Category: ESG

Chemical Footprint: Screening Stocks for Chemicals of Concern

Chemicals are in virtually every product we buy from clothing, cosmetics, furniture, shampoo, fragrances, and building products to the food we eat and, of course, the pharmaceuticals used to treat illnesses. In short, life as we know it would not exist without chemicals.

Yet, chemicals also can be harmful and pose risks to human health depending upon their nature and the amount of time we’re exposed to them. So as a consumer, investor or business executive, it’s critical to understand your exposure to “chemicals of concern.”

Chemicals of Concern

Across the world, various regulatory, industry and government agencies have established lists of chemicals of concern. Any chemical that can potentially cause harm can be considered hazardous. However, certain chemicals can persist in the environment (air, water, land, plants and animals), build up in animal tissues and be toxic—causing different types of harm ranging from mild skin irritations to cancer.

Chemicals of high concern (CoHCs), as defined under the California Candidate Chemical List, include:

  • Carcinogens, mutagens or reproductive toxins (CMR)
  • Persistent bioaccumulative and toxic substances (PBT)
  • Other chemicals for which there is scientific evidence of probable serious effects on human health or the environment
  • A chemical whose breakdown products result in a CoHC that meets any of the above criteria

Sounds complicated but extremely important, right? Absolutely, socially responsible investors recognize that the improper use of chemicals can cause materially adverse investment performance and even greater harm to society. Therefore, it’s important that your investment manager conduct a broad screening for chemicals of concern when selecting stocks for your portfolio. Let’s look at a real-world example.

Lumber Liquidators (LL) – Linked to Health and Safety Violations

On March 1, 2015, Anderson Cooper, CBS News correspondent, reported on 60 Minutes that the laminate flooring sold by Lumber Liquidators (LL) may fail to meet health and safety standards because it contained high levels offormaldehyde, a known cancer causing chemical. As shown below, the stock price fell sharply just before and immediately following the report—then down 72% since the start of the year.

Source: Wall Street Journal Online

What went wrong?  Allegedly, it appears that Lumber Liquidators failed to properly control its supply chain by sourcing lower-cost, formaldehyde-tainted laminate flooring manufactured overseas. The flooring was tested by 3 independent labs and failed to meet California formaldehyde emissions standards (CARB-2) with levels, on average, six or seven times higher than allowed and in some cases as high as twenty times higher than allowed.

What were the repercussions? Lumber Liquidator’s CEO, Robert Lynch, resigned on June 16, 2015, and the company announced it would discontinue the sale of the laminate flooring manufactured overseas. Now, the company faces a growing number of product liability and securities lawsuits including allegations that its directors breached their fiduciary duties by failing to properly oversee the laminate flooring manufactured overseas.

This story offers an interesting case study on the importance of Socially Responsible Investing (SRI) and the value of careful environmental, social and governance (ESG) screening. Here are a couple of key takeaways:

I. Watch the Profit Margins  – 60 Minutes reported that Whitney Tilson, a hedge fund manager, correctly identified that Lumber Liquidators had doubled its profit margins in just two years. An unusual gain in a commodity business. These gains should have led more analysts to question the sustainability of the increased profits and the underlying business drivers.

II. Don’t forget the “S” in ESG – Some key social factors that can have a material impact on the value of a stock include (1) customer satisfaction (2) product safety and liability (3) supply chain management and (4) occupational health and safety.

In this case, Lumber Liquidators frequently advertised images of children playing on new hardwood and laminate flooring. Unfortunately, due to their size, children are also the most likely to first show symptoms of exposure to harmful chemicals. So, the risks of providing an unsafe product, used by children and in the home, ultimately destroyed customer satisfaction and caused homeowners to immediately rip the flooring out. Responsible investors should evaluate if the supply chain is sustainable and provides occupational health and safety to its workers.

Sustainable Investing: The ESG Approach

A sustainable approach to investing incorporates the analysis of material, non-financial ESG factors into the investment decision-making process and helps determine the final selection of securities for your portfolio. Analyzing material ESG factors ultimately helps investors rank order stocks before making final investment decisions.

