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In London, about 50% of the clean water leaks away because
the infrastructure is so old. The cost of digging up all of the old pipes and
replacing them would be astronomical. But let's say a company had a robot-like
device that could enter the pipes and coat them, stopping the leaks. Wouldn't
that company sound like a great investment?
That's the kind of story that is clear, appealing and easy
to sell. And that's why funds focusing on themes like sustainable water,
materials and energy will likely be the kind of sustainability funds that most distributors offer to retail investors
for some time, according to Sander van Eijkern, CEO of Sustainable Asset
Management (SAM), who spoke with me in a recent interview. In fact, many major
fund companies now offer such clean energy, water and even climate change
mutual funds and ETFs.
Of course, Sustainable Asset Management and other companies
also offer all-cap global sustainability portfolios, primarily for
institutional clients and overseas investors. A few retail global mutual funds
with these sustainability goals have been introduced in the United States
(including one in June by SAM), but investors and fund distributors don't
understand the approach enough yet for such funds to proliferate, van Eijkern
believes. Broker-dealers also have been slow to embrace model portfolios that
incorporate sustainability criteria.
Advocates define sustainable companies as those that
outperform on environmental, social and governance (ESG) criteria, and maintain
that managers who routinely consider these factors in investment analysis will
produce portfolios with higher long-term returns for shareholders. Unlike most
traditional socially responsible investors, SAM and some other firms don't use
negative screens to eliminate entire industries such as alcohol, tobacco,
gambling or defense from their investing universe.
A recent white paper released by the company, Alpha From
Sustainability, looked at whether companies it had rated as sustainability
leaders outperformed those it identified as laggards. During the eight years
from 2001 through 2008, SAM found that the leaders outperformed by an average
of 148 basis points annually.
SAM, based in Zurich, Switzerland, is a subsidiary of Robeco
with $12.4 billion in assets and is one of the world's most well-known
sustainability managers. In addition to managing money for institutions, it
manages clean tech private-equity assets and licenses indexes, including the
10-year-old Dow Jones Sustainability Indexes, the longest-running and
best-known group of sustainability indexes.
Today, sustainability is one of the major topics in finance,
and more major companies are embracing it as a way to mitigate risk and create
a competitive advantage. Unfortunately, most mainstream financial analysts,
fund companies and broker-dealers have not found ways to significantly incorporate this major trend into their products and services. While some
financial professionals think that considering sustainability will hurt
returns, most studies have shown this belief to be false. As a result of
inaction by fund companies in particular, typical investors don't get any
comprehensive investment choices based on sustainability in their main savings
vehicles—their 401(k) plans—even though I suspect many would want these options
once the concept was explained to them.
With the number of people and companies interested in
sustainability continuing to grow, the financial services industry will
undoubtedly catch up—eventually.
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