Hammer time: why sustainable investors need to tool up

QHow will sustainability factors drive investment outcomes in 2022 and beyond?

I believe that externalities – the costs or benefits for others that are not taken into account by the person or company performing an action – are increasingly being valued and priced. In the last couple of years, the externalities associated with carbon-emissions have really begun to be noticed by the market, and we have seen the start of significant momentum there. But as the focus on building a sustainable future intensifies, we are at the dawn of a much broader shift, where externalities beyond carbon will start to matter from an investment perspective.

QHow does that change the way investors should think about an opportunity?

It requires new skillsets. As investors, we need to think more holistically about how we allocate capital, considering the broader impacts of investments from a longer-term perspective. Given the focus on climate this year, there’s clearly growing recognition of the ways that companies impact the world’s natural capital. But the understanding of externalities is widening to include impacts on human, social and financial capital – such as the extent to which a company’s products or services may extend financial inclusion, broaden access to healthcare or provide infrastructure that contributes positively to society. These externalities may be challenging to measure, at least at present. But they can still have a significant influence on how an investment performs, so investors need to be able to assess them.

QIf these impacts are hard to measure, how can investors evaluate them?

Investors need different analytical approaches, and different ways of thinking about how businesses are creating value. For example, we have been doing a lot of work over the past year on evaluating corporate cultures. Business leaders often talk about the importance of culture, but to date the investment community has largely ignored it – mostly, I think, because it’s difficult to measure. There is no single statistic that I can plug into a spreadsheet to tell me whether a business has a good or bad culture. So we have built a qualitative framework, underpinned by empirical evidence and with input from academia, for evaluating corporate cultures that can be applied across all sectors and regions. The aim is to identify companies with strong cultures that are appropriate for their specific businesses, and that we believe have the potential to contribute to value creation for investors.

QWhere might investors find companies with good cultures?

Interestingly, the companies we have identified as having a corporate culture advantage differ to those that might be identified via a screen based on typical ESG [environmental, social & governance] metrics. This suggests that a corporate-culture focus gives us the potential to build a portfolio of sustainability leaders that is differentiated from other sustainability-oriented investment approaches. And the opportunity set we have identified is itself diverse. We have found companies with strong and appropriate cultures across developed and emerging markets, and a broad range of sectors.