Start with the Chemicals of Concern by Industry

When screening prospective investments, it’s helpful to start by identifying the chemicals of concern used in the industry you’re evaluating. Then determine the level of revenues from products containing those substances and explore the firm’s processes and controls for managing its chemicals. Look for information from industry, regulatory and government sources such as:

Benchmark and Rank Order Your Investments

After you’ve gained a broad perspective on the industry, it’s time to collect the sustainability metrics. In the Household and Personal Products industry, for example, the Sustainable Accounting Standards Board (SASB) suggests the following four metrics regarding chemicals of concern under its Product Environmental, Health and Safety Performance topic:

  1. Revenues from products that contain REACH substances of very high concern (SVHC) (Metric CN0602-05)
  2. Revenue from products that contain substances on the California DTSC Candidate Chemicals List. (Metric CN0602-06)
  3. Discussion of process to identify and manage emerging materials and chemicals of concern. (Metric CN0602-07)
  4. Revenues from products designed with green chemistry principals (Metric CN0602-08)

Ultimately, we’re trying to identify the firm’s “chemical footprint.” To that end, the Chemical Footprint Project (CFP) Assessment Tool (released on June 19, 2015) also provides a good resource for publicly benchmarking chemical use and management. It’s backed by over $1.1 trillion in purchasing and investment power with signatories that include Aviva Investors, BNP Paribas IP, Boston Common Asset Management, Calvert Investments, Miller/Howard InvestmentsTrillium Asset Management, Zevin Asset Management, Dignity Health, Kaiser Permanente, Staples, Target and many others.

In the final analysis, we’re looking for best-in-class performers and screening out firms with significant risks. In the long-term, integrating ESG analysis into the investment decision-making process will help identify companies with business models that are more sustainable, socially responsible and profitable.

Investing in a Changing Climate

Investing in a Changing Climate

Is climate change for real? The short answer is yes. According to Doug Sisterson, co-author with Seth B. Darling of How to Change Minds About Our Changing Climate…about 98% of climate scientists believe that the Earth’s climate systems are changing due to “anthropogenic” (caused or produced by humans) greenhouse gas (GHG) emissions.

Based on peer-reviewed scientific reports, The International Panel on Climate Change (IPCC) concludes that the effects of greenhouse gas emissions, and their anthropogenic drivers, are extremely likely (95% – 100%) to have been the dominate cause of global warming since the mid-20th century in its Climate Change 2014 Synthesis Report Summary for Policymakers (4). The IPCC describes the causes of climate as follows:

SPM 1.2 Causes of Climate Change

“Anthropogenic greenhouse gas emissions have increased since the pre-industrial era, driven largely by economic and population growth, and are now higher than ever. This has led to atmospheric concentrations of carbon dioxide, methane and nitrous oxide that are unprecedented in at least the last 800,000 years. Their effects, together with those of other anthropogenic drivers, have been detected throughout the climate system and are extremely likely to have been the dominant cause of the observed warming since the mid-20th century.  {1.2, 1.3.1}” (4).

The IPCC presents an interesting graphical view of GHG emissions (in gigatonne of CO2-equivalent per year, Gt CO2-eq/yr) for the period of 1970 to 2010 (shown below). Interestingly, annual CO2 emissions from fossil fuel combustion andindustrial processes accounted for 65% of the 49 Gt total. Other major sources include methane (CH4) at 16%, CO2 from Forestry and Other Land Use (FOLU) at 11% and Nitrous Oxide (NO2) at 6.2%.

What are the risks of climate change?

The risks associated with global warming are expected to create widespread impacts across the planet—and include more severe weather-related events. In Asia, IPCC identifies increased drought-related water and food shortages, more heat-related human mortality and increased flood damage to infrastructure, livelihoods and settlements. Europe faces increased damage from river and costal floods, increased water restrictions and increased damage from extreme heat events and wildfires. North America faces similar problems with increased damage from wildfires, increased heat-related human mortality and increased damage from river and costal urban flooding. The oceans face reduced fisheries catch potential, mass coral bleaching/mortality and increased damage from costal inundation and loss of habitat (14). While this is not an exhaustive list, the point is that the effects are widespread and can impact human health, agriculture, housing, infrastructure and many other industries too—think of massive insurance claims after extreme weather events.

What’s the global plan?

In order to limit the harmful effects of global warming, The United Nations Framework Convention on Climate Change (2010) established a global accord in Copenhagen that attempts to limit the future increase in global temperature to 2 degree Celsius from pre-industrial temperatures. Since scientists estimate an almost linear relationship between cumulative CO2 emissions and projected global temperature change to the year 2100; this effectively means that a “carbon budget” on CO2 emissions has been established between 430 to 530 Gt CO2. The graph below illustrates the relationship between the carbon budget (CO2 emissions permitted below a 2 degree temperature increase) and climate change.

