Sustainability is often portrayed as the cause of young and idealist activists. Now the denizens of Wall Street are getting in on the act as well.
The eco-drive of the big investors might not be as altruistic, but their reach and influence is in many ways much greater. The retreat of a major money manager can cause stock prices to tank.
While it might not seem second nature for Wall Street to actually try to save the planet or society, the investment set can be a powerful influence where money and sustainability align. For instance, if less waste means more efficient and cheaper operations or if workers with better benefits produce better results — the bottom line can improve.
For the most part, sustainability concerns fall under rubric of the ESG investing, which translates to environmental, social and governance issues. The latest tally from the Global Sustainable Investment Alliance, from 2016, found that 26 percent of all professionally managed assets globally were managed under responsible investment strategies, for a total of $22.89 trillion.
The result, though, is uneven.
For instance, a recent Harvard University working paper on Millennials and sustainable investing noted that, “Capital markets and stock analysts in particular have been remarkably slow to catch on to the issue of corporate responsibility, let alone human rights specifically, even as their salience to companies and stakeholders has increased significantly for the past two decades. But that complacency is now being challenged by the fast growing interest on the part of asset owners and asset managers in ‘ESG’ investing.”
Like seemingly most other aspects of business, a big shock from the Great Recession and the rapid development of technology has changed the game. “The current boom in ESG investing began in the aftermath of the 2008 financial sector meltdown, which implicated failures by government and the financial industry alike,” the Harvard paper said. “More specifically, technology is driving ESG investing. Big data combined with more sophisticated machine learning algorithms have enabled analysis of the environmental, social and governance performance of companies on a scale that manual assessments simply cannot match.… This is creating previously unknowable levels of transparency.”
On Wall Street that translates — like nearly everything else — into a number and companies are tagged with ESG ratings that move up and down, giving management a grade on performance and shareholders an easy metric to turn to.
A WWD tally of ESG ratings of publicly held companies by Sustainalytics, which are available on Yahoo Finance, found that it is largely Europe leading the charge in sustainability, producing eight of the top 10 performers. Of the 30 retail, fashion and beauty companies examined in total, Cartier-parent Compagnie Financière Richemont came out on top with a score of 81 out of 100 (a rating in the 100th percentile of its peer group).
Still, the sustainability crowd is not entirely sold.
“Luxury brands have been changing their business models to incorporate sustainable processes; however, there is still debate whether they can be perceived as sustainable,” according to a detailed report on Richemont by Sustainalytics industry lead analyst Roxana Dobre. “With consumers increasingly interested in buying sustainable products, companies like Richemont have started to actively implement a life-cycle approach in their product design, including a reduction of the resource intensity of their products and increasing their products’ recyclability.”
So, Richemont gets points for taking the right kinds of moves, even if it’s operating in a sector that is viewed skeptically by some.
But progress is progress. And the big investors are looking for more, even if only because they sense a world on the move across many vectors — from the environment to workers’ rights — and want a more stable landscape to put their money to work.
And, of course, there is genuine concern for the future and an evolution in the notion of just what goals companies could pursue. The days of focusing on shareholder value above all use seem to be fading, at least somewhat.
Larry Fink, founder and chief executive officer of BlackRock, which oversees $6.44 trillion and is deeply invested in retail and fashion, put ceo’s on notice in an open letter, noting that “the prospect of a secure retirement is slipping further and further away” for many workers and has become “a major source of the anxiety and polarization that we see across the world today.”
“We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining,” Fink said. “As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”
On the ground, all of this translates into something that looks like slow progress forward.
Ed Yruma, equity analyst and managing director at KeyBanc Capital Markets, said he sees signs that larger investors are starting to make sustainability a part of their investing process.
“I don’t know as though they’re using it to drive investment decisions,” the analyst said. “They’re asking questions now, I think it’s kind of a filter. I’m getting the questions now [about sustainability].”
There is also the notion that companies are going to start feeling more pressure from increasingly eco-minded consumers.
“When does that Millennial who shops at Whole Foods, composts their garbage and drives a hybrid realize that the environmental impact of producing fashion is severe,” Yruma said.
Ultimately, it is the consumer who has the eco-power. Companies and their investors will follow.
WWD List: Calculating Conscience
|Investors are increasingly relying on data that goes beyond dollars and cents and looking at new measures, such as Sustainalytics’ ESG Ratings, which takes into account environmental, social and governance concerns. The quantitative measure, which is based a balanced scorecard system, starts at 1 and goes up to 100 for the highest rating.|
|Total ESG Score||Environment||Social||Governance||Controversy Level|
|Burberry Group plc||
|LVMH Moët Hennessy Louis Vuitton||69||74||68||64||Moderate|
|The Gap Inc.||68||65||68||71||Significant|
|Hennes & Mauritz||68||70||62||74||Significant|
|Procter & Gamble Co.||65||69||62||63||Significant|
|Luxottica Group SpA||64||54||72||66||Low|
|Estée Lauder Cos. Inc.||
|TJX Cos. Inc.||62||67||57||65||Moderate|
|Wal-Mart Stores Inc.||58||69||47||60||High|
|Lululemon Athletica Inc.||57||55||54||65||Moderate|
|Tiffany & Co.||57||50||60||63||Moderate|
|Ross Stores Inc.||56||53||51||67||Moderate|
|Ralph Lauren Corp.||55||52||55||59||Moderate|
|Hermès International SCA||
|Michael Kors Holdings Ltd.||46||37||49||55||Moderate|
|The Swatch Group Ltd.||45||45||43||48||Low|
|Source: Sustainalytics via Yahoo Finance|