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Is Everything Sustainable?

Is Everything Sustainable?

16 April 2012

Most companies and organisations are now adept in using the language of ‘sustainability’. Much like a tourist who has enough vocabulary to see him through a short weekend break, companies find it relatively easy to pick up a few choice phrases and begin to speak with their limited sustainability vocabulary.

Some even hire a translator in the form of a CSR manager, to help them communicate with those on the other side of the debate, the sustainable investors. No-one seems to agree on what exactly counts as sustainable, and to most people using the term it apparently means little more than an activity or investment being ‘affordable or ‘worthwhile’.

However, like the overconfident tourist, there is a real danger in using phrases you don’t fully understand. It seems every company from miners to arms manufacturers can lay claim to the sustainability of their operations, and therefore present themselves as sustainable investment options. 2012 marks the 25th anniversary of the publication of the UN world commission on environment and development’s Brundtland Report entitled “Our Common Future”(1). This document stated a definition of sustainable development, it championed ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’(2). Taking this as our definition of ‘sustainability’, would all investments or activities claiming to be sustainable stand up to this scrutiny?

In this context, there is a need for genuinely sustainable investment, one which fully understands the concept it is trying to apply. This means investing in activities where management have regard for the balance between what is consumed and what is produced, with an eye to the long term. Sustainability in this sense is not a moral or ethical imperative, but profoundly practical. In 2011, the world population tipped over the seven billion mark(3), an unprecedented time in human civilisation. The choices we face are stark; do we have the ingenuity and resources to supply the basics of life – energy and food – to this many people, let alone continue to allow the minority of this 7 billion to live in relative luxury?

Arriving at an appropriate definition of ‘sustainability’ involves a thorough understanding of the problems we face, the challenges are ones of scale and complexity. The energy glut has fuelled innovation and development at a fantastic rate, but we are reaching our limits in terms of the carrying capacity of the ecosystem, both to supply resources at the rate we demand, and to deal with the waste streams we produce. Some industries are in clear decline as the world wakes up to its limits. The question for investors is how long to continue supporting such industries. For example, the oil industry is moving into more and more energy  intensive and remote assets(4), which may well make money in the short-term; but will investors miss out in the long term if society fails to invest in the new, sustainable technologies which will be needed to fuel growth once peak oil hits?

The investment industry has not been immune from questions about its long-term viability. The credit-crunch, subsequent recession and now the eurozone crisis have forced many to rethink exposure to more speculative investments and companies with high levels of debt. Whilst not incompatible with the concept of speculation, sustainable investment needs to take on a core characteristic of usefulness, seeking to invest in very normal, everyday companies which make or do things of direct benefit. Increasingly, the sustainable investment agenda has been dominated by an approach which seeks to balance the positive and negative aspects of a company’s behaviour, and if balance is reached the resultant compromise is labelled ‘sustainable’. The use of the term sustainable in this way leads to some very difficult situations – for example, a tobacco supplier focussing on the sustainability of its farming practices, ignoring the health impacts from the use of its products; or a mine which balances pollution and ecosystem disruption with revenues to pay for much needed social services. The latter example is perhaps a more acceptable trade-off, but many will still find the definition of such situations as ‘sustainable’ to be troubling.

In the healthcare profession, doctors and nurses are guided by the Hippocratic Oath which includes this maxim; ‘First, do no harm’. Companies might do well to adopt such an approach, and investors could seek companies which at a very basic level do not undermine societal welfare. Does the core activity of a company advance human well-being – for example, in the production of advanced medical implants which relive pain and restore movement, low-energy solar lighting which finds use in developing countries or the production of mechanical valves which vastly improve the efficiency and safety of industrial processes?

When a company ‘does no harm’, it can then seek to do some good, adopting best practice in employee relations or making charitable community investment.

Investors and companies dwell in a political context which has recently championed long-termism. David Cameron sparked a debate in the New Year(5), promising to give shareholders a more binding vote on executive pay deals. Investors in companies should have more regard to their role as owners, asking critical questions of management, encouraging and incentivising better long-term decision making. This means raising concerns when poor years are rewarded with unjustifiably high executive pay, or asking questions about long-term environmental impacts and costs. The adoption of the UK stewardship code by many asset managers(6) in the UK gives some hope that investors will begin to make full use of the ownership powers they already have, before any further reforms become reality.

Fortunately, the interests of owners, management and society can and do align. When a company instigates excellent environmental management policies, investors do not suffer hits to earnings from large fines from environmental regulators. When a company decides to reduce the rate of serious injuries among its workforce, managers get the benefit of a motivated and healthy workforce, increasing productivity and avoiding litigation. Society feels the cumulative impact of the choices and investments made in the past – our ‘tomorrow’ is often dictated by what we do ‘today’. Investing in a truly sustainable, practical and long-term manner has the advantage of creating societal value now, and ensuring that it can be created in the future.

By Matt Crossman
Ethical research and corporate engagement
Rathbone Greenbank Investment Management

Sources

1 www.news.bbc.co.uk/1/hi/51080.stm
2 www.un-documents.net/wced-ocf.htm
3 www.unfpa.org/swp/
4 www.energyandcapital.com/articles/iea-says-conventional-oil-has-peaked/1910;
www.ipcc.ch/publications_and_data/ar4/wg3/en/ch4s4-3-1-4.html
5 www.bbc.co.uk/news/uk-16458570
6 www.frc.org.uk/corporate/stewardshipstatements.cfm

The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.