What does sustainable/sustainability investing mean?
Sustainability is the most important challenge of our age. Megatrends associated with sustainability are changing our world – and are having measurable effects on corporate sales and earnings.
Long-term challenges such as scarcity of resources, demographic shifts and climate change are redefining social expectations, the political discourse, regulatory operating conditions and consequently the business environment as well as investment returns.
In 1987 the World Commission on Environment and Development, WCED, which was founded in 1983, published the report named after its chair Gro Harlem Brundtland “Our common future”. In this, guidelines on sustainable development, as we generally understand the concept today, were set out. The Brundtland Report stated that critical, global environmental problems are primarily the result of greater poverty in the Southern Hemisphere and unsustainable consumption and production patterns in the Northern Hemisphere. It consequently called for a strategy that would bring development and the environment together. This was described with the now ubiquitous term “sustainable development”, which was defined as follows:
“Sustainability means satisfying the needs of the current generation, without compromising the corresponding opportunities of future generations.”
The report underscored the interconnected nature of economic, social and ecological processes, and formed the basis for the three-dimension concept promulgated at the 1992 Earth Summit in Rio de Janeiro, as well as the capital stock model for sustainable development drawn up by the World Bank. Permanently stable societies could be achieved, it was asserted, by ensuring that ecological, economic and social goals were not pitted against each other, but were instead targeted as equally-important objectives. It is intrinsic to this definition of sustainability that these goals are applicable to all countries of the world (global justice) and to future generations (intergenerational justice).
Such challenges create new opportunities and risks which today’s companies will have to tackle if they are to remain successful in the years ahead. Those companies that exploit these challenges successfully and to their own advantage will probably also outperform their competitors in future.
Sustainability means the ability of a company to operate successfully in a highly competitive and rapidly changing global business environment. Companies that focus on quality, innovation and productivity, thereby anticipating and addressing current and future economic, ecological and social opportunities and risks, will be amongst the leading companies that will tend to achieve competitive advantages and create long-term values for their stakeholders.
Business processes represent a sequence of value-adding activities that aim to secure the competitiveness of a company. Business processes describe what input goes into a company, what resources are processed within a company, and which customer-specific output is generated by the company. In this conjunction, sustainable business processes likewise focus on the three aspects of sustainability: economic, ecological and social aspects. Against this backdrop, this gives rise to the following three terms:
Economic sustainability aims, on the one hand, to maximise the earnings of a company, while on the other preserving the resources that are required for these earnings in the long term. Economic efficiency is a decisive criterion when it comes to ensuring the optimum utilisation of resources and production.
Ecological sustainability focuses on the general resilience and state of health of ecological systems. The objective is to reduce the negative environmental impact caused by corporate business processes.
In broad terms, social sustainability concerns the improvement of individual and social wellbeing. This is achieved by boosting social capital. Social sustainability encompasses the impact of economic activities on society as a whole, inter alia in the form of business processes.
How does sustainability create added value?
Integration of sustainability criteria in traditional financial analyses generates additional insights into the management quality and output potential of companies. Conventional investment concepts that rely exclusively on standard financial analyses may neglect important non-financial factors linked to global sustainability challenges. Despite this, the repercussions of long-term sustainability trends on the long-term earnings prospects of companies are frequently underestimated by average investors. This leads to market inefficiencies that can be exploited in a targeted manner by investors who invest sustainably. With its team of analysis-focused investment specialists and proven sustainability expertise, RobecoSAM focuses on how companies respond to global developments and long-term trends. In short: a focus on sustainability facilitates investment decisions on the basis of improved information.
In general terms, RobecoSAM understands sustainable investment strategies to mean all investments that systematically take account of financially relevant aspects in the environmental, social and governance fields (hence the acronym ESG) in conjunction with the investment process. ESG criteria describe, for example, the ability of a company to boost its resources efficiency, to safeguard health and safety at the workplace, or to operate risk and crisis management.
A further trend in the field of sustainable investment strategies is the so-called topic strategy. Investment funds with specific topics pursue neither a purely geographic nor a sector-specific focus. Instead they specialise in a specific topic. Whereby the relevant factor is not whether a specific company operates in a specific country or in a specific sector, but instead whether it fulfils specific criteria. Typical sustainable investment topics are, for example, “water”, “food”, “health”, agriculture” or “renewable energies”.
When it comes to selection, however, the strong specialisation of these investment funds calls for a sure touch and in-depth knowledge of the corresponding topic. For investors, the advantage of topic funds is that they can be used to participate in growth markets in a carefully targeted manner.
Driven by these values and convictions, RobecoSAM works tirelessly to promote the advantages of sustainable investment, thus closing the gap between sustainability experts at the executive board level and the investment specialists who are beginning to discover that a focus on sustainability creates value.