies to improve sustainability performance.

In late 2006, the Global Reporting Initiative (GRI) released G3, its third generation of sustainability reporting guidelines, which are evolving by default into the generally accepted accounting principles for disclosing environmental, social, and governance information. (See Chapter 2.) Currently, almost 2,500 of the nearly 15,000 sustain-ability reports logged on comply with GRI guidelines, which were conceived in 1997 by Ceres, a coalition of environmental organizations and activist investors, and drafted with significant input from social investors.51

Similarly, more than 300 institutional investors representing over $41 trillion— almost a third of McKinsey's estimated $136 trillion in total global capital markets—have signed onto the fifth iteration of the Carbon Disclosure Project, which asks 2,400 of the world's largest companies to voluntarily report their carbon emissions and management processes. A majority of firms now recognize the financial and reputational benefits of improving their carbon performance—in other words, lowering their carbon emis

Investing for Sustainability sions. Four fifths of respondents recognize that climate change poses commercial risks or opportunities, and just over three quarters reported implementing greenhouse gas emissions reduction initiatives—compared with 48 percent in 2006.52

Of course, actual performance in reducing carbon emission trumps the importance of disclosure, both in sustainability and in financial terms. According to Innovest CEO Matthew Kiernan, leaders in carbon disclosure outperform their same-sector peers financially, but leaders in actual carbon emissions reductions perform even better. However, it is safe to say that the Carbon Disclosure Project plays a significant role in driving both disclosure and emissions reduc-tions—and, presumably, corporate financial performance and hence the performance of sustainability investments.53

Complementing the Global Reporting Initiative and the Carbon Disclosure Project are the Principles for Responsible Investment sponsored by the United Nations. Launched in April 2006, some 20 mainstream institutional investors managing $2 trillion in assets announced their commitment to address environmental, social, and governance factors in their investment decisions. By April 2007, membership grew ninefold, to 183 signatories, and the assets under management quadrupled to $8 trillion.54

These initiatives demonstrate the significant muscle behind sustainable investing, marching forward in spite of regulatory roadblocks. The sea change in momentum swelling behind this over the past few years gives rise to optimism that the world is approaching a tipping point whereby all investing addresses sustainability factors, as a matter of course. However, the challenge of actually achieving sustainability—of getting the economy to respect ecological limits and human rights—remains well beyond the horizon. Time alone will tell how much sustainable investing contributes to saving the future.


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