One of the most-discussed sessions at the recent Russell Institutional Summit was “Investing Sustainably,” which featured Christianna Wood, CEO, Gore Creek Capital Ltd. (and former Senior Investment Officer for CalPERS) and Mark Walker, Unilever’s Global Chief Investment Officer. The sound bite that stuck with me was Mark’s comment that “it’s sometimes better to think of these issues as future financial rather than non-financial.”
Not every financial factor plays out over the next twelve months
I have long taken the view that there are two distinct reasons investors might take ESG factors into account: they may do so as a reflection of their convictions, or they may do so because they think there is a positive financial impact from doing so.
Mark’s comment, in effect, points out that we should not be too narrow in how we think of financial impact. A financial impact which lies in the future is still a financial impact.
Now, if financial markets were perfectly efficient, then all potential future risks would be fairly reflected in today’s price and “future financial” would be the same as simply “financial.” News flash: markets are not perfectly efficient. In particular, it is not difficult to believe that there could be considerations of sustainability and risk that are not significant for (say) an investment manager focused solely on quarterly returns and a mandate to beat an index benchmark by 1% a year, but which nonetheless may affect an investor’s ability to achieve their long-term financial objectives.
So the attitude that Mark and Unilever are taking is not that ESG considerations demand a change of the typical investment objective: the ultimate goal generally remains the maximization of the long-term risk-adjusted return on the portfolio. Rather, the questions around sustainability point to a possible omission in pursuing that goal. Typical investment structures at present do not necessarily capture the potential impact of ESG factors.
Disagreement? That’s what makes markets work
Judging by the wide range of opinions on this topic, it seems fair to assume that the broad investor community will not settle down to a single consensus on ESG questions any time soon. That’s nothing to be concerned about: markets work best when investors think for themselves. There has to be diversity among investors if markets are to do their job of allocating capital effectively. It’s a difference of opinion that makes a market.
So let the debate continue.