Smart Means Sustainable: Investing in the Bigger Picture

By Melissa J. Anderson (New York City)

With Earth Day around the corner, The Glass Hammer has decided to take a look into why sustainability makes sense from a business standpoint. We’ve long pointed out that companies must take a broader look at the gender composition of their workforce and senior leadership if they are to maintain a sustainable and profitable future. Today, we’re examining why a fresh look at investment in sustainability can spur innovation and growth.

Erika Karp, Head of Global Sector Research at UBS, said that she feels strongly that sustainability investing needs to be “completely integrated into the investment process – the decision-making matrix which drives stock recommendations.”

Karp said, “We’re talking about a paradigm shift here.”

She continued, “Good long-term investing starts with great questions. What we can do through great questions is make sure we are covering the material areas of inquiry that haven’t been pursued as they should be from the standpoint of risk adjusted return.”

What a mouthful! But, Karp explained, considering sustainability issues around environmental, social, and governance matters can only improve the investment process. She said, “If we are doing our best in investment bank research, we must do our best to pursue all areas of inquiry.” Considering so-called non-financial (or extra-financial) information when making decisions about investments is just a smart way to do business.

Sustainability as Innovation

Karp said, “Great investors are always pursuing different avenues of inquiry in the most aggressive way.” UBS, for example, has come out strongly in support of sustainability, as UBS Global Asset Management division is a signatory of the UN Principles for Responsible Investment and the UN Global Compact, as well as partnering with the Smith School of Enterprise and the Environment at Oxford University (led by Sir David King).

UBS is not alone. In their recent article in the Harvard Business Review, “Why Sustainability Is Now the Key Driver of Innovation,” Ram Nidumolu, C.K. Prahalad, and M.R. Rangaswami, write: “Our research shows that sustainability is a mother lode of organizational and technological innovations that yield both bottom-line and top-line returns.”

They explain:

“Becoming environment-friendly lowers costs because companies end up reducing the inputs they use. In addition, the process generates additional revenues from better products or enables companies to create new businesses. In fact, because those are the goals of corporate innovation, we find that smart companies now treat sustainability as innovation’s new frontier.”

The paper includes several real examples of how investment in sustainability led to innovation and bottom line results for big companies like HP, IBM, and Wal-Mart.

But, in fact, research has also shown that sustainability has the power not only to transform individual businesses and institutions but economies on a whole. For example, a new report entitled “A New Growth Path for Europe,” commissioned by the German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety, found that increasing sustainability targets could lead to significant growth in prosperity and jobs.

The report says, “In the coming decade, Europe will need to accept the challenge of increasing economic growth while reducing both unemployment and greenhouse gas emissions. New model results show that these three goals can actually reinforce one another.”

According to the report, raising the EU’s climate goals from a 20% cut in emissions to a 30% cut could:

• “increase the growth rate of the European economy by up to 0.6% per year
• create up to 6 million additional jobs Europe-wide
• boost European investments from 18% to up to 22% of GDP
• increase European GDP by up to $2004842 bn
• increase GDP by up to 6% both in the old (EU15) and new (EU12) member states.”

The report authors believe that taking a more aggressive tack in addressing sustainability issues would, in fact, drive innovation, create jobs, build wealth, and help drag Europe more rapidly from the global economic downturn. They write, “a new challenge can mobilise capabilities that could not be
tapped without it.”

Sustainability In Practice

Does sustainability always pay off for the investor? Yes and no. According to a recent study in the Journal of Operations Management certain green commitments make markets happy, while others don’t. And yet others don’t really have an effect at all.

According to GreenBiz.com, researchers Brian Jacobs, Michigan State University, Vinod Singhal, Georgia Institute of Technology, and Ravi Subramanian, Georgia Institute of Technology, found that the majority of corporate responsibility activities had no impact on a firm’s market value. These kinds of activities include “environmental business strategies (such as new standards), new eco-friendly products, renewable energy (supply or purchase), recycling programs, announcements of LEED certification.”

The researchers found that announcements of philanthropy efforts and ISO 14001 certifications can improve a company’s share price. At the same time, they found, the market reacted negatively to announcements of voluntary cuts in emissions.

But this is a short-term way to look at gaining from sustainability. Certain activities are likely to affect nearsighted investors differently than they would affect those with a long-term view of growth. After all, long-term growth is is just what the term “sustainability” entails.

As Karp said, “This is important to me personally because I have three young children and I want the world sustained for them. Just as I try to live my life based on principle, I try to drive my business responsibilities based on principle as well. Not only is this important for me personally, but it’s important to the future of the firm.”