Problem solved?

Not so fast. Under this carbon budget, the International Energy Agency (IEA) reports that no more than one-third of proven fossil fuel reserves can be consumed prior to 2050, unless carbon capture and storage (CCS) is widely deployed in its 2012 World Energy Outlook.

No more than one-third of proven reserves of fossil fuels can be consumed prior to 2050 if the world is to achieve the 2 °C goal, unless carbon capture and storage (CCS) technology is widely deployed” (3).

This dilemma has led some to conclude that fossil fuel reserves may become “stranded assets” that won’t or can’t be used in the future—which could lead to asset write downs (impairment) on balance sheets and imply that current stock prices are overvalued. The Carbon Tracker Initiative notes that assets can be stranded for regulatory, economic or physical reasons.

Stranded assets are fossil fuel energy and generation resources which, at some time prior to the end of their economic life (as assumed at the investment decision point), are no longer able to earn an economic return (i.e. meet the company’s internal rate of return), as a result of changes in the market and regulatory environment associated with the transition to a low-carbon economy.” Carbon Tracker Initiative: Resources: Stranded Assets, Web. June 2015.

However, according to Julie Fox Gorte, Ph.D., senior vice president for Sustainable Investing at Pax World Investments, “Factually, unburnable carbon doesn’t exist.” In short, Dr. Fox Gorte correctly points out that in order for fossil fuel reserves to become stranded (unburnable) assets there would need to be new regulations that don’t exist today in Pax World’s ESG MattersEven still, I believe new environmental regulations, legislation and carbon markets will develop and we must pay very close attention to them.

I know of no nation that has or is considering legislation to make it either illegal or uneconomic to extract remaining coal, oil or natural gas reserves and burn them in the engine of commerce, mostly to produce energy” (1).

What can investors do? 

First, recognize that the problem is real. Second, understand that the timing, magnitude and consequences of climate change are evolving issues. Consequently, one could develop an investment strategy that evolves as new scientific information, technology, environmental markets (for greenhouse gases, carbon, water, weather risk, etc.) and legislative or regulatory policies emerge.

Many colleges, universities, foundations, cities and other civic, charitable and religious institutions have opted to divest from fossil fuels (see Go Fossil Free Divestment Commitments). Others have opted to influence change through corporate engagement. And still others use low carbon indexes to increase exposure, while reducing tracking error, to more carbon-efficient companies (seeMSCI Beyond Divestment: Using Low Carbon Indexes).

Finally, let’s not forget that climate change will create new investment opportunities and environmental markets. Surprisingly, the best trade can be counterintuitive.Richard L. Sandor, Ph.D., Chairman and Chief Executive Officer, Environmental Financial Products, LLC, recently talked about his new book Sustainable Investing and Environmental Markets: Opportunities in a New Asset Class by authors Sandor, Clark, Kanakasabai and Marques in Chicago. Sandor explained that environmental markets often over-estimate the cost of compliance with new regulations so the best trade could be to short the carbon market—even though your gut is telling you that the price will go up.

ESG: A Material Information Advantage

Does your ESG integration program have an edge? If not, read on. Everyone knows that it’s difficult to produce alpha—an abnormal excess return over the market—due to skill rather than luck. And yet, by looking deeply, and at the right factors, one can find investment opportunities (and market inefficiencies) that are overlooked by others.

Howard Marks, Co-Chairman of Oaktree Capital Management, refers to this process as “second-level thinking” in his incredible book The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor (46). Marks goes on to explain:

 Second-level thinkers know that, to achieve superior results, they have to have an edge in either information or analysis, or both” (78).

Sustainable investing is all about second-level thinking. First, we need to gain an informational advantage by identifying material environmental, social and governance (ESG) factors. Then, we need to understand how that information drives intrinsic value, and cash flow, to design investment strategies that appropriately meet the client’s risk and return objectives over an appropriate time horizon.

 

Corporate Sustainability: First Evidence on Materiality

The good news is that Harvard researchers have found new evidence linking performance on sustainability issues to financial performance. Importantly, the research differentiates between material and immaterial sustainability factors—addressing a significant gap in prior research.

Authors Mozaffar Khan, George Serafeim and Aaron Yoon from Harvard Business School present their findings in Corporate Sustainability: First Evidence on Materiality (Working Paper 15-0703). A major finding is that firms with high performance on material sustainability issues and concurrently low immateriality  scores have the best future stock performance—generating an annualized alpha of 6.01%.

