It was an honor and a pleasure to join the Confluence Philanthropy Advisors Forum, where our opening panel offered some excellent perspectives on the current environment and both the crisis & opportunity for values-aligned investors. I’m grateful to have the opportunity to elaborate on the discussion and share some ideas that are driving the actions of clients focused on sustainability and impact at Cambridge Associates, and to unambiguously state that all of us who enjoy the privilege to work in investments and philanthropy can and must do more to advance the sustainability of social and environmental ecosystems.
As the calendar approaches the midpoint of 2020, it feels to many as if we have passed through six years rather than six months. The combination of epic events related to epidemiology, economics, and social cohesion has been historic by any measure. The global spread of COVID-19, the fastest bear market decline in the history of the S&P 500, and the surge of voices rising against systemic racial and economic inequities are incredibly powerful forces. Some days, it seems there are more questions than answers.
- How will global demand patterns change, and which of these changes will be permanent?
- Are markets more clearly recognizing the materiality of sustainability?
- How can investors account for the systemic risks of inequality and what actions can they take to address it?
- How should one account for the seeming disconnect between the capital markets and the real economy?
When the only certainty seems to be uncertainty, it’s helpful for investors to maintain a focus on the long term and employ multiple lenses for viewing institutional priorities, portfolio strategy and risk profile. At the same time one needs to be highly engaged with and observant of short-term events and volatility. The times we are living help reveal the depth of risks related to inequality and climate change as well as the acceleration of trends that are supportive of both market-based and philanthropic solutions.
Climate change, for example, requires both a long-term lens and a short-term sense of urgency. The warming of the planet and the risks to people, property, communities and economic systems is directional rather than cyclical. Heretofore, portfolio asset allocation and risk models have not effectively captured or priced in this risk, but that is changing. Disclosure efforts like those of the PRI, SASB, and TCFD have increased the flow of information and insights.
Investors that have prioritized sustainable investing and mitigation of climate risks in their strategies and decision criteria are taking clear and concrete steps forward. They are assessing the carbon intensity of portfolios, with the aim of owning less over time. Such analysis not only quantifies where mispriced carbon risk is greatest, but also enables investors to engage their managers about holdings with high levels of emissions and ensure there is clear and cogent reasoning for assuming these risks, and ideally plans for how companies will reduce carbon intensity over time.
Similarly, investors are also better equipped to assess physical risks associated with the changing climate and increases of weather extremes. Employing such analysis should help protect portfolio value as well as sharpen thinking on the proactive pursuit of solutions such as distributed infrastructure for food and energy or technologies that reduce the pain points for access to and delivery of water.
All portfolios bear some degree of transition risks as the global economy moves to decarbonize, and the risks come in the form of regulation, liabilities, and technological disruption. While geopolitical shifts and some populist leaders heighten uncertainty regarding regulatory risks, sustainable investors are on the front foot when it comes to investing in the technologies that are expected to lead this transition. While the operations and existence of some legacy industries have been challenged by COVID-19, sustainable investors have remained bullish on new ventures and technologies that help optimize the flow of electrons from the grid to consumers or cultivate goods and services that have low reliance on the burning of carbon.
In many respects, the market movements of 2019 have been validating for those with portfolio strategies that are environmentally sustainable and solutions oriented. Our panel, investment manager returns, and the financial press have all highlighted the resilience of ESG portfolios compared with others and market indices over recent months. This is welcome news and has accelerated action by investors who have yet to prioritize sustainability in their strategies. Thoughtful and careful analyses like those noted above also help ensure investors aren’t using short-term results as “easy” confirmation of strongly held beliefs or desired outcomes.
However, sustainability is not limited to climate and environment alone, but speaks to the sustainability of all critical systems that support communities and social cohesion. While carbon-light enterprises have enjoyed relative success in 2020, deeply entrenched and systemic inequities have been laid bare. Here in the United States, the negative impacts of COVID-19 on public health, job security, workplace safety, and community cohesion have been disproportionately unleashed on people of color and those most economically vulnerable, communities that are often one in the same. As the spread of the disease increases in the Southern Hemisphere, similar patterns of social impact are visible in more developing countries.
Anyone reading this blog (and certainly its author) enjoys the privilege to work in investments or philanthropy and have the time to convene, debate, and discuss these topics, oftentimes from a comfortable distance. I’ve grown weary of reading the missives of think tank academics debating shareholder vs. stakeholder capitalism. We live in a multi-stakeholder society where the daily actions and decisions of all help shape our global economic systems and have an impact on portfolio risks and opportunities, regardless of whether these are visible within audited financial statements.
So, what can sustainable investors do about these social externalities? As a starting point, we need to recognize that sustainable and impact investments have their limitations. Indeed, the last decade has seen historically large inflows to values-aligned investments, yet carbon emissions and social inequality have increased over the same period. Philanthropic institutions should continue to optimize and harmonize efforts across the entire enterprise and break down internal silos, and as much as they reexamine and adjust investment philosophy and strategy they should hold the philanthropic approach up to the same scrutiny. What can be done today inside our own organizations and portfolios to support multiple stakeholders? How should more patient dollars be deployed over time? How can we increase effective collaboration with other partners?
At the portfolio level, and within the realm that can be controlled today, investors should examine their assets for exposure to the risks associated with perpetuating inequality, and seek out opportunities where their investments (and investment managers) can engage directly with industry to support multi-stakeholder assessments and initiatives. Both society and markets can be harsh and swift arenas of judgement during volatile times like these. Sustainable solutions that investors can enable are not always easily attained, but consistency and commitment can make organizations, portfolios, and communities more resilient in times of crisis.
I want to conclude by thanking Confluence Philanthropy, again, for a convening where we did not gather to engage in self-congratulation. Rather, I left the forum encouraged to dig deeper, thoughtfully reflect on relative successes and failures, and work harder to create and deliver solutions. Let us continue helping each other be better.
- Tom Mitchell, Managing Director, Cambridge Associates
