In the fourth part of our ‘As If People Matter’ series, Michael Townsend takes the investor’s perspective, as they too try and make sense of a changing world. [Another blast-from-the-past, published four years ago, this piece highlighted the shift towards sustainable investment and ESG metrics that we now see taking real shape.]

1. Trends Corporate strategy
“Integrating issues such as climate
change into investment analysis is
simply common sense.”
Al Gore,
Chairman of Generation Investment
Management, & Former Vice President
of the United States
It has taken four long, arduous years for
the US stock market to recover its value
after the financial crash of 2008. In the
UK the FTSE has yet to fully recuper-
ate. This has not been a good time to be
an investor. OK, many still have enough
cash and good lifestyles, at a time when
many other businesses, people and fami-
lies have been struggling merely for
survival. But investors play an impor-
tant part within our capitalist economic
machine; they keep the wheels oiled and
moving, so that jobs are created, salaries
paid, lives can be lived. If they are not
functioning in the right way, it is also
hard for the rest of us to do so.
Investors too are getting to grips with
how best to operate within a volatile 21st-
century economy. Questions abound.
What does a good investment look like in
a resource constrained, rapidly changing,
and unpredictable world? What should
one invest in: clean tech, renewables, or
conventional industries? How certain
are we of getting a return? What are the
risks? What are the new rules? What is
the new normal? It is certainly part of
the human condition to believe that our
experience of past events provides us
with a realistic predictor for future out-
comes. But we probably look to our old
roadmaps, more in hope, than in true
Pity the poor investor?
In the fourth part of our ‘As If People Matter’ series, Michael Townsend takes
the investor’s perspective, as they too try and make sense of a changing world

2. certainty during this time of change.
And the challenge is not just for indi-
vidual or institutional investors, but also
for companies and how they invest and
reinvest, too. A recent McKinsey Global
Surveyfoundthatmostexecutivesbelieve
their companies are under-investing, and
even missing out on worthy opportuni-
ties, due to fears around market volatil-
ity. The tragedy is not just the missed
opportunities for individual companies,
but also how a lack of investment over
time can adversely affect whole econo-
mies, along with job creation efforts too.
There is some good news out there,
which can help investors establish
the principles they need in navigating
towards sustainable investment suc-
cess. According to a study by Harvard
Business School, sustainability-focused
companies significantly outperform tra-
ditional firms in terms of stock market
and accounting performance. ‘Taking a
long-term view’ is cited as the key ena-
bler for this success; not usually a feature
associated with investors, or business in
general, either. One of our recent case
studies provides a useful insight into
the relationship between sustainability,
business performance, stock value and
taking the long-term view.
Life Technologies, a global biotech-
nology tools company, has seen its stock
price generally take an upward trend
over the past five years, outperforming
the NASDAQ Top 100 by around 8%,
and the entire index by around 30% dur-
ing this period, despite the general vola-
tility in the market since the onset of the
global financial crisis in 2008.
The key to investor confidence is, of
course, providing year on year growth
and high quality of earnings, and Life
Technologies continues to deliver on
both counts: in 2010 the company expe-
rienced 9% growth in revenue and 17%
growth in earnings per share. This level
of business performance is itself under-
pinnedbywhatthecompanycallsRadical
Efficiency: a range of business improve-
ment initiatives, including the integra-
tion of sustainability principles.
Eachyear,sustainabilityinitiativescon-
tribute an increasing amount to Radical
Efficiency performance, and could repre-
sent the major share of efficiency savings
for Life Technologies within 5-10 years.
It is also clear that the contribution of an
increasingly sustainable product portfo-
lio will provide a greater contribution
towards growing the top-line.
For Life Technologies, radical effi-
ciency takes a long-term perspective,
seemingly at odds with the very short-
term demands of shareholder capitalism.
Despite this apparent tension, investors
are slowly becoming more sensitised to
the importance of sustainability issues
and their direct impact on long-term
investment performance.
Any good investment of course relies
on a robust assessment of the busi-
ness model, and how money will be
made and sustained. Investors need to
be mindful of the full range of factors to
be included in the investment decision.
Conventional approaches here are com-
ing under increasing strain, as the era of
abundant and cheap resources draws to a
Trends Corporate strategy
According to a study
by Harvard Business
School, sustainability-
focused companies
outperform traditional
firms in terms of stock
market performance