Using calendar-time portfolio stock return regressions we find that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing” (1).

In addition, firms with good performance on material sustainability factors also  outperformed those with good performance on immaterial sustainability factors by an annualized alpha of 1.96%. So, again good performance on the right (material) ESG factors adds value. The results are summarized below.

Source: Sustainability Accounting Standards Board (SASB) Industry-based Standards to Guide Disclosure and Action on Material Sustainability Information Slide 22 (2015).

Even good performance on immaterial sustainability factors added .6% annualized alpha. At a minimum, this means that sustainability investments are not shareholder value-destroying (3). However, firms with poor performance on sustainability factors (both material and immaterial) underperformed by an annualized alpha of -2.90%.

What’s the big idea? Access to material sustainability information can give your ESG integration program an edge.

 

Material ESG Information Access

In the Harvard study cited above, the data collection process was driven based on materiality guidance on sustainability issues from SASB. The SASB website provides a sector-level materiality map that identifies sustainability issues by level of materiality at http://materiality.sasb.org. In short, this map is a great starting point for identifying which issues are likely to be material for more than 50% of the industries in the sector. Then, the Harvard researchers used MSCI KLD as the source of their sustainability data—which is the most widely used dataset by past studies (7).

SASB sustainability issues are organized under the following five categories: Environmental, Social Capital, Human Capital, Business Model and Innovation and Leadership and Governance. For example, the environmental category contains issues like greenhouse gas (GHG) emissions, air quality, energy management, fuel management, water and wastewater management, waste and hazardous materials management and biodiversity impact.

After identifying the material issues, the SASB Standards Navigatorhttps://navigator.sasb.org/ can be used to research specific “evidence-based metrics” that are known to impact business value in the areas of revenues, costs, assets, liabilities and cost of capital. Bottom line, it’s all about analyzing the right non-financial ESG metrics that can have a material impact on financial performance.

For illustrative purposes, a few SASB environmental accounting metrics applicable to the Oil and Gas Exploration and Production industry are shown below. As you can see, each metric in the SASB Standards has a unique reference number, description and a clearly defined unit of measurement.

Sector: Non-renewable Resources, Industry: Oil & Gas Exploration and Production

  • Greenhouse Gas Emissions – Accounting Metric NR0101-01 – Gross global Scope 1 emissions, percentage covered under a regulatory program, percentage by hydrocarbon resource. Unit = Metric tons (t) CO2-e, Percentage (%). The registrant shall disclose gross global Scope 1 greenhouse gas (GHG) emissions to the atmosphere of the six greenhouse gases covered under the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride
  • Air Quality – Accounting Metric NR0101-04 – Air emissions for the following pollutants: NOx (excluding N2O ), SOx, volatile organic compounds (VOCs), and particulate matter (PM) Unit = Metric Tons (t)
  • Water Management – Accounting Metric NR0101-06 – Volume of produced water and blowback generated; percentage (1) discharged, (2) injected, (3) recycled; hydrocarbon content in discharged water. Unit = Cubic meters (m3), Percentage (%), Metric tons (t)
  • Reserves Valuation & Capital Expenditures – Accounting Metric NR0101-22 – Sensitivity of hydrocarbon reserve levels to future price projection scenarios that account for a price on carbon emissions. Unit = Million barrels (MMbbls), Million standard cubic feet (MMscf).

Importantly, SASB standards are drawing wide interest across the globe and have been downloaded over 27,392 times by more than 4,640 users in over 65 countries in top capital markets including the U.S. ($25.9B), E.U. ($10.4B), Japan ($4.6B), China (3.9B) and Hong Kong ($3.1 B) (Slide 24).

SASB standards can be downloaded, at no charge, for a variety of sectors and industries at: http://www.sasb.org/standards/download/. Additionally, MSCI ESG Research sells a comprehensive suite of ESG data, ratings and research products.  See https://www.msci.com/resources/factsheets/MSCI_ESG_Research.pdf

 

A Vision of the Future

As noted at the outset, after gaining an informational advantage one must then be able to efficiently analyze the data in order to design investment strategies that appropriately meet the client’s risk and return objectives. Given the wealth of new ESG information that will be coming down the pike through the SASB Standards, there will be exciting opportunities to develop new investment strategies and analysis.

For example, financial analysts will enjoy creating new multi-factor regression models that incorporate material ESG factors in an attempt to forecast sources of performance and risk. And there will be even more ways to conduct peer comparisons with a complete data set—using consistent ESG units—while benchmarking against the industry average.

