Environmental Alpha Against a Backdrop of Industry Change
Katherine Burstein McGinn, CFA
When a professor first introduced me to the concept of sustainable investing, the academic literature in which I immersed myself mostly explored the positive and negative impacts of exclusionary screening. That was 2007.
At the time, there was already evidence that of the three categories of typical exclusionary screens-environmental, social, and governance (ESG) -the environmental one had standout potential to act as a proxy for the overall quality of corporate management. When I entered the industry as an intern at Calvert Investments that year, I realized that the potential went much deeper than that. For example, I saw that shareholder advocacy around ESG issues was a powerful tool for gathering insight into corporate management and exploring long-term corporate visions.
Flash forward to 2009. Through my academic studies and my continued internships in the field, I could tell that the sustainable investment community was at an inflection point. The United Nations Principles for Responsible Investment was growing rapidly, and the concept of exclusionary screening had assumed more of a supporting role to the idea that ESG factors were crucial to risk management and active portfolio construction.
When Environmental Alpha hit shelves in 2009, the conversation was shifting. The book jacket reads: “The definitive guide for how institutional investors should approach the risk and opportunities associated with climate change.” This sentence captures perfectly the industry scene at that time-global, institutional investors were inserting ESG factors into mainstream conversations around strategic asset allocation, risk management, and fundamental analysis.
I joined the Responsible Investment Team at Mercer Investment Consulting in 2009 at just about the same moment in industry history. My first projects involved the group’s seminal Climate Change Scenarios study and the academic meta-review Shedding Light on Responsible Investment. These works made a strong case for the general inclusion of ESG integration in investment decisions and were widely referenced in the mainstream financial press.
Since then, the sustainable investment industry has continued to grow, expand, and overlap with mainstream finance. The UN Principles for Responsible Investment now represents over $59 trillion in assets. Nearly all of the global asset management houses have invested in research, product development, and consumer engagement around sustainability.
Despite this explosive growth, the conversation still remains quite similar to the one in 2009, when I joined the field as a full-time practitioner. While some institutional investors have become quite advanced in their methods for ESG integration, others are still puzzling over nonstandardized corporate sustainability reporting and waiting for mandates around disclosure to formalize their approach.
Opportunities for true leadership are still, in my opinion, up for grabs. Although there are many institutional investors with successful track records in the sustainable investing space, there are only a few that have woven sustainability into the fabric of their culture, investment outlook, and processes. Many times, the sustainability team is a separate entity within an organization.
In any case, I am quite optimistic looking forward. Almost two years ago, I began working with individual investors as a financial advisor. When I explain the concept of ESG integration to my clients at Pell Wealth Partners-the idea that we need to look at all material factors, not just ones that have been tracked in the past-they usually respond by asking why professional investors haven’t been thinking this way all along.
I believe that the industry will continue to evolve, and companies will continue to disclose information about their ESG practices. Mandated reporting in some of the largest global markets is even a real possibility. More investors are asking questions about ESG factors than ever before. What I see is a cycle, one that has started, but is not yet complete. New patterns of institutionalized behavior take time to root, and, considering where the industry was when I started, we’ve come a very long way. As just one example of how far we have come, is the addition of technical services to help financial advisors along with their jobs. When I first started out advising with some individual investors, I was using a standalone platform that wasn’t diverse enough to cater to all my clients as individual investors in an array of many markets. However, with the improvement of digital technology and services provided, financial advisors of today could look at services such as these hybrid platforms here to help them manage their various clients in many different financial fields.
So here’s to the next chapter. This Journal captures conversations within the sustainable investing industry just as Environmental Alpha allowed a broader audience to view the change taking place among the largest and most forward-thinking institutional investors at the time. I look forward to catalyzing continued change with my Journal of Environmental Investing colleagues and our readers.
Katherine Burstein McGinn, CFA, is the book review editor for the Journal of Environmental Investing and a financial advisor at Pell Wealth Partners, A Private Wealth Advisory Practice of Ameriprise Financial. She is also a guest lecturer for Columbia’s Master of Science in Sustainability Management program.