3. Trends Corporate strategy
close. Investors need a new lens through
which they can evaluate potential invest-
ments and avoid the risks of stranded
assets, i.e. those investments whose value
could be dramatically influenced when
major externalities, such as the price of
carbon or water, are taken into account.
Indeed, ecosystem degradation is
becoming an increasingly serious and
expensive concern. According to a
study commissioned by United Nations
Environmental Programme Finance
Initiative (UNEP FI) in 2010, environ-
mental damage caused by human activ-
ity in 2008 was estimated to be $6.6 tril-
lion, equivalent to 11% of global GDP
– a huge economic impact, that cannot
be ignored.
Thesignificanceforinstitutionalinves-
tors is their exposure to rising environ-
mental costs that contribute to economic
and market risks, which can affect asset
values and investment fund returns. It
is naturally in the interests of investors
to reduce the risks and costs associated
with externalities within their investment
portfolios. The risks to investor funds are
not just the direct environmental costs;
future cash flows and dividends could
also be impacted by reduced productivity
and increased input costs, such as higher
taxes, levies and insurance premiums.
Further impacts could include falling
revenues, unplanned capital investments
and increased costs of capital driven by
higher risks and lower potential returns.
UNEP FI provides some useful guid-
ance for investors, for their direct con-
sideration, but also to help influence the
necessary systemic change:
1. Evaluate impacts of investee compa-
nies on natural resources.
2. Incorporate information on environ-
mental costs and risks into engagement
and voting initiatives and seek to reduce
environmental impacts of portfolio com-
panies.
3. Join other investors and engage col-
laboratively with companies through
platforms such as PRI Clearinghouse to
address key issues.
4. Engage individually or collaborative-
ly with public policy makers and regula-
tors to encourage policies that promote
the internalisation of costs and establish
clear regulatory frameworks.
5. Request regular monitoring and
reporting from investment managers on
how they are addressing fund exposure
to risks from environmental costs and
how they are engaging with portfolio
companies and regulators.
6. Encourage rating agencies, sell side
analysts and fund managers to incorpo-
rate environmental costs into their anal-
ysis.
7. Support further research to build
capacity and improve understanding of
therelationshipbetweencorporateexter-
nalities, ecosystem goods and services,
company financial risk and portfolio
returns.
Further support for change in the
investment model comes from Al Gore,
chairman of Generation Investment
Management, and Former Vice President
of the US, with his call for responsible,
sustainable capitalism. This he describes
as a framework that seeks to maximize
long-term economic value by reforming
The risks to investor
funds are not just the
direct environmental
costs; future cash flows
and dividends could also
be impacted by reduced
productivity

4. markets to address real needs while inte-
grating environmental, social and gov-
ernance (ESG) metrics throughout the
decision-making process.
Gore also points out that around $30
trillion of assets are currently signed up
to the UN Principles for Responsible
Investment – some 20% of the world’s
capital – and says: “If the majority of
those assets were actually shifted into
truly sustainable investment models, the
effect would be dramatic and would sig-
nal that Sustainable Capitalism is enter-
ing the mainstream.”
And there are real signs that investor
behaviours are changing, albeit slowly, in
response to the challenges they face, but
also motivated through enlightened self-
interest – the need to protect the value of
their assets.
In 2011 nearly 30 Investor organisa-
tions, representing over $170B of assets,
urged the US Environmental Protection
Agency to initiate a review process to
evaluate the mine waste impacts of a
proposed mine on Alaska’s Bristol Bay
watershed, which produces roughly half
the world’s commercial supply of wild
sockeye salmon.
The group of investors, led by Trillium
Asset Management Corp and Calvert
Investments, collectively holds over 13
million shares in Anglo American plc,
the UK-based mining company. They
recognised the combined impact and
risks associated with the proposed mine
could have a devastating impact on the
natural habitat and local economy.
They also recognised the potential
for significant environmental costs, tak-
ing heed of the UNEP FI Universal
Ownership Report, and the consequen-
tial risk to company earnings and there-
fore investor returns. They calculated
that 50% of company earnings could be
at risk if this project were to proceed.
Taking a far-reaching view, they could
also see that any problems with this pro-
ject could cast a shadow over all mining
projects, even responsible and safe ones,
which could destabilise the global min-
ing industry. This led to the investors
issuing a statement to call for a review
process as a responsible and crucial step.
Microsoft provides a further example
of a company responding positively to
activist shareholder pressure. The New
York City Pension Fund, an institutional
investor,waskeentomakesureitsinvest-
ments were protected from any adverse
affects on company revenue that could
be brought on by labour, environmental
or other issues involving Microsoft. As
a result, Microsoft will now make sup-
plier sustainability disclosure mandatory
from 2013.
Just like business leaders, the work-
force and the wider population, inves-
tors are going through their own trans-
formation, as they too try and make
sense of the post crisis world, and move
stutteringly towards a sustainable, low
carbon economy. There is still some way
to go, before quantification of sustaina-
bility principles, risks and opportunities
becomes a mainstream consideration for
investors.
But, given the very real impact of key
issues like climate change, energy and
resource scarcity, along with increas-
ing regulation and reputational risks, it
is only a matter of time before we see
a clear and direct relationship between
sustainability impact, business perfor-
mance and stock price.
Trends Corporate strategy
Michael Townsend is CEO of Earthshine
Solutions / @mike_earthshine /
earthshinesolutions.com /
sustainablebusinesslab.org