SASB provides a vision of this future in the illustration below. It shows a hypothetical peer comparison using sustainability fundamentals in the pharmaceutical industry.

Source: SASB: Industry-based Standards to Guide Disclosure and Action on Material Sustainability Information Slide 19 (2015).

It’s my hope that more access to high-quality, material ESG information will improve the investment decision making-process, increase business competition and lead us to a more sustainable future.

Five Hobbit Lessons for Sustainable Investing

In Devin Brown’s Hobbit Lessons: A Map for Life’s Unexpected Journeys, we learn five key lessons drawn from J.R.R. Tolkien’s timeless story The Hobbit. These lessons are well worth remembering and, in fact, may even help add meaning and value to your investment portfolio. And when it comes to sustainable investing, the lessons are particularly fitting because sustainability, by definition, causes us to think even more deeply about the long-term—how we earn our wealth, what we do with it and the implications our investments have on the environment and society.

Hobbit Lesson #1 – When adventure comes knocking, let it in—even if it makes you late for dinner, even if part of you says not to, despite what the neighbors might say. Saying yes to adventure will be good for you, and profitable too—though not in the way you might think” (32).

Developing a sustainable investment program is like embarking on a new adventure. The global sustainable investment market is growing rapidly and there are numerous strategies to help you achieve your goals. Although it may take a little longer to identify and analyze these material non-financial factors (and even make you late for dinner)—I believe that incorporating sustainable environmental, social and governance (ESG) analysis can reduce portfolio risk and generate long-term returns.

Global Growth in SRI Assets

According to the Global Sustainable Investment Review 2014, the world market for sustainable investing (SRI) has grown from (USD) $13.3 trillion in 2012 to $21.4 trillion in assets by 2014 (3). That’s a 26.9% compound annual growth rate (CAGR) in just the past two years. And, sustainable investment assets in Asia have grown at a 15.1% CAGR—from $40 billion to $53 billion over the same timeframe (4).

In my view, this remarkable growth in assets illustrates both the value of a more robust investment decision-making process and the dawn of a new era in sustainable investing.

Sustainable Investment Strategies

Hobbit Lesson #2 – Have your friends’ backs – someone has yours” (58).

As with any great adventure, there are a number of paths to choose from. The paths (or strategies) can demonstrate both your commitment to protect others from harm (e.g. having your friends’ backs) and lead you to opportunities where others can protect you from risk. GSIA reports that seven key sustainable investment strategies have emerged across the globe:

  1. “Negative/exclusionary screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria;
  2. Positive/best-in-class screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;
  3. Norms-based screening: screening of investments against minimum standards of business practice based on international norms;
  4. Integration of ESG factors: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into traditional financial analysis;
  5. Sustainability themed investing: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);
  6. Impact/community investing: targeted investments, typically made in private markets, aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose; and
  7. Corporate engagement and shareholder action: the use of shareholder power to influence corporate behavior, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines” (6).

Across these investment strategies, GSIA reports that the largest strategy globally is negative screening/exclusions ($14.4 trillion), followed by ESG integration ($12.9 trillion) and corporate engagement/shareholder action ($7.0 trillion). Negative screening is the largest strategy in Europe and ESG integration dominates in the United States, Australia/New Zealand and Asia.

The Association for Sustainable & Responsible Investment in Asia (ASrIA) reports that the top three investment strategies in Asia (ex-Japan) are ESG integration ($23.4 million), negative/exclusionary screening ($16.5 million) and sustainably themed investing ($2.0 million) in their 2014 Asia Sustainable Investment Review(10).

Importantly, Asian investors cite fiduciary duty, financial opportunity and risk management as their primary motivations for sustainable investing (20). Which brings us to Brown’s third lesson:

Hobbit Lesson #3 – Be fond of waistcoats, pocket handkerchiefs and even Arkenstones (just don’t let them become too precious)” (82).

In short, it’s okay to seek financial opportunity and enjoy “fancy” or valuable things. However, Brown draws out Tolkien’s theme and warns us that, “…if we let our possessions become too important, if we let them become too precious, they will eventually come to possess us and bring about our downfall” (81).

Emerging Themes in Asia

Interestingly, the data show that sustainability-themed investment strategies have had the highest asset growth rates—both globally and in Asia. ASrIA reports that game-changing issues like climate change mitigation are driving many countries in Asia to implement more supportive regulatory landscapes for environmentally focused investments like clean tech and renewable energy (14). The four key themes emerging in Asia include new opportunities for clean energy, green bonds, conservation finance and impact investing.

