Sustainable investing is the new killer app

The business of investment managers is to make money, regardless of environmental and social costs, right? Wrong, says Robert Rubinstein. Triple bottom line investment counts the social and environmental costs in the balance sheet. And despite resistance, it’s catching on.

When I speak to people in the mainstream financial sector who are not involved in triple bottom line investing (TBLI) they all tell me it is not relevant, too small, too niche or too unimportant. Investment, I am told by financial experts in the City of London, in New York, Tokyo, Frankfurt and Paris, should only look at financial returns. It should not be bothered by social and environmental added value issues, or so-called non-financial criteria.

But doing that not only hurts the returns, it also breaks the solemn oath of fiduciary responsibility.

Another common excuse the professional investors give me for not looking at TBLI is that “there is no demand”. That might or might not be true. But what I find so interesting is that despite all these excuses and obstacles, TBLI, or sustainable investment, just keeps on growing: no matter what is thrown in its path, it doesn't stop. I think it is the killer app.

TBLI includes all form of investment that looks at social, environmental and financial returns. It covers public equity, private equity, bonds, real estate, carbon finance, microfinance, project finance and many others. If you look at all these fields, every single one of them is growing and some are growing by leaps and bounds as institutional investors at last engage with Socially Responsible Investment (SRI).    

Cleantech is investment in technology that reduces waste, energy use, water, toxicity and material and achieves financial returns. In the United States, Cleantech private equity is more than10% of the venture capital market, excluding corporate commitments. Walmart has announced that it will invest US$500 million per year in solar power to reduce their own energy costs and CO2 emissions and, at the same time, they are demanding a 20% reduction in energy and CO2 emissions from their own operations and those of all their suppliers.

General Electric recently announced that it will invest US$2.5 billion in clean water and energy technologies. BP has committed US$8 billion for renewable energy. Draper, Fischer, Kleiner Perkins, Robeco, Rabo, ABN, and dozens of others are establishing institutional mandates for cleantech space. Why? Because the market is booming. They are not doing it for the sake of their reputations but because they see a clear opportunity. 

The amazing growth in commodity and energy demands due to the growth in emerging markets is creating a vast opportunity for resource efficiency. This will only increase as pressure on energy and commodities reaches the limits of supply. The Equator Principles, internationally recognised, voluntary project finance guidelines for the banking industry that establish social and environmental standards for project finance, began by covering project finance worth over US$50 million, and require social and environmental impact assessments before a loan is approved. Within 20 months of the Equator Principles being launched in 2003, 85% of the market had signed on. Now the figure has been reduced to US$10 million, and more than 43 banks have committed to it. Are all the banks doing this just for the sake of their reputation? No. They saw that the investment was more appealing if the risk was reduced. In addition, they saw that their project finance departments could do this.

When you take into account the hindrances to the growth of TBLI’s growth over the last five to 10 years, the results are even more extraordinary. Very few business schools teach their MBAs anything about sustainable finance. I know, because I have been teaching one of the few courses that does. All the schools, that I approached to with the offer of the course declined.

Most universities have been teaching the same lessons on finance for the past 15 years. Few, if any, banks give incentives to their staff for TBLI performance or targets. The CEOs stay around only a pitifully short time, so they have no incentive to create long term projects which will benefit their successor. Added to that, the tax system externalises all cost onto society and provides no incentive for environmentally or socially beneficial activities.

Look at the airplane industry. If you buy a bicycle in the Netherlands, you pay 19% VAT. If you buy gasoline in most of Europe, it costs Euros 1.30 or more per litre. But if you buy an airplane ticket, you will pay no VAT and no excise tax and the kerosene your plane uses costs about Euro 0.35 to 0.40 per litre. This is not a level playing field or a market mechanism.

In theory we subsidise green energy but we do not tax fossil fuels for the true cost of their societal impact. (Has anyone kept track of the cost of the wars in middle east lately? Should that not be added to the cost of oil?) But asset management employees only know what they know and they are not expected to know anything else.

The media are no help either. Most of the press focuses on the least important bit of financial information: what did the DOW or the FTSE or the other stock markets do today? They occasionally offer a token bit of information on TBLI, if it can be squeezed into an advertising special. For most of the time, the press is busy processing press releases and going to annual general meetings, where none of the journalists ask any major industrial company why their carbon risk is not clearly stated. If they did ask, they would find that nobody had an answer, but they don’t know to ask. The press was created by the same system that produced the rest. 

In the United States, the neo-cons have even mounted a campaign (NGOWatch) to discredit the Corporate Social Responsibility (CSR) movement and SRI.

Even the organisations that have a clear moral and ethical purpose – organisations such as the churches, grant-making foundations, NGOs, and trades unions – fail to invest and manage their own assets responsibly. Private banks keep their clients in ignorance about the opportunities that sustainable alternative investments offer because it is a new sector and the private banks tend to avoid anything new like the plague. They prefer the familiar opportunities – like Enron, Parmalat, Worldcom and so on. This barrier is high, thick and well guarded and TBLI was not intended to get through, but it did.

We have an ignorant profession, reinforced by an educational system that reproduces the same ignorance, an institutional sector that hides behind the fiduciary responsibility of maximising returns and does not look at all the risks, a government that reinforces harmful behavior and a society that is fed on financial news designed to entertain rather than inform. The wealth management sector advises its foundation clients to give away 5% in charity, but invests the principle assets in destructive industries. With hundreds of similar roadblocks, it is a miracle that TBLI has come so far.

Perhaps the force behind TBLI was so powerful, that nothing could stop it. In the last 10 years, it has felt like driving on a highway behind five trucks that were dropping barrels in our path. But the industry that feels that social and environmental issues are as important as financial concerns, in assuring the financial return, has endured, grown and prospered and is now poised now to become the "mainstream". Why? Because it is the smart, professional way to manage money for the long term.

TBLI is the Killer App.


Robert Rubinstein is the Founder and CEO of Brooklyn Bridge-TBLI Group. The TBLI Group runs the Triple Bottom Line Investing Conference, which will be held in Bangkok May 24-25, 2007.

Robert Rubinstein ©