Clean Energy

Bloomberg New Energy Finance expects that over US $250 billion per year will be invested in Asia’s clean energy infrastructure through 2030. Although renewable power is expected to produce a third of the region’s electrical power by 2030, even more coal and oil-fired electric generation can be expected to be used to meet the region’s growing energy needs—and that will lead to a significant rise in emissions as well (21).

China is already the world’s largest energy consumer and it’s expected to increase its energy use by 60% by 2030. Therefore, investment opportunities should abound across Asia as the region attempts to transition to a more sustainable, and environmentally friendly, low-carbon future. In the Philippines, the National Renewable Energy Program (2011-2013) plans to triple renewable capacity to 15.3 GW by 2030. In India, multiple policies have been deployed to increase renewable power such as Renewable Purchase Obligations, Renewable Energy Certificates (“RECs”) and favorable State Electricity Regulatory Commission (SERC) tariffs for mainly private-investment driven renewable generation—though coal will still be a major fuel over the next five years. In Thailand, renewable energy makes up 12.2% of capacity and the Alternative Energy Development Plan (ADEP) (2012 – 2021) has set an ambitious 25% target (22).

Green Bonds

KEXIM Bank in South Korea issued the first green bonds in Asia in 2013. Although the market is still in its infancy, first movers like the Asian Development Bank (ADB), the Development Bank of Japan and Taiwan’s Advanced Semiconductor Engineering have also issued green bonds. And the Chinese government has decided that green bonds will be an important part China’s financial market reform (23).

Hopefully, proceeds from green bonds will help the region finance large-scale energy and environmental projects that will support its transition to a low-carbon growth model. However, investors will need to be cautious and seek full disclosure, transparency and an independent evaluation of these new financing vehicles to ensure that investor expectations can be met (23).

Conservation Finance

The scale of Asia’s economic growth is creating incredible financial wealth but inevitably depletes natural resources and increases the risk of pollution. Globally, we’ve lost 50% of the world’s mammals, birds, amphibians and reptiles over the past 40 years due to human activities that destroy habitat or over-exploit fishing and hunting. Examples in Asia include degradation of natural forest in Indonesia and Cambodia and threats to coral reefs in Southeast Asia by overfishing (24). So, it’s imperative that we protect these truly irreplaceable and invaluable treasures.

 Hobbit Lesson #4 – Remember not all that is gold glitters (in fact, life’s real treasures are quite ordinary looking)” (100).

Conservation finance is a form of impact investing in which part of the investment remains in the ecosystem to enable its conservation (the ‘impact’) and part of it is returned to investors. While more government and regulatory intervention is expected, there remains a US $200 bn – $300 bn funding gap to satisfy global conservation needs. Therefore, asset managers and banks have the opportunity to develop new products and advisory services for private, philanthropic and institutional investors with an appetite for conservation finance (24).

Impact Investing

Impact investing takes an ownership stake in equities, bonds or other instruments to generate social, health and environmental benefits with the expectation of subsequently exiting the investment. ASrIA surveyed Asian investors and found that they recognize financial opportunity, contribution to community and fiduciary duty as primary motivations of impact investing (26). I’d also note that Michael E. Porter and Mark R. Kramer argue that creating societal value is a powerful way to create economic value while meeting the vast unmet needs in the world in their article, “Creating Shared Value,” in the January 2011 issue of Harvard Business Review.

J.P. Morgan estimates that the global impact investment market could absorb between US $400 billion and US $1 trillion over the next decade. And the Rockefeller Foundation forecasts that Southeast Asia will be the next hub for impact investing. However, currently a shortage of viable investment products and limited access to qualified professional advice is reportedly holding impact investing back in Asia (25).

Putting it in Perspective

Part of the adventure of sustainable investing is the opportunity to generate both financial and social returns while addressing the world’s most significant challenges. At times, it might seem hard to believe that your investments can make a global difference but remember this final Hobbit lesson:

 Hobbit Lesson #5 – Recognize you are only a little fellow in a wide world (but still an important part of a larger story)” (122).

ASrIA reports that Malaysia, Hong Kong, South Korea and Singapore are the largest Asian markets for sustainable investments. In addition, Indonesia, Singapore and Hong Kong were the fastest growing markets since 2011 (11). As global and Asian SRI markets continue to grow there will undoubtedly be new risks but there will also be exciting new opportunities for